Preparation Criteria of Information Disclosure by Companies Offering Securities to the Public No.18 --- Specific Regulations on Information Disclosure by Commercial Banks

1.      Preparation Criteria of Information Disclosure by Companies Offering Securities to the Public No.18 – Specific Regulations on Information Disclosure by Commercial Bank (the Regulations) have been formulated pursuant to the Company Law of the People’s Republic of China, Securities Law of the People’s Republic of China, Law of the People’s Republic of China on Commercial Banks and other laws and regulations as well as the relevant regulations stipulated by the China Securities Regulatory Commission (hereinafter referred to as the CSRC) and the People’s Bank of China with a view to standardizing the information disclosure behaviors of commercial banks offering securities to the public and safeguarding the legitimate rights and interests of investors.

2.      Commercial banks shall, in addition to abiding by the general stipulations concerning the financial reports and the contents and formats of the prospectus and annual reports provided by the CSRC, comply with the provisions of the following regulations when preparing prospectus for public offering and preparing annual reports and notes to the financial statements after the public offering.

Chapter 1 Prospectus

3.      Commercial banks shall disclose the following risks and analyze the impacts such risks pose on the banks with respect to financial status and operation results:

(1)   Credit risk, including:

a.      Distribution of risks, degree of credit risks concentration, quality of credit, e.g. the present loan portfolio and client convergence.

b.      Major policies and organizational arrangements made by the bank management for administration and control of the credit risks.

(2)   Liquidity risk, including:

a.      Describing the management’s definite policies on the risk, whether the management information system and other internal control systems are established or not, and the evaluation on the management over liquidity risk.

b.      By analyzing the specific scale and operation environment in combination of the financial statements and notes to such statements, describing how the liquidity is affected by the unfavorable factors, including but not limited to the huge increase of credit demands, fulfilling large amounts of commitments for loans, sharp decrease of deposits and dramatic changes of domestic or international interest rates.

c.      Analyzing the matching between assets and liability within respect to term and structure, the reliance of such matching on the source of a certain type of fund, short term convertible liquid assets, short term financing capability and cost, the bank’s reputation in the money market, and disclosing whether the bank has emergency financing plans for any contingencies.

d.      Analyzing the effect of capital adequacy rate on liquidity.

(3)   Risks brought about by the changes of exchange rates, such as the effect of interest rate variation on the foreign exchange transactions, and on the holding of the foreign currency assets and liabilities.

(4)   Risks brought about by the changes of interest rates, such the interest rates policy adopted by banks, effect of interest rate variation on the banks’ profitability and financial status. Sensitivity analysis shall be made on such effects.

(5)   Risks brought about by the technological and human factors, such as unreliable computer system, embezzlement, fraud and poor measures on assets preservation.

(6)   Risks brought about by the changes of national laws, regulations and policies, such as the influence of the changes of tax system, business license system and foreign exchange system on the banks.

(7)   Other risks, like the fact that many foreign invested commercial banks are allowed to enter the China’s credit market after China’s entry into WTO.

A commercial bank shall clearly describe the compliance of relevant asset/liability indexes as provided by laws and regulations when analyzing the foregoing risks.

4.      A commercial bank shall establish a sound internal control system and set aside a part in the text of prospectus to give detailed descriptions of the completeness, rationality and effectiveness of its internal control system.

A commercial bank shall also entrust the accounting firm employed to make evaluations on the completeness, rationality and effectiveness of its internal control system and risk management system and put forward improvement proposals, which shall be made into the evaluation report on internal control. The evaluation report on internal control shall be submitted to the CSRC by attaching to the prospectus.

Where there are serious defects in the aforesaid three characteristics as pointed out by the accounting firm employed, the commercial bank shall disclose such defects and make description of related improvements to be taken.

5.      Where a commercial bank uses the funds raised for setting up branches, the commercial bank shall disclose the quantity of funds needed and location of the newly added branches. In case the funds raised are only for increasing capital, the specific purposes for such funds do not need to be disclosed. In case the funds raised are for renovating equipment, acquisition and merger and other purposes, the details of investment of the funds raised shall be disclosed.

6.      A commercial bank shall, upon introducing the issuer, disclose in detail the name, location, number of employees and assets scale of each branch as well as the number and geographical distribution of each branch and savings office.

7.      A commercial bank shall disclose the accruals of provisions for loan loss and loan loss written-off system with respect to prudence and effectiveness and describe whether the following requirements are met:

(1)   Regularly conduct meticulous credit risk quality analysis

(2)   Focus on all loans (whether based on individual loans or on loan categories)

(3)   Categorize the loans by virtue of similar risks with considerations of the actual influence of different risks.

(4)   Consider all known internal and external factors that may affect the recovery of loans based on the latest reliable data.

(5)   Estimate loss in a comprehensive way by adopting systematic and logic methods, and make sure that the loan loss reserve is accrued in compliance with the requirements provided in the accounting system and standards.

(6)   Consistency shall be observed for the foregoing methods that are subject to change owing to the new factor that may influence the recovery of loans if necessary.

(7)   The competent professionals shall be employed to conduct analysis, evaluation, review and other work relating to determining the loan loss reserve.

(8)   Prepare complete written documents to clearly set out relevant policies, analysis and basis.

(9)   The management shall regularly conduct examination and adjustment to the accruals of provisions for loan loss reserve and loan loss written-off system.

8.       A commercial bank shall disclose the following information concerning the non-performing assets:

(1)   The accruals of provisions for loan loss reserve at year end over the previous 3 years, including

a.      The “5-category” classification for the year-end loans over the previous 3 years, amount of loans at different levels and accrual ratio of loan loss reserve.

b.      Accrual ratio of special reserve at the year-end over the previous 3 years

c.      Accrual ratio of general reserve at the year-end over the previous 3 years

(2)   Analysis of the non-performing assets with respect to term and structure from such factors as the loan granting time and geographical distribution.

(3)   The year-end balance, term, structure and overdue status of overdue loans.

(4)   Withdrawal of bad debts reserve for interests receivable and other receivables, bad debts written-off procedures and policies.

9.      A commercial bank shall disclose its capital adequacy, including, with simple computation process, the total amount of venture capital at year-ends over the previous 3 years, quantity and structure of net capital, core capital adequacy and capital adequacy calculated at the year-ends and by month over the previous 3 years, and shall analyze the trend and reason of change and other information about the capital adequacy over the previous 3 years.

10.  A commercial bank shall disclose the annual average balance and annual average loan interest rate that are calculated by month for the major loan categories over the previous 3 years.

11.  A commercial bank shall disclose the information concerning the treasury bonds it holds and loans as follows:

(1)   Information about the large-value treasury bonds, including face value, interest rate and maturity date.

(2)   Amount of restructured loans and amount of overdue part of such loans.

(3)   Loan concentration, namely, the ratio of the amount of top 10 clients’ loans to the total loans.

(4)   Amount and key composition of the discounts that account for more than 20% (20% inclusive) of total loans.

12.  A commercial bank shall disclose the annual average balance and average deposit interest rate per annum calculated by month for the major loan categories over the previous 3 years.

13.  Where a commercial bank adopts tax effect accounting method to calculate the income tax expenses, if the debit amount of the deferred taxes is huge , the commercial bank shall analyze the reversal period and reversal amounts for the deferred taxes.

14.  Where a commercial bank has overdue outstanding debts, the commercial bank shall make a detailed description about the amount, interest rate, creditor, reason for unpayment of such debts in due time and the estimated time for repayment.

15.   A commercial bank shall disclose the following annual average financial indexes (with concise computation processes) calculated by month and at the year-ends over the previous three years: loan quality ratio, ratio of deposits to loans, short term asset liquidity ratio, ratio of borrowing funds, proportion of international commercial loans and interest collection ratio.

A concise analysis shall also be made with respect to the important change trend, reason and other related information concerning the foregoing indexes over the previous three years.

16.  A commercial bank shall disclose the total amount of important off-the-balance-sheet items and related key information that may affect its financial status and operating results. These off-the-balance-sheet items include banker’s acceptance bill, financing guarantee, non-financing guarantee, issuance of sight letter of credit, issuance of usance letter of credit, loan commitment, foreign exchange contract, sale of assets with recourse and important blank vouchers.

17.  A commercial bank shall employ an accounting firm that is experienced in commercial bank auditing and has relevant qualifications for practicing in securities and futures to conduct audit in accordance with the China’s Independent Auditing Standards on the statutory financial reports the commercial bank prepares in line with the China’s accounting systems and information disclosure rules. In addition, the commercial bank shall engage an international accountant’s office specially certified by the CSRC and the Ministry of Finance to perform audit in accordance with the internationally accepted auditing rules on the supplementary financial reports the bank prepares in compliance with the internationally accepted accounting and information disclosure rules.

When additional auditing is needed, attention should be paid to the following: withdrawal of loss reserve and disposal of non-performing assets, major off-the-balance-sheet items and their impact on the financial conditions and operating results, the assets quality, profitability and operation risks of different clientele, operation projects and regions, and the principal differences between the statutory financial reports and supplementary ones.

The financial information set forth in the text of prospectus should be abstracted from the statutory financial reports. The supplementary reports, which are disclosed as the attachments to the prospectus, only serve as a reference for investors in judging the commercial bank’s financial status and investment risks.

Chapter 2 Annual Report

18.  A commercial bank shall disclose the following financial data for the year-ends over the previous three years as of the end of the reporting period: total venture capital, quantity and structure of net capital, loan loss reserve, total liabilities, total deposits, total long term deposits and inter-bank loans, total loans and balances of various loans.

A commercial bank shall disclose the following annual average financial indexes for the year-ends over the previous three years by the end of the reporting period: core capital adequacy, capital adequacy, loan quality ratio, ratio of deposits to loans, short term assets liquidity ratio, proportion of borrowing funds and interest collection ratio.

19.  A commercial bank shall disclose the information concerning the accrual system for provisions of loan loss and loan loss written-off system in accordance with the provisions in the aforesaid Article 7.

20.  The board of directors of a commercial bank shall disclose the following information in its report:

(1)   Information about the subordinated branches, including the name, address, number of employees, assets scale, number of outlets and geographical distribution.

(2)   Capital structure by the end of reporting period, including core capital, supplementary capital and net capital (listed as per the algorithm provided by the People’s Bank of China and international banking industry).

(3)   Credit risk status, including the credit risk management, credit risk exposure, credit quality and utilization of credit risk mitigation, which are categorized into the following:

a.      Business activities generating credit risk

b.      Credit risk management and control policies

c.      Organizational structure and division of responsibility of credit risk management

d.      Procedures and methods for asset risk classification

e.      “5-category” classification of loans by the end of reporting period, accrual ratio of provisions for loan loss at different level

f.        Initial amount, accruals of current period, reversals of current period, written-offs of current period and year-end amount of loan loss reserve. The general reserve, specific reserve and special reserve shall be disclosed respectively.

g.      Ratio of top ten client loans to the net capital by the end of reporting period shall be listed and the risk control over the loan client concentration shall be described.

h.      Analysis on industry, region, client category concentration with respect to loans.

i.        Analysis on non-performing loans.

j.         Year-end balance of the restructured loans and the overdue amount of such loans.

k.      Annual average balance and annual average loan interest rate calculated by month for the major loan categories of current year.

l.         Annual average balance and annual average deposit interest rate calculated by month for the major deposit categories of current year.

m.    Utilization of credit risk mitigation.

(4)    Liquidity risk, including the relevant indices reflecting its liquidity, analysis on the factors affecting liquidity and description of liquidity management strategy of the bank.

(5)   Operation risk, including the risks brought about by the imperfection or mistakes of the internal procedures, personnel and system or by external events, and the description of the completeness, rationality and effectiveness of the internal control system of the bank.

(6)   Other risks, including the risk factors that may pose seriously unfavorable impact on the bank.

Quantitative analysis shall be made on the foregoing risk factors if practicable. And the analysis methods for such quantitative analysis shall be disclosed.

(7)   Composition of assets for offsetting debts in suspense and accruals of provisions for depreciation.

(8)   Balance of non-performing assets by the end of reporting period, the measures taken and proposed to be taken for solving the non-performing assets.

(9)   The year-end balance of off-the-balance-sheet items that may pose great impact on the financial conditions and operation results of the commercial bank and the related important information.

(10) The loss caused by the risk factors disclosed in the previous report period on the commercial bank in the current year.

21.  A commercial bank shall employ an accounting firm that is experienced in commercial bank auditing and has relevant qualifications for practicing in securities and futures to conduct audit in accordance with the China’s Independent Auditing Standards on the statutory financial reports the commercial bank prepares in line with the China’s accounting systems and information disclosure rules. In addition, the commercial bank shall engage an international accountant’s office specially certified by the CSRC and the Ministry of Finance to perform audit in accordance with the internationally accepted auditing rules on the supplementary financial reports the bank prepares in compliance with the internationally accepted accounting and information disclosure rules.

When additional auditing is needed, attention should be paid to the following: withdrawal of loss reserve and disposal of non-performing assets, major off-the-balance-sheet items and their impact on the financial conditions and operating results, the assets quality, profitability and operation risks of different businesses and operation regions, and the principal differences between the statutory financial reports and supplementary ones.

The financial information in the text of annual reports shall be consistent with that provided in the statutory financial reports. And the supplementary financial reports shall be disclosed as the attachments to the annual reports.

22.  A commercial bank shall make a description of the completeness, rationality and effectiveness of its internal control system.

A commercial bank shall also entrust the accounting firm employed to make evaluations on the completeness, rationality and effectiveness of its internal control system and risk management system and put forward improvement proposals, which shall be made into the evaluation report on internal control. The evaluation report on internal control shall be submitted to the CSRC and the stock exchanges by attaching to the prospectus.

Where there are serious defects in the aforesaid three characteristics as pointed out by the accounting firm employed, the commercial bank shall disclose such defects and make description of related improvements to be taken.

23.  A commercial bank shall prepare its annual report summary in which the major contents set forth in the foregoing Article 18 through Article 22 shall be included. And the formulas for computing do not need to be listed for the financial indices therein. In case of any major difference between the statutory financial reports and the supplementary ones, such difference shall be noted in the summary.

Chapter 3 Notes to Financial Statements

24.  A commercial bank shall disclose the following information in its principal accounting policies:

(1)   Category and scope of loans, standards for converting accrued loans to non-accrual loans, accounting methods for non-accrual loans.

(2)   5-category loan classification and the scope and methods for accruals of provisions for loan loss, accrual ratio and determination basis for general reserve, specific reserve and special reserve. For reserve determined by the actual condition of individual loans, the bases for determination shall be described, such as the evaluations on the borrower’s solvency, financial conditions, and hypothecation sufficiency.

(3)   Pricing and earnings determination methods for the sell-back securities.

(4)   Determination methods for interest income.

(5)   For the derivative instruments such as foreign exchange transaction contracts, interest rate futures, forward exchange rate contracts, currency and interest rate hedge, currency and interest rate options, the pricing methods shall be described. In case the fair value is adopted, the methods for obtaining fair value shall also be described, such as the market price ratio and future cash flows.

(6)   For the derivative instruments for speculations and other derivative instruments for hedging purpose, the methods for determining profit and loss, and the standards for determining the derivative instruments for hedging shall be described.

25.  A commercial bank shall disclose the following information in the notes to its financial statements:

(1)   List of amounts by category due from the central bank with computation basis.

(2)   Amounts due from banks according to amounts due from banks in the territory and outside the territory.

(3)   Amounts due to banks according to amounts due to banks in the territory and outside the territory.

(4)   The initial and period-end amounts of loans separately by loan types such as credit loans, guarantee loans, mortgage loans and hypothecated loans.

(5)   The interest receivable and bad debts reserve shall be disclosed in the format shown as follows:

(6)   The buyback securities shall be disclosed by category, such as treasury bonds and financial debentures buyback.

(7)   The medium and long term loans shall be disclosed in the format as follows:

(8)   The amounts at the beginning of period and period-end amounts of loans separately by loan risk classification. For the non-performing loans, the amounts at the beginning of period and period-end amounts of loans shall be disclosed by types such as credit loans, guarantee loans, mortgage loans and hypothecated loans.

In case the loans of the shareholders who hold over 5% (5% inclusive) of the stake of the bank are included in the foregoing items 4, 5, 7 and 8, the description of such loans shall be made in the notes to specific items respectively.

(9)   The loan loss reserve shall be disclosed in the format as follows: