business overvie · the hong kong residential mortgage portfolio (industry average of 0.03%), 1.05%...

Business Overview

Business Overview

The Hong Kong Mortgage Corporation Limited Annual Report 2015 25

Performance Highlights

Themajorachievementsof theCorporation for theyearincluded:

• purchasingaboutHK$337millionofloanassets

• helpinghomebuyersborrowa totalofHK$17.2billionmortgage loans through theMortgage InsuranceProgramme(MIP)

• approving1,096applicationssince the launchof theReverseMortgageProgramme(RMP),withanaveragepropertyvalueofaroundHK$5.1million

• launchingthePremiumLoan InsuranceScheme(PLIS)withpositivemarketresponse

• approving loans totallingHK$41.2millionunder theMicrofinanceScheme(MFS)since its inceptionanduptotheendof2015tobusinessstarters,self-employedpersons fromdifferentbackgroundsandprofessionsandthosewantingtoachieveself-improvementthrougheducationandtraining

• withthesupportof theGovernment, furtherextendingtheapplicationperiod for the80%guaranteeproductundertheSMEFinancingGuaranteeScheme(SFGS) foroneyear to29February2016.Sincethe launchof theSFGS in January2011, theCorporationhadapprovedover 10,900applications for a total loanamountofapproximatelyHK$44.1billion,ofwhichmorethan10,600applications fora total loanamountofaboutHK$43.2billionwereapprovedwith80%guaranteeprotection.Over6,900 localsmallandmediumenterprises (SMEs)andnearly183,000relatedemployeeshavebenefitedundertheSFGS

• issuingHK$14billionofdebtsecurities (withmaturityof1-yearandabove) inacost-effectivemanner, thuspromoting thedevelopmentof the localdebtmarketandmaintaining theHKMC’spositionasoneof themostactive issuers inHongKong.Among them, theCorporation issued30-yearbondstotallingHK$1billionfor the first time tosupportpotentialnew fixed-ratebusinesses

• safeguardingexcellentcreditquality,withover90-daydelinquency ratiosof0% for themortgage insuranceportfolio, 6.53% for the SME guarantee portfolio(excluding the80%productunderSFGS), 0.02% fortheHongKongresidentialmortgageportfolio (industryaverageof 0.03%), 1.05% for themicrofinance loanportfolioand0.02%acrossallassetclassesasat31December2015

• maintaining theHKMC’s long-term foreignand localcurrencyratingsofAAAbyStandard&Poor’s(S&P)andAa1byMoody’sInvestorsService,Inc.(Moody’s).

TheCorporationmaintainedasolid financialposition for2015:

• profitattributabletoshareholdersofHK$725million

• netinterestmarginof1.2%

• returnonassetsof1.4%

• returnonshareholders’equityof8.1%

• cost-to-incomeratioof25.7%

• capitaladequacyratioof21.9%,wellabovetheminimumrequirementof8%stipulatedbytheFinancialSecretary.

The Hong Kong Mortgage Corporation Limited Annual Report 201526

Business Overview

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Market Overview

General Economic ConditionsIn 2015,major advanced economies continued theirdivergent trendswith theUS reportinggooddomesticgrowthwhiletherecovery inEuropeandJapanremainedsluggish.ThestrengtheningUSeconomyfinallypromptedtheUSFederalReserve to raise the federal funds targetrateforthefirsttimeinalmostadecade,markingthestartofUSinterestratenormalisation.Incontrast,thecontinuedweaknessinrecoveryandsubduedinflationinEuropeandJapansignalledthe likelihoodof furthermonetaryeasing.Growth inChinaslowedonweakenedexternaldemandandsubduedprivateinvestment.Againstthisbackdrop,theHongKongeconomygrewmodestlyat2.4%year-on-yearinreal termsduringtheyearwithamoderatingdomesticdemandandalacklustreexportperformance.

Liquidity and Interest-Rate EnvironmentIngeneral,HongKong’smonetaryenvironmentstayedaccommodativeand the low interest rateenvironmentcontinuedinHongKong.Themarketremainedfloodedwithliquidity.At theendof2015, theHKDandallcurrenciesloan-to-deposit ratiosofallAuthorized Institutions (AIs)edgeddownto78.2%and70.1%respectively from83.3%and72.2%attheendof2014(Figure 1).

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Loan-to-deposit Ratio

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Overall,themortgagerateinHongKongstayedlowin2015.TheBestLendingRates(BLRs)remainedunchangedat5%and5.25%throughouttheyear.TheHongKong InterbankOfferedRates (HIBORs) also remainedsteady,with theone-monthHIBORfloatingintherangeof0.20%–0.24%,intermsofperiodaverage1.Asthecompetitionformortgagebusinesswaskeen, themortgageratesremainedstatic.Attheendof2015,theBLR-basedmortgagerateswereataboutBLR-3.1%toBLR-1.95%andHIBOR-basedmortgagerateswereatHIBOR+1.7%toHIBOR+2.95%(Figure 2).

Figure 2

Best Lending Rate and Gross Mortgage Rate


Property MarketAmidconcernsoveran imminentUS interest rate lift-offand theslowdown in theMainlandChinaeconomy, theresidentialpropertymarketconsolidatedinthethirdquarterof theyearafter the introductionof furtherprudentialmeasuresonresidentialmortgageloansbytheHongKongMonetaryAuthority (HKMA) in lateFebruary.Thenumberof property transactions in 2015decreased by about12%year-on-year to55,982,while theconsiderationoftransactionsdroppedbyalmost4%year-on-year(Figure 3).

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Agreements for Sale and Purchase of Residential Building Units

Source:LandRegistry

While trading inboththeprimaryandsecondarymarketsfell, thegrowthofresidentialpropertypricesdecelerated.Ingeneral, residentialpropertyprices2 recordedanabout2.5%cumulative increasein2015,comparedwiththe13%increase in2014.However,with thecontinuedsurge inprices in thepast fewyears, residentialpropertypricessurpassedthe1997peakbyaround67%asattheendof2015 (Figure 4).

Figure 4

Private Domestic Price Index (1999 = 100)

Source:RatingandValuationDepartment

Mortgage MarketIn tandemwith theconsolidation in thepropertymarket,mortgagelendinggrowthalsoshowedaslowingtrend,withthegrossvalueofnew loansdrawndown3 increasingby14%year-on-year,comparedwiththegrowthrateof35%in2014 (Figure 5).Despite theslowdown in thegrowthofnewmortgage lending, the totaloutstandingvalueofall residentialmortgage loansrosemoderatelyby8.7%toHK$1,119.3billionin2015.

Figure 5

New Residential Mortgage Loans Drawn Down


With HIBOR remaining at a low level, 79.7% of newmortgage loanswerepricedwith reference toHIBOR inDecember2015.TheproportionofBLR-basedmortgagesstayedbelow15%throughouttheyear,withthemajoritypricedwithintherangeof2%and2.25%(Figure 6).Inthesecondhalfof theyear, theshareof fixed-ratemortgageloansincreased,from1.3%inJulyto7.9%inDecember.

2 Source:ThePrivateDomesticPrice Indexpublishedby theRatingandValuationDepartment

3 Source:HKMA’sMonthlyResidentialMortgageSurvey(HKMA Survey)


Business Overview

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Pricing of New Residential Mortgage Loans Approved


Withthestablelabourmarketandtheprudentsupervisionof themortgage lending sector by HKMA, the assetqualityof residentialmortgage loansremainedexcellentin2015.Theover-90-daydelinquency ratioofmortgageloans4stayedata lowlevelof0.03%throughouttheyear,reflectingtheprudentunderwritingstandardsadoptedbythebanks.Thecombinedratio,whichtakes intoaccountbothdelinquentandrescheduledloans,alsoremainedlowat0.03%duringthesameperiod(Figure 7).Asresidentialproperty prices started to decline after themarketconsolidation,95mortgageloans,withanaggregatevalueofHK$480million,wererecordedtobe innegativeequityatend-December2015. Itwas the first timeof reportednegativeequitycasessinceend-September20144.

4 Source:HKMASurvey

Figure 7

Delinquency Ratio of Residential Mortgage Loans


Banking-Sector ExposureThetotaloutstandingvalueofmortgage loansforprivateresidentialproperties increased toHK$1,077.9billionattheendof2015 (end-2014:HK$988.1billion),accountingforone-fifthoftotalloansinHongKong(Figure 8).Addingto this the lending forbuildingandconstruction,alongwithpropertydevelopmentand investment, theamountof property-related loans totalledHK$2,216.5 billion,representingabout42%of the total loanbookofbanks.Theoutstandingvalueofmortgage loansforthepurchaseof flats in theHomeOwnershipScheme,PrivateSectorParticipation Scheme and Tenants Purchase SchemedroppedslightlytoHK$41.4billionbytheendof2015(end-2014:HK$41.7billion).


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Total Loans and Private Residential Mortgage Loans ofAll Authorized Institutions


Asset Acquisition

While theample liquidity in themarkethas led toweakincentivesforbankstooffloadtheirassets,theCorporationis prepared to provide liquidity to themarket as andwhen required.For theyear, theCorporationacquiredaboutHK$337millionofassets,whichincludedresidentialmortgageloansandotherassets.

E x t e n s i o n o f t h e t i m e - l i m i t e d 8 0 % g u a r a n t e e p r o d u c t u n d e r t h e S M E Financing Guarantee Scheme (80% SFGS)

TheFinancialSecretary in the2012–2013BudgetSpeechannouncedsupportmeasures forSMEs to tideover theuncertainglobaleconomicenvironmentandthepossiblefinancingdifficultiesasa resultofcreditcrunch.Beingpartandparcelof thepackageofsupportmeasures forSMEs, theCorporationpromulgatedthetime-limited80%SFGSforanapplicationperiodofninemonthsuptoend-

February2013with theGovernment’s total guaranteecommitment of up to HK$100 billion. The 80% SFGSprovides80% loanguaranteeoneligible loan facilitiesapprovedbyparticipatinglendersatasubstantiallyloweredguaranteefeerate,whichhelpsSMEstoobtain loansforgeneralworkingcapitaloracquiringequipmentorassetstosupportbusinessoperations. In lightof theuncertainexternaleconomicenvironmentandtradeperformance,the80%SFGSwasextendedforatotalofthreeyearstoend-February2016.

TheCorporationadministers the80%SFGSonprudentcommercialprinciples.Theguaranteefeesaresetasidetopaydefaultclaimsfromparticipating lendersandout-of-pocketexpensestobeincurredunderthearrangement.Atotalof30AIshaveparticipatedintheSFGSaslenders.

The80%SFGShasbeenwellreceivedbythemarket.Asat31December2015,theCorporationhadapprovedmorethan10,900applicationsforatotalloanamountofapproximatelyHK$44.1billionunder theSFGS.Morethan10,600of theapplicationsfor loansamountingtoaboutHK$43.2billionwereapprovedunderthe80%SFGS.Over6,900localSMEsemployingnearly183,000peoplehavebenefitedundertheSFGS.

TheCorporationhasbeenmaintainingongoingdialoguewiththeHongKongGovernment, lending institutionsandmarketparticipants inorder to further improvepublicawarenessandrecognitionof theSFGS, inparticular the80%SFGS.Moreover, theCorporationhascontinued totakeproactivestepstoimprovetransparencyandenhancemutualunderstandingbetweentheCorporationand theparticipatinglenders.

TocopewiththedevelopmentoftheSFGS,theCorporationintroduced furtherenhancements inApril 2015 to theexistingweb-basedsystemwithanaimtostreamlinetheprocessingofclaimrequests.Theenhancementenablesapaperlesssubmissionprocessandareal-timetrackingoftheupdatedstatus.


Business Overview

Mortgage Insurance Programme

TheMortgage InsuranceProgrammeservesasausefultool inassistingpotentialhomebuyersstrugglingtocomeupwithasubstantialdownpayment for thepurchaseofaproperty.Fromabanking industryperspective, theMIPallowsbanks toengage inhigher loan-to-value lendingwithoutincurringadditionalcreditriskandjeopardisingthestabilityofthebankingsystem.All inall,theMIPcreatesawin-winsituationforbothhomebuyersandbanks.

Overtheyears,theMIPhasfirmlyestablisheditselfasanintegralpartofmortgagefinancinginHongKong.Demandfor theMIPremainedsteady in2015,and thevolumeofloansdrawndownunder theMIP increasedslightly toHK$17.2billion in2015fromHK$16billion in2014(Figure 9).About88%oftheMIPloansdrawn(intermsoftheloanamount)were securedonproperties in the secondarymarket.Thisdemonstrates the importanceof theMIP tohomebuyersinsecondarymarket.

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Mortgage Loan Amount Drawn Down under HKMC MIP

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Since1999,theMIPhashelpedmorethan117,000familiesachievethedreamofhomeownership,withanaggregateloandrawdownofHK$278billion.

Premium Loan Insurance Scheme

AscommissionedbytheFinancialSecretaryinthe2015-16Budget, theCorporation launched thePremiumLoanInsuranceSchemeinSeptember2015toprovideaplatformforownersofsubsidisedhousingpropertiesaged50orabovetofinancetheirlandpremiumpaymentstotheHongKongHousingAuthority (HA),HongKongHousingSociety(HS)ortheGovernment.

UnderthePLIS,borrowerswillbegranted loansbybanksagainst their subsidisedhousingpropertiesassecurityprimarily forsettlingpremiumpaymentstotheHA,HSortheGovernment.TheCorporationwillactasaninsurerbyprovidingassurance to theparticipatingbanks tocoverlossesarising from thepossibleshortfall at the timeofsellingthepropertywhentheloanisterminated.Bytheendof2015,theCorporationhadapproved3PLISapplications,withanaverageappraisedpropertyvalueofaroundHK$4.8millionandanaveragelump-sumpayoutamountofHK$1.2million.

TodrawattentiontothenewlylaunchedPLIS,anadvertisingcampaignwas launched, including televisionand radiocommercials, newspaper advertisements andminibusbodyadvertisements, following the launchceremony inmid-September2015.AsthetargetcustomersofthePLISareownersofsubsidisedhousingproperties,district-levelpromotionswereheld to reachout to this targetgroup,whichincludedrovingexhibitionsatshoppingcentresclosetosubsidisedhousingestatesandseminarsincollaborationwiththeparticipatingbanks.


Reverse Mortgage Programme

TheReverseMortgageProgrammewaslaunchedwiththeaimofprovidingelderlypeoplewithanadditionalfinancialplanningoptiontoenhancetheirqualityof life.Bytheendof2015,theCorporationhadapprovedatotalof1,096RMPapplications,withanaveragepropertyvalueofaroundHK$5.1millionandanaveragemonthlypayoutamountofHK$14,800.

For enhancing the RMP to suit the needs of targetcustomers, the Corporation launched a number ofenhancementsinMarch,includingtoaccept(1)morethanoneself-usepropertyassecurityunderareversemortgageloan,(2)suchpropertiesnottobetheborrower’sprincipalresidence, (3) jointapplicationbythreeborrowersand(4)life insurancepolicy(ies)asadditionalsecurity.Thesenewinitiativeswereexpectedtoenhancetheflexibilityof theproductwhilemaintainingahealthy riskpositionof theCorporation.

Topromotepublicawarenessandunderstandingof theRMP,theCorporationproducedamicrofilmnamed“SweetHome”, the themeofwhichwasonhowtheRMPcouldhelpprovidea financialsolution tomodern familiesandfoster familybondingbetweendifferentgenerations.Themicrofilmwasa first-everattemptof theCorporation topromote itsbusinessprogrammesbywayofanonlinemovie. To reinforce themessages to the public, anadvertisingcampaignwaslaunchedthroughdifferentkindsofchannelduringtheyear.TheseincludedTVcommercialvia onlinemedia (e.g. YouTubeandFacebook) andatcommercial sites (e.g. lobbiesof commercialbuildingsandbankbranches), radio commercial, TV andRadioAnnouncementsinthePublicInterests,aswellasbusbodyandnewspaperadvertisements.

To reachout toawide spectrumof stakeholders, theCorporationcontinued toundertake joint initiativeswithbanks, counterparties, professional bodies and non-governmentalorganisations (NGOs), includingseminarsand talks and/or participating in public conferences/forumstopromotetheRMP.InDecember,theCorporation

collaboratedwith theHS in promoting the RMP as afinancingoption to theelderlywhomightbecome thetenantsofTheTannerHill,afirst-of-its-kindnon-subsidisedqualityhousingproject forcitizensaged60orabove inHongKong.

Microfinance Scheme

UndertheMicrofinanceScheme,theCorporationcontinuedtotakeuptheroleofaschemeoperatorand liaisedwithparticipatingbanksandNGOstoofferloansatanaffordablerateandancillarysupportingservicestoassistpeoplewhowishtostarttheirownbusiness,becomeself-employedorachieveself-enhancement throughtraining,upgradingofskillsorobtainingprofessionalcertification.

InJune,theCorporationextendedtheschemeforafurthertermof3yearsto2018.AlongsidetheextensionofthetermoftheMFS,aseriesofenhancedfeatureswereintroduced,including (1) raisingtheaggregate lendingamountcapoftheMFSbyHK$100milliontoHK$200million;(2)increasingthemaximumloanamountofaSelf-employmentLoanfromHK$200,000 toHK$300,000; (3) increasing themaximumnumberofco-borrowers from2to3;and (4) forexistingor formerborrowersofMicroBusinessStart-upLoanorSelf-employmentLoanwhohavemaintainedtheirexistingor former loans forat least twoyearsandasatisfactoryrepayment record under theMFS, allowing them toapply foranew loanwithanaggregate loan limitup toHK$600,000.

TheMFShasoperatedsmoothlysince its launch in June2012.Bytheendof2015,theMFShadapprovedatotalof164loanswithatotalloanamountofHK$41.2million.

TheMFShas a goodmix of borrowers fromdifferentbackgroundsandprofessions,suchasyoungbeauticians,makeupartists, apetgroomingawardwinner, fashionandwatchdesigners, IT graduates,Chinesemedicinepractitioners,rehabilitatedoffenders,aclownperformanceentertainer,nativeEnglishspeakingteachers,dessertsandpastrychefsandatestinglaboratoryspecialist.


Business Overview

TheCorporationcontinueditsfocusedstrategyinpromotingtheMFSto the targetmarketsegmentsandcommunity.With a view to reaching awider range of potentialborrowers and furtherpromotingentrepreneurship inthe community, the Corporation joined public talks,seminars,exhibitionsand/or relatedactivitiesorganisedbyeducational institutionsandNGOs. Inaddition,anMFSBooklet, titled “Tips for SuccessfulBusinessStart-up”,wasmadeavailable inbanks,NGOs,businesscentres,communityorganisations, secondary schools, tertiaryeducationinstitutionsandpubliclibraries.

ToenhancepublicreceptivenesstotheschemeandhelpMFSborrowerspromotetheirproductsandservices, theCorporationorganised theMicrofinance SchemeFairatOlympianCity.TheCorporationalsoproducedanewtelevisioncommercialandamusicvideo,andcontinuedtoarrangemediainterviewswithMFSborrowerssoastoraisetheprofileoftheMFS.

Funding

Theglobal financialmarkets remainedvolatile in2015andwereaffectedby theuneveneconomicgrowthanddivergingmonetarypolicypaths in themajoreconomies.Despite the challengingmarket conditions, theHKMCmanagedtosecureprudentpre-fundingforloanpurchasesandrefinancingactivities.GiventheCorporation’sstrongbackgroundasawhollygovernment-ownedentityand itssolidcredit rating, theCorporation raiseddebt totallingHK$14billion (withmaturityof1-yearandabove) in2015.Attheendoftheyear,theCorporation’stotaloutstandingdebtamountedtoHK$33.5billion.

TheCorporationiscommittedtodevelopingthelocaldebtmarketthroughregulardebtissuancesandtheintroductionofnewdebtproducts.Asoneof themostactivebondissuers inHongKong, theCorporationwill continue toissuedebtinbothlocalinstitutionalandretailmarkets,anddiversifyitsfundingsourcesandinvestorbasetooverseas

institutionalmarkets.ThiswillnotonlyhelpbroadentheCorporation’s fundingbase,butalsoprovide institutionaland retail investorswithhighqualitydebt instrumentstosatisfy theirneedforportfoliodiversificationandyieldenhancement.

TheCorporationhas threedebt issuanceprogrammes,whichallowthe issuanceofdebtsecurities inanefficientand effectivemanner.With its strong credit rating,theCorporation’sdebt issuesarewell receivedby theinvestmentcommunity,suchaspensionfunds, insurancecompanies,investmentfunds,charities,government-relatedfundsand retail investors.TheCorporationundertakesproactive investorcommunications tomeetandupdateinvestorsregularly.

Medium Term Note ProgrammeTheCorporationestablished themulti-currencyMediumTermNote(MTN)ProgrammeinJune2007tobroadenitsinvestorbaseandfundingsourcesin internationalmarket.ItwassetupwithaninitialsizeofUS$3billion,whichwassubsequently increased toUS$6billion in July 2011 tomeetgrowingdemandfromoverseasinvestors.Themulti-currencyfeatureoftheprogrammeenablestheCorporationto issuenotes inmajorcurrencies, includingHongKongdollars,USdollars, renminbi,Australiandollars,Britishpounds,euroand Japaneseyen, tomeetdemand fromboth localandoverseas investors.All foreigncurrency-denominatedMTNdebt is fully hedged intoeitherUSdollarsorHongKongdollars.Theprogrammeincorporatesflexibleproductfeaturesandofferingmechanismsforbothpublic issuancesandprivateplacements to increase itsappealto investorswithdifferent investmenthorizonsandrequirements.Asat theendof2015,anextensivedealergroup comprising 10major international and regionalfinancial institutionshadbeenappointedtosupportfutureMTNissuanceandprovidesecondarymarketliquidity.


In2015, theCorporation launched21MTNprivatedebtissues,totallinganequivalentofHK$14billion(withmaturityof1-yearandabove).Amongthem,theCorporationissuedthe30-yearbondstotallingHK$1billionforthefirsttimetosupportpotentialnewfixed-ratebusinesses.

Debt Issuance ProgrammeTheDebt IssuanceProgramme (DIP)wasestablished inJuly1998totarget institutional investorsintheHongKongdollardebtmarket.ItwassetupwithaninitialprogrammesizeofHK$20billion,whichwassubsequentlyincreasedtoHK$40billionin2003.TheDIPhassinceprovidedaflexibleandefficientplatform for theCorporation to issuedebtandtransferable loancertificateswithatenorofupto15years.AtotalofsixPrimaryDealersand16SellingGroupMembershadbeenappointedunder theDIP toprovidewidedistributionchannelsforbothpublicandprivatedebtissues.

Retail Bond Issuance ProgrammeTheCorporation is dedicated to promoting the localretailbondmarketwith theobjectiveofextending theCorporation’s investorbasebeyond its already stronginstitutional investor community. InNovember 2001,theCorporationsuccessfullypioneeredanewofferingmechanismfortheretailbondmarketinHongKong.

Tosupport thedevelopmentof the retailbondmarket,theCorporationestablishedtheHK$20BillionRetailBondIssuanceProgrammeandmadeitsdebut issuanceinJune2004.Underthisprogramme,placingbanksusetheirretailbranchnetworks,telephoneandelectronicbankingfacilitiestoplacedebtsecuritiesissuedbytheCorporationwithretailinvestors.Toensure the liquidityof theaforementionedretailbonds, theplacingbanksarecommittedtomakingfirmbidpricesforthebondsinthesecondarymarket.Since2001,theCorporationhas issuedatotalofHK$13.7billionretailbonds.Overtheyears,theCorporation’sretailbondshavegainedwidespreadrecognitionasasafeandsimple

investmentchoice,with reasonablyattractive returns,givingretailinvestorsanopportunitytoinvestinhigh-gradedebt securities issuedbyawholly 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 smoothoperationunderexceptional circumstances, so that it canbetterfulfil itsmandatetopromotebankingandfinancialstabilityinHongKong.While theCorporationobtains long-termfundingfromlocaland internationaldebtmarketstofunditsoperations,theFacilityalsoprovidesa liquidityfallbackfortheCorporation. In lightoftheglobal financialcrisis in2008,thesizeoftheFacilitywassubsequentlyincreasedtoHK$30billioninDecember2008,demonstratingtheHKSARGovernment’srecognitionoftheimportanceof,andfurthersupportfor,theCorporation.

TheCorporationusedtheRevolvingCreditFacilityduringtimesofmarketstressin1998and2008topartiallyfundtheacquisitionofHongKongresidentialmortgageassetsfromlocalbanks.Atbothtimes,theRevolvingCreditFacilitywasfullyrepaidwithfundsraisedfromtheCorporation’scost-effectivedebt issuancewhen themarketsstabilised. In2015,therewerenodrawdownsundertheRevolvingCreditFacility.

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


Business Overview

Credit Ratings of the HKMC

S&PShort-term Long-term

Moody’sShort-term Long-term

LocalCurrency A-1+ AAA(Negative) P-1 Aa1(Negative)

ForeignCurrency A-1+ AAA(Negative) P-1 Aa1(Negative)

The credit rating agencies havemade very positive

redit2015

commentsontheCorporation’screditstanding.

The following comments are extracts from the cratingreportsofS&PandMoody’s in JuneandJulyrespectively:

S&P“WeequalizetheratingsonHKMCwiththeratingonHongKong,thecorporation’ssoleowner.Thisreflectsourviewofan“almostcertain” likelihoodof timelyandsufficientextraordinarysupport from theHongKonggovernmentin theunlikelyevent thatHKMCneeds it…WeconsiderHKMC’sundertakingofadditionalpolicyinitiativesoverthepastseveralyearsashavingamildsolidifyingeffectonitstieswiththeHongKonggovernment,andreinforcingtheintegrallinkbetweenthetwoentities.”

“Inourview,HKMC’sverystrongmarketpositionand itsstrongmanagementandgovernanceunderpin itsstrongbusinessposition.HKMC is theuniqueentity inHongKongaddressing localbanks’ liquidityandbalance-sheetmanagementneeds throughpurchasesofmortgageandloanportfolios,especially in timesof stress…HKMC’sbusinessmodelhasbeentestedduringavarietyofstressfulmarketconditions.Whentheglobal financialmarketandthelocaleconomywereunderstressinlate2008andearly2009,HKMCenlargeditsmortgageacquisitionsinresponsetobanks’requests,andenhanced itsmortgage insuranceprogram. Inmorerecentyears, it tightenedtheeligibilitycriteriaforitsmortgageinsuranceprogram.ThemovewaspartofHKMC’s jointeffortwith thegovernmentand tomitigateapossibleoverheatingofpropertyprices inHongKong.”

“Webelievethatmarketrisksaremanagedeffectively.Thecompanymaintainsasimpleassetand liabilitystructure,withmainly vanillaproductsmanagedwithinwhatweregardassoundmarket riskpolicies.Thecorporation’sexposure tomarket risk is principally to interest ratemovements,withexposure to interest ratemismatchesappearingtobewellmanaged.”

“WeexpectHKMC tocontinue toprudentlymanage itsfundingand liquidity.Weassess thecompany’s fundingprofileasadequate,consideringits lackofretail funding…WeexpectHKMCtomaintainabufferofhighlyliquidassets,whichismorethansufficienttocoveritsshort-termfundingneeds…Further,aHK$30billionrevolvingcredit facility,whichisequivalenttoaboutthreequartersofHKMC’stotalliabilitiesattheendof2014,providesasignificantcushionagainstanyunexpectedliquiditystress.”

Moody’s“HKMC is fullyownedby thegovernment, andcarriesoutpublicpolicy functions in itsdailyoperations. Thecompany’spolicymandatesincludeenhancingfinancialandbankingstabilityinHongKong,promotinghomeownership,andfacilitatingthedevelopmentofthe localdebtmarket.Aspartof itsmandatetopromotebankingstability,HKMCactsasanalternative ‘lenderof last resort’bystandingreadytopurchaseresidentialmortgagesfromHongKongbanksduringtimesofstress.”

“ThegovernmentprovidestheHKMCwithaHKD30billionrevolvingcredit facilityandHKD1billionofequitycapitalcallablewhenneeded. In theevent thecompany’screditprofile isweakened inastressscenario,weexpect thegovernmenttoprovidetimelyextraordinarysupport.”

“TheHKMChasmaintainedverysoundassetqualitymetricsthroughmultiplehousingcyclessince itsestablishment…Hong Kong residentialmortgages have historicallyperformedverywellthrougheconomiccycles.Evenwhenpropertypricefellbyupto70%between1997and2003,overallmortgagedelinquenciesneverexceeded2%.Thecurrentaverageloan-to-valueratioonthecompany’sHongKongmortgagesisbelow40%.”


“Asawholesalefundedentitywithnocustomerdeposits,theHKMC reliesonongoingaccess to thedebtcapitalmarketstofund itsoperation.Nevertheless,thecompanyhasapolicyofpre-funding itsexpectedassetpurchasesandmaintainsaverystrongliquidityprofileduringnormaleconomicconditions. Ithasverygoodaccess tocapitalmarkets due to its strong financial fundamentals andgovernmentaffiliation…ItalsohasaHKD30billionrevolvingcredit facility fromthegovernment’sExchangeFund.Thecompanyhas sufficient liquid assets andgovernmentrevolvingcreditfacilitytorepayallof itsoutstandingdebtsasofend-2014.”

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-BackedSecuritisationProgrammewasestablished in 2001 toprovideaconvenient, flexibleandcost-efficientplatformfor theCorporation to issueMBSwithvariousproductstructures,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 isk

managementframeworkanddisciplinesitsusesinitsday-to-daybusinessexecution.Overtheyears,theCorporationhascontinuouslymaderefinementstoitswell-established,robustand time-tested riskmanagement framework toreflectchangesinthemarketsanditsbusinessstrategies.

Corporate Risk Management CommitteeTheBoard is thehighestdecision-makingauthorityoftheCorporationandholds theultimateresponsibility forriskmanagement.TheBoard,with theassistanceof 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,andmonitoring improvementefforts ingovernance,policiesandtools.RegularstresstestsarereviewedbytheCRCtoevaluatetheCorporation’s financialcapability toweatherextremestressscenarioswhentheyarise.

TheCRCischairedbyanExecutiveDirector,withmembersincludingChiefExecutiveOfficer,SeniorVicePresident(Operations), SeniorVicePresident (Finance),GeneralCounsel,SeniorVicePresident(Risk),andseniorstafffromtheRiskManagementDepartment.

ThemajortypesofrisktheCorporationmanagesarecreditrisk,marketrisk,operationalrisk,legalandcompliancerisk,leveragingrisk,longevityriskandpropertyrisk.


Business Overview

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

• prudent eligibility criteria for asset purchase,insuranceandguaranteeapplication

• effective duediligenceprocess formortgagepurchase,default loss, insuranceandguaranteeclaims

• enhancedprotectionforhigher-risktransactions.

LossesmayariseifthereareshortfallsintherecoveryamountreceivedfordefaultedloansthatfallundertheMortgagePurchaseProgramme (MPP).Tomitigatethisdefaultrisk,theCorporationestablishesprudentloanpurchasingcriteria;andconductseffectiveduediligencereviewsaspartoftheloanpurchaseprocessinorder tomaintain thecreditqualityof loans. Inaddition,dependingontheprojectedriskexposureofeachunderlying loanportfolio,creditenhancementarrangementsareagreeduponwithApprovedSellersonadeal-by-dealbasis to reduce thecredit lossesthatcouldarisefromtheborrower’sdefault.

Lossesmayalsoarise fromdefaulton loansundertheMIP’s insurancecoverage.EachMIPapplicationisunderwrittenby theCorporation inaccordancewithasetofeligibilitycriteria,andeachclaimfromaparticipatingbank isreviewedbytheCorporationtoensurethefulfilmentofallMIPcoverageconditions.As a result, the default risk for loanswithMIP

coveragehasbeengreatly reduced.Toreducetheriskofpossibleconcentrationofthisdefaultrisk,theCorporationtransfersaportionoftherisk-in-forcetoApprovedReinsurersviareinsurancerisk-sharingandexcess-of-lossarrangements.

Similarly,lossesmayarisefromborrower’sdefaultonloansintheSMEguaranteeportfolio.Theborrower’sdefaultriskofeachguaranteeapplicationisassessedbythelenderinaccordancewiththeircreditpolicies.Inaddition,theCorporationadoptsprudenteligibilitycriteria,conductsadministrativevettingandcreditreviewstobetterunderstandthecreditqualityoftheapplications,andcarriesoutduediligencereviewoneachdefaultclaimtoensurethe loan’scompliancewiththeCorporation’seligibilitycriteriaaswellasthelenders’internalcreditpolicies.

Inaddition, theCorporationadoptsathree-prongedapproach tomanage the default risk under theMFS,which includes: (a) prudent assessment ofborrowers’repaymentcapability; (b)avettingpaneltoconsiderbusinessviabilityandapprovalof theloanapplications;and (c)provisionof trainingandmentoringsupporttoborrowers.

Credit performances of the loan and guaranteeportfoliosaretrackedandreportedonaregularbasistoprovidemanagementwithupdatedcreditprofiletocloselymonitor theoperatingenvironment foranyemerging risks to theCorporation,and timelyimplementriskmitigatingmeasures.

(b) Seller/Servicer counterparty riskCounterparty risksmayarise from the failureofaSeller/Servicerofanacquiredportfolio to remitscheduledpayments to theCorporation ina timelyandaccuratemanner.

TheApprovedSellers/Servicersaresubjecttoarisk-basedeligibility reviewandongoingmonitoringontheirloanservicingqualityandcreditstanding.


(c) Reinsurer counterparty riskReinsurercounterparty risk refers to the failureofanApprovedReinsurer tomakeclaimpaymentsto theCorporation. Inorder tomitigate reinsurercounterparty riskeffectively, theCorporationhasestablishedaframeworkfortheassessmentofeachmortgagereinsurer’sfinancialstrength,creditratingandrelevantexperienceinmortgageinsurance.

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

(d) Treasury counterparty riskTreasury counterparty risk ariseswhen there isa delay or failure from treasury counterpartiesto make payments wi th respect to t reasuryinstruments transactedwith the Corporation.Treasurycounterpartiesaremanagedbya rating-based counterparty assessment framework anda risk-based counterparty limitmechanism. Thetreasurycounterpartiesarecontinuallymonitoredandthecounterpartylimitsareadjustedbasedontheassessmentresults.

Furthermore, theCorporationhassetupbilateralco l l a t e r a l a r r angemen t s w i t h ma jo r swapcounterpartiestomitigatethecounterpartyrisk.

(e) Lender riskTheCorporation isexposed to lender risk inSMElendingthatarises from: (a)a lender’sunderwritingbeingincompliantwith itscreditpolicy; (b)a lender’slooselyformulatedcreditpolicywhich isnotspecificenoughorsufficientlydefined forcompliance;and(c) themoralhazardofalenderbeinglessprudentinunderwritingaguarantee-protectedapplication.The

Corporationmanages lenderriskthroughthereviewof the lenders’creditpoliciesandtheduediligencereviewsonclaims.

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

Credit CommitteeTheCreditCommittee(CC) isresponsibleforsettingtheCorporation’soverallcreditpoliciesandeligibilitycriteria,particularly forassetacquisition,mortgageinsurance,SMEguaranteebusinessandMFS.TheCCoperatesunderaframeworkthathasbeenapprovedby theBoard.TheCC is theapprovalauthority foracceptingapplicationstobecomeApprovedSellers/ServicersundertheMPP,ApprovedReinsurersundertheMIP,Approved Lenders under the SFGSandeligibletreasurycounterparties. It isalsoresponsibleforsettingriskexposurelimitsforthecounterparties.The CC a lso c losely moni tors the operat ingenvironment,andputs inplacetimelyriskmitigatingmeasurestomanagethecreditrisk.

Transaction Approval CommitteeTheTransactionApprovalCommittee(TAC)conductsan in-depth analysis of pricing economics andassociatedcreditrisksforbusinesstransactions,whiletakingintoconsiderationthelatestmarketconditionsandbusinessstrategiesapprovedbytheBoard.Majortransactionsendorsedby theTACare subject toapprovalbyanExecutiveDirector.

TheCCandtheTACarebothchairedby theChiefExecutiveOfficer,withmembers includingSeniorVicePresident (Operations),SeniorVicePresident(Finance),GeneralCounsel,SeniorVicePresident(Risk)andseniorstaff fromthe relevant functionaldepartments.


Business Overview

Market RiskMarketriskariseswhentheCorporation’s incomeor thevalueofitsportfoliosdecreasesduetoadversemovementsinmarketprices.Marketriskconsistsof interestraterisk,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 riskariseswhenchanges inmarketinterest ratesaffect the interest incomeassociatedwiththeassetsand/or interestexpensesassociatedwiththeliabilities.

Theprimaryobjectiveofinterestrateriskmanagementis thereforeto limit thepotentialadverseeffectsofinterestratemovementsoninterestincome/expense,whilemaintainingstableearningsgrowth.TheinterestrateriskfacedbytheCorporationistwo-fold,namelyinterestratemismatchriskandbasisrisk.Interestratemismatchrisk is themostsubstantial riskaffectingtheCorporation’snetinterestincome.Itarisesmainlyasaresultofthedifferencesinthetimingofinterestratere-pricingfortheCorporation’s interest-earningassetsand interest-bearing liabilities. Interest ratemismatchrisk ismostevident in the loanportfolioswhere themajority of the loansare floating-rateassets(benchmarkedagainstthePrimeRateorHIBORRate),whilstthemajorityoftheCorporation’sliabilitiesare fixed-rate debt securities. TheCorporationthereforemakesprudentuseofarangeof financialinstruments,suchasinterestrateswaps,interestrateswaptions,basisswaps,forwardrateagreementsandissuancesofMBS,tomanageinterestratemismatchrisk.Theproceedsof the fixed-ratedebtsecuritiesaregenerallyswapped intoHIBOR-based fundsviainterest rate swaps inorder tobettermatch thefloating-rateincomesfrommortgageassets.

The Corporation also uses duration gap as anindicator tomonitor,measureandmanage interestratemismatch risk. Duration gapmeasures thedifferenceininterestratere-pricingintervalsbetweenassetsand liabilities. Thewider thedurationgap,thehighertheinterestratemismatchrisk.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).

Basisriskrepresentsthedifferenceinthebenchmarkrates between the Corporation’s Prime-basedinterest-earningassetsanditsHIBOR-basedinterest-bearing liabilities.However, thereareonly limitedfinancialinstrumentscurrentlyavailableinthemarkettofullyhedgethePrime-HIBORbasisrisk. Ingeneral,basis riskcanbeeffectivelyaddressedonlywhenassetsarebasedonHIBOR tomatch the fundingbase,orwhenrelatedriskmanagement instrumentsbecomemoreprevalentoreconomical.Overthepastfewyears,theCorporationhasconsciouslyadoptedastrategythatacquiresmoreHIBOR-basedassets.Asaresult,thePrime-HIBORbasisriskfortheCorporationhas been substantially reduced. In addition, theCorporationhad issuedPrime-basedMBSandusedhedgingderivativesinthepasttomitigatesuchbasisrisk.

(b) Asset-liability maturity mismatch riskTheactualaverage lifeofaportfolioofmortgageloans,whichisusuallyshorterthantheircontractualmaturity, depends on the speed of scheduledmortgagerepaymentsandunscheduledprepayments.Higherprepayment ratesshorten theaverage life


of a portfolio ofmortgage loans. InHong Kong,prepaymentoccursfortwomainreasons:(i)housingturnover—borrowersrepayingtheirmortgageloansuponthesalesof theunderlyingproperties,and (ii)refinancing—borrowersrefinancingtheirmortgageloanstoobtainlowermortgagerates.

Asset-liabilitymaturitymismatch riskcanbemorespecificallycharacterisedas reinvestment riskandrefinancingrisk.Reinvestmentriskreferstotheriskofa lowerreturnfromthereinvestmentofproceedsthattheCorporationreceivesfromprepaymentsandrepaymentsofitsloanportfolio.Refinancingriskistheriskofrefinancingliabilitiesatahigherlevelofinterestrateorcreditspread.TheCorporationisexposedtorefinancingrisk (inbothfundingamountandcostoffunds)when itusesshort-term liabilities to financelong-term,floating-rate loanportfolios.Reinvestmentrisk ismanaged through theongoingpurchaseofnewloanstoreplenishtherundownintheretainedportfoliosandthroughtheinvestmentofsurpluscashindebtsecuritiesorcashdeposits to fine-tune theaveragelifeoftheoverallassetspool.Inaddition,theCorporationmakesuseof the issuanceofcallablebondsandtransferable loancertificatestomitigatereinvestmentrisk.Thecalloptionincludedincallablebondsand transferable loancertificatesallows theCorporationtoadjusttheaverage lifeof its liabilitiestomatchmoreclosely thatof theoverallpoolofassets.

TheCorporationmanagesitsrefinancingriskthroughthe flexibledebtsecurities issuancewithabroadspectrumofmaturities.Thisagainserves toadjusttheaverage lifeof theoverall liabilityportfolio inadynamicfashion. Inaddition,refinancingriskcanbemitigatedbyadjustingthematuritiesofassets intheinvestmentportfoliooroff-loadingmortgageassetsthroughsecuritisationofmortgageloansintoMBS.

TheCorporationusestheasset-liabilitymaturitygapratiotomeasure,monitorandmanageasset-liabilitymaturitymismatchrisk, toensureaproperbalancebetweentheaveragelifeoftheCorporation’sassetsandliabilities.

(c) Liquidity riskLiquidity riskrepresents theriskof theCorporationnotbeingable torepay itsobligations,suchas theredemptionofmaturingdebt,ortofundthecommittedpurchases of loan portfolios. The Corporationimplements its liquidityriskmanagementframeworkin response tochanges inmarketconditions.TheCorporationhascontinuouslymonitoredtheimpactofrecentmarketeventsonitsliquidityposition,andhaspursuedaprudentpre-fundingstrategywhichwouldhelp tocontain the impactofanyglobal financialturmoilon its liquidity.Liquidity risk ismanagedbymonitoringthedailyinflowandoutflowoffunds,andbyprojecting the longer-term inflowsandoutflowsof funds across the fullmaturity spectrum. TheCorporationuses the liquidasset ratio tomeasure,monitorandmanageliquidityrisk.

Givenitsstrongbackgroundasawhollygovernment-ownedentityandsolidcreditrating,theCorporationisefficientinraisingfundsfromdebtmarketswithbothinstitutionalandretail fundingbases.Thisadvantageis supplementedby theCorporation’sportfolioofhighly liquid investments,which isheld toenableaswiftandsmooth response tounforeseen liquidityrequirements. TheHK$30billionRevolvingCreditFacilityfromtheExchangeFundfurtherprovidestheCorporationwithaliquidityfallbackevenifexceptionalmarketstrainslastforaprolongedperiod.


Business Overview

TheCorporationmanagespre-fundingprudentlythroughwell-diversified fundingsources,sothatallforeseeablefundingcommitmentsaremetwhentheyfalldue,inordertosupportthegrowthofitsbusinessand themaintenanceof awell-balanced liabilityportfolio.SuchdiversificationallowstheCorporation

to pursue a pre-funding strategy at the lowestpossiblecost,whilstatthesametimeoffersafeguardsagainstthedifficultytoraisefundsindistortedmarketconditions.ThecurrentfundingsourcesareillustratedinTable1below:

Table 1: Current Funding Sources for the HKMC

Funding Source Description

US$6billionMediumProgramme

TermNote Thereare10Dealerswhounderwriteanddistributecurrencydebttointernationalinstitutionalinvestorsprogramme

localandforeignunderthe

HK$40billionDebtIssuanceProgramme Thereare6PrimaryDealersand16SellingGroupMemberswhounderwriteanddistributedebttoinstitutionalinvestorsundertheDIP.TheTransferableLoanCertificateSub-ProgrammeundertheDIPprovidesfurtherdiversificationofitsfundingsourcesandbroadeningofitsinvestorbase

HK$20billionProgramme

RetailBondIssuance Thisdebtissuanceprogrammehasofferingretailbondstoinvestors

19PlacingBankswhichassistin

US$3billionBauhiniaMortgage-BackedSecuritisationProgramme

Withatotalof8Dealers,thismulticurrencymortgage-backedsecuritisationprogrammepermitstheCorporationtooriginateboththelocalandinternationalmarkets

MBSin

InvestmentPortfolio Thisportfoliocomprisesmainlycashandbankdeposits,commercialpaper,high-qualitycertificatesofdeposit,andnotesthatarereadilyconvertibleintocash

MoneyMarketLines TheCorporationhasprocuredmoneymarketlinesfromoflocalandinternationalbanksforshort-termfinancing

alargenumber

HK$30billionRevolvingCreditFacility TheExchangeFundcommitsbillioninrevolvingcredit

toprovidingtheCorporationwithHK$30


(d) Currency riskCurrency risk arises from the impact of foreignexchange rate fluctuations on theCorporation’sfinancialpositionandforeigncurrency-denominatedcashflows.TheCorporationmanagesitscurrencyriskstrictly inaccordancewiththeinvestmentguidelinesapprovedby theBoardandunder thesupervisionof theALCO,whichsetsdailymonitoring limitsoncurrencyexposure.

Inaccordancewith thisprudent risk-managementprinciple, thenetexposureof the foreigncurrencydenominateddebtsissuedundertheMTNProgrammeisfullyhedgedbytheuseofcross-currencyswaps.

Transactionexecutionissegregatedamongthefront,middleandbackofficestoensureadequatechecksandbalances.TheTreasuryDepartment,actingasthefrontoffice,isresponsibleformonitoringfinancialmarketmovementsandexecutingtransactionsinthecash,derivatives,debtandsecuritisationmarkets,inaccordancewith thestrategies laiddownby theALCO.TheRiskManagementDepartment,assumingthemiddle-officerole,monitorsthecompliancewithtreasurycounterpartyandmarket risk limits. TheOperationsDepartment,actingas thebackoffice,is responsible fordeal verification, confirmation,settlementandthepaymentprocess.

Asset and Liability CommitteeTheALCOisresponsiblefortheoverallmanagementofmarket risk of theCorporation. It follows theprudent r iskmanagement principles and theinvestmentguidelinesapprovedby theBoard. It isresponsible forreviewingandmanagingthemarketriskincludinginterestraterisk,asset-liabilitymaturitymismatchrisk,liquidityandfundingrisk,andcurrencyriskof theCorporation.Regularmeetingsareheldto reviewthe latest financialmarketdevelopmentsand formulate relevantasset-liabilitymanagementstrategiesfortheCorporation.

TheALCO ischairedbytheChiefExecutiveOfficer,withmembers including Senior Vice President(Finance),SeniorVicePresident (Operations),SeniorVicePresident(Risk)andseniorstafffromtherelevantfunctionaldepartments.

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

The Corporat ion adopts a bottom-up approach inidentifying operational risk by carrying out in-depthanalysesofnewproducts,businessactivities,processes,systemenhancements and due diligence reviews ofnewoperational flows.Comprehensivevalidation rules,management informationsystemreportsandaudit trailsareinplacetotrackandreportanyerrorsordeficiencies.

TheCorporationactivelymanagesoperationalriskwith itscomprehensivesystemofwell-establishedinternalcontrols,authentication structuresandoperationalprocedures.Theoperational infrastructure iswelldesignedtosupportthe launchofnewproducts indifferentbusinessareas.Rigorousreviewsareconductedbeforetheimplementationofoperationalorsysteminfrastructure inorderto identifypotential operational risks and to ensure adequatesegregationofduties.

To ensure an eff ic ient and effect ive discharge ofdaily operations, theCorporation pursues advancedtechnologicalsolutionsalongsiderobustbusiness logisticsandcontrols tocarryout itsoperational activitiesandbusinessprocesses. Stepshavebeen taken toensuretheaccuracy,availabilityandsecurityof thesesystems.TheCorporationhasalsotakencautiousstepsto instituteadequatechecksandbalancestoensurethatitsoperationsareproperlycontrolled.Effectiveinternalcontrolsalsohelptominimisefinancialriskandsafeguard itsassetsagainstinappropriateuseor loss, including thepreventionanddetectionoffraud.


Business Overview

TheCorporation’s InformationSecurityManualdocumentsthe requirementsof security standards andpracticesrelating to informationanddatasecurity forobservancebyallstaff.TheCorporation implementsvarioussecuritymeasures,suchasdouble firewallprotection, intrusion-detectionsystems,virusalerts,quarantinesystemsandvulnerabilityscanningsystems tominimise itsexposuretoexternalattacks. Internally, theCorporationhasalsoimplementedsecuritycontrolsonitsLocalAreaNetworktoreducedamage intheeventofamalicious intrusion.TheCorporationengagesexternalconsultantswhenappropriatetoconduct intrusionvulnerabilityteststoenhancesystemsecurity. Toensure ahighdegreeof compliance, theCorporation’scoreoperatingsystemsandprocessesaresubjecttoregularreviewbyinternalauditors.

Business Continuity PlanTheCorporation’sbusiness recoveryplanensures thatmaximumpossibleservicelevelsaremaintainedatallunitstosupportbusinesscontinuityandminimisetheimpactofbusinessdisruptionfromdifferentdisasterscenarios.Eachbusinessunitassesses the impactofdisasterscenariosandupdatesrecoveryprocedures fromtimeto time.Toensure thatbusiness recoveryproceduresarepractical,a corporate-widebusiness recoverydrill is conductedannually.Daily back-ups andoffsite storageof back-up tapesare inplace toprotect theCorporation from ITdisasters.

Product Sign-off MechanismTo ensure that all risk factors are consideredwhendesigningandimplementinganewproduct,theCorporationhas developed a product developmentmanagementframework, underwhich proper sign-off of productspecification isconductedpriortothe launchofanynewproduct.Theproductdriver isclearlyassignedatthestartof theproductdevelopmentprocess tobe responsiblefor institutingthesign-offprocess.Productscanonlybelaunchedafterall functionaldepartmentshavesignedoffandconfirmedfunctionalreadiness.

Complaint-Handling MechanismTheCorporationmakesacontinuouseffort to improve itscoreprocesses toensure that itsproductsandservicesmeetcustomers’expectations.Tomakesurecustomers’feedbackistimelyandproperlyattendedto,theCorporationhasaformalcomplaint-handlingmechanismtotrack,reportandhandlecomplaints.

Operational Risk CommitteeTheOperational RiskCommittee (ORC) is responsibleforensuring thatallbusinessentitiesand line functionsin theCorporationmaintainaneffectiveoperational riskandinternalcontrolsframework.TheORCestablisheskeyrisk indicatorstotrackthekeyoperationalrisk itemsandmonitortheeffectivenessoftheriskmitigatingmeasures.TheORC is also responsible for providing directionsand resolving issues related to policies, controls andmanagementofoperational issues,aswellasensuringpromptandappropriatecorrectiveactions in responsetoaudit findings related tooperational risksor internalcontrols.

TheORC ischairedby theChiefExecutiveOfficer,withmembers includingSeniorVicePresident (Operations),SeniorVicePresident (Finance),GeneralCounsel,SeniorVicePresident (Risk)andsenior staff from the relevantfunctionaldepartments.

Legal and Compliance RiskLegal riskarises fromuncertainty in theapplicationorinterpretationoflaws,regulations,andanyunenforceabilityor ineffectivenessof legaldocuments insafeguardingtheinterestsoftheCorporation.Complianceriskarisesfromthefailuretocomplywith laws,regulations,codesofpracticeandindustrypracticesapplicabletotheCorporation.

TheLegalOffice,headedbytheGeneralCounsel (who isalsotheCompanySecretary),advisestheCorporationonlegalmatterswithaviewtocontrolling legal risk.Whennewproductsorbusinessactivitiesareconsidered, the


LegalOfficewill advise on the relevant laws and theregulatoryenvironment.Itwillalsoadviseonthenecessarylegaldocumentation,and identifypossible legalpitfallswithaviewtoprotectingthe interestsoftheCorporation.Whereappropriateexternalcounselwillbeengaged toassist theLegalOffice inproviding legal support to theCorporation.TheLegalOfficeworkscloselywiththeotherdepartmentsof theCorporationtoadviseon legal issuesanddocumentation.

TheComplianceFunction ispartof theLegalOfficeandis ledbytheChiefComplianceOfficerwhoreportstotheChiefExecutiveOfficerthroughtheGeneralCounsel.WhereappropriatetheComplianceFunctionwillengageexternalcounsel toadviseoncompliancematters. For amoredetaileddescriptionof theComplianceFunctionand itswork,pleaserefertotheComplianceReportingSectionoftheCorporateGovernanceReport.

TheORC is the governance committee for legal andcompliancerisks.

Leveraging RiskInorder toensure that theCorporationwouldnot incurexcessiveriskwhenexpanding itsbusinessandbalancesheet in relation to itsowncapitalbase, theFinancialSecretary,inhiscapacityastheFinancialSecretaryandnottheshareholder,actedastheregulatoroftheCorporation,by issuingasetofguidelinesoncapital-to-asset ratio forcompliancebytheCorporationupontheestablishmentoftheCorporation in1997.Theguidelineshavesincebeenupdatedfromtimetotimetotakeaccountofnewproductslaunchedby theCorporation. TheFinancial SecretaryissuedinOctober2011anewsetofguidelinesbyreferenceprincipally to theBasel II risk-basedcapital adequacyframework,theGuidelinesonCapitalAdequacyRatio(CAR),withtheminimumCARsetat8%.Asat31December2015,theCorporation’sCARwas21.9%.

Theprudentuseofregulatorycapital ismonitoredcloselyin accordancewith the capital guidelines. TheChiefExecutiveOfficerreportstheCARandthedailyminimumratiototheBoardofDirectorsonaquarterlybasis.Anearlywarningsystem isalso inplace. If theCARdrops to thethresholdlevelof14%,theChiefExecutiveOfficerwillalerttheExecutiveDirectors. If theCARfalls to12%orbelow,theBoardofDirectorswillbe informedandappropriateremedialactionswillbetaken.

Longevity RiskLongevity risk refers to theheightening risk of largerpayoutsundertheRMPandPLIS.Thelongerthepayoutandloanperiodis,thelargertheloanbalancewillaccrueovertime,andthelessbuffertherewillbefromthesaleofthepropertytocovertheoutstandingloanbalance.Alossmayariseifthereisashortfallintherecoveryamountafterthedisposaloftheproperty.Theterminationrateofthe loansdependslargelyonthemortalityrate(i.e.lifeexpectancy)oftheborrowers.

Annual riskanalysis isconducted inorder toassess thepotential financial impactof longevityrisk,aswellas theinteractionamongthevariousriskfactorsundertheRMPandPLIS.Themortalityassumptionsare reviewedonaregularbasisbytheTAC.

Property RiskProperty riskarises from the fluctuation in thevalueofpropertywhichactsascollateralfortheCorporation’sloanandguaranteeportfoliosunder theMPP,MIP,RMPandPLIS.TheCorporationmanagespropertyriskbyconductingexternalproperty valuation foreach loanpurchaseorapplication,settingprudentassumptionintherecoverablevalueof thecollateralisedproperty, restrictingmaximumloan-to-valueratiosoftheloansundertheprogrammesandconductingstress test toexaminethe impactofadversemarketconditions.


Business Overview

Process Management and Information Technology

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

Ourpublicwebsitehasbeenrevampedtoimproveusabilityandpresenta fresh image.Thenewwebsite isdesignedwiththeneedsofmobileusersinmind.Atthesametime,itcontinuestocomplywiththeWebContentAccessibilityGuidelines2.0toensurethatitisaccessibletopeoplefromallwalksoflife.

In response to the launchofPremiumLoan InsuranceScheme, anew information systemwasdeveloped tosupport theparticipatingbanksandtheCorporationwiththecoverageofoperationalcyclefromproductapplicationtoaccountadministrationsunder theScheme.Thenewsystemwas rolledoutalongwith theproduct launch inSeptember2015.

TheCorporationcontinuedtoimproveprocessautomation,data integrity,systemresilienceand informationsecuritythrough systemsdevelopment and enhancements tosupportvariouscorporateandbusinessinitiatives,e.g.theSFGS, theRMP, thePLIS, theMFS, theMIP, the treasuryoperations,andstrengthenedriskmanagement.Suchstepsarevital inensuringefficiency,accuracyandrobustnessinbusinessoperationsthat translate intobetterservicestothecommunity. Inaddition,oursystemenhancementsandprocessre-engineeringmeasuresalsoaimtoachievepaperlessoperationsthathelpcontributetoabetterandgreenerenvironment.

Corporate Social Responsibility

In recognitionof theCorporation’scontribution to thecommunity and its commitment to corporate socialresponsibility(CSR)inpastyears,theCorporationhasbeenawardedtheCaringOrganisationLogobytheHongKongCouncilofSocialServicesince2008andhasnowsteppedintotheeighthyearofCSRparticipation.

Asasocially responsibleorganisation, theCorporationcares forboth itsemployeesand thecommunity. TheCorporationhasunderlined its commitment toCSRbycaringforitsemployees’well-being,participatingincharityactivities and implementingenvironmental protectionmeasures.

Care for EmployeesStaffing and RemunerationTheCorporationattractsandgroomstalenttoensuretheefficientperformanceof itscoremissionsofenhancingstability in thebanking sector, promotingwiderhomeownershipand facilitating thedevelopmentof thedebtsecuritiesmarket.Employeesareprovidedwithcompetitiveremunerationpackagesand fringebenefits,apromisingcareerpathanddevelopmentopportunities,andahealthyandsafeworkingenvironment.TheCorporationhasalsoadoptedfamily-friendlypracticesbyofferingafive-dayweektohelpemployeesmaintainagoodwork-lifebalance,aswellascomprehensivemedicalanddentalinsuranceplanswhichcoverbothemployeesandtheirfamilymembers.

Throughsystemautomationandprocessre-engineering,theCorporation hasmaintained a lean and efficientworkforce,despitean increase inthescopeofoperationsandthecomplexityof theproducts itoffers. In2015, thepermanentstaffestablishmentoftheCorporationwas201,andthestaffturnoverratewas10.17%.

Training and DevelopmentTheCorporation recognises the importanceofongoingtrainingandhasdevotedconsiderable resources to thecontinuousenhancementof itsemployees’professionalknowledgeandskills. In2015, theCorporationarrangeddifferentprogrammesandworkshopstohelpemployeesenhance theirproductknowledge,andstrengthen theirmanagerialandtechnicalcompetenceandsoftskills.


The in-housetrainingworkshopscoveredawiderangeoftopicssuchasproblemsolvinganddecisionmaking,teamcollaborationandoccupationalsafetyandhealth.Duringtheyear,seminarsonPersonalData (Privacy)Ordinance,CompetitionOrdinanceandBankruptcyOrdinancewerealsoheld.

TrainingonProblemSolvingandDecisionMaking

TrainingonOccupationalSafetyandHealth

TeamBuildingTraining

TeamBuildingTraining

TheCorporationalsosponsoredemployees forexternaljob-related traininganddevelopmentcoursescoveringawide rangeof topics frommortgage-related issues,riskmanagement, corporategovernance, financeandaccounting to information technology and leadershiptraining.

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

Employee Relations and Staff ActivitiesTopromoteahealthywork-lifebalanceandfosterafamily-friendlyworkingenvironment,theHKMCStaffClubregularlyorganisesstaffactivities tocultivatebetter relationshipsandcommunicationamongemployees. In2015, theseactivitiesincludedinterestclasses,Work-LifeBalanceWeek,outingsandotherstaffgatherings,allofwhichwerewellreceivedbyemployeesand their families.The in-housestaffpublication“HKMConnection”recapssnapshotsoftheHKMCstaffactivities.

Work-lifeBalanceWeek


Business Overview

Care for the

Community

ChristmasPartywithChildren SeniorsDay2015

BloodDonation VisittoelderlylivingalonebeforeMid-autumnFestival

OutingwithchildrenDressCasualDay2015


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.

Health and SafetyAsacaringorganisation, theCorporation isdedicatedto lookingafterboth thephysicalandmentalhealthofitsemployees.AnEmployeeSupportProgramme is inplacetoprovideconfidentialexternalcounsellingservicestoemployeesand their familymembers, if needed.Avaccinationprogrammeforthepreventionofinfluenzaandhealth-checkprogrammesatprivileged rateswerealsoofferedtoemployees.

TheCorporationhas, from time to time, reviewedandstrengtheneditscontingencyplanswhichaimtominimiseany unexpected or sudden disruption to businessoperations,suchas fromanoutbreakofcommunicablediseaseamongemployees.Periodicdrillsareorganisedtomake sure employees are conversant with theactivationof theback-upfacilities,contingencyplansandcommunicationarrangementsincaseofemergency.

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

In2015, theCorporationorganiseddonationcampaigns,suchasDressCasualDay2015fortheCommunityChest,andhelditsannualBloodDonationDayeventfortheHongKongRedCross.

Employeeshavebeenkeen toparticipate in voluntaryservices, demonstrating their concern for the needyby dedicating time and effort to various causes. TheCaringLeaguehaspartneredwithseveralsocialserviceorganisations to participate in a number of voluntaryservices,includingthefollowing:

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

• carefortheelderly—organisedbytheHOPEWorldwideandHong Kong PlaygroundAssociation, involvingour volunteers visiting thehomesof elderlypeoplelivingaloneandbringingthem“luckybags”withdailynecessitiestowelcometheChineseNewYearandMid-AutumnFestival

• care for the children— organised by the HOPEWorldwideandHongKongPlaygroundAssociation,involvinganoutingandaChristmaspartywithchildrenfromlow-incomefamilies.

Internship and Manager Trainee ProgrammesTohelpnurture talent for the future, theCorporationprovides a number of internship programmes forundergraduatestogivethematasteof therealbusinessworldandhelpthembetterpreparefortheirfuturecareers.Thestudentswho joined theprogrammesappreciatedthe learningexperienceandworkopportunitiestheywereexposedto.

During the year, the Corporation has continued theManager Trainee Programmewith the objective ofidentifyinghigh-calibreyoungexecutives forgroomingtomeet theCorporation’s long-termstaffdevelopmentplan.Throughoutthethree-yearprogramme,theManagerTraineeswillgo throughon-the-job training indifferentdepartments, takepart incorporateprojectsandattendstructuredlearninganddevelopmentprogrammes.

Environmental ProtectionTheCorporationcontinuouslysupportsand implementsvariousgreenmeasurestocreateamoreenvironmentallyfriendlyofficeandraiseemployees’awarenessofmethodsofwastereductionandenergyconservation.Employeesareencouraged to adoptpaperlessworkingpracticesby usingmore electronic communication. They arealsoencouraged tocollectwastepaperandused tonercartridges for recycling.Since2006, theCorporationhasadoptedvariousmeasures,includingbettercontrolofofficetemperatureandtheuseofLEDlighting, inthe interestofenergyefficiency.TheCorporationwelcomessuggestionsfromemployeesongreenoffice ideasandencourages itssuppliers touseandoffermoreenvironmentally friendlyproductswheneverpossible.

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