Increases in provisions and operating expenses forced Citic Ka Wah Bank to report a 79.9 per cent plunge in attributable profit to $103 million last year. President and chief executive Cai Zhongzhi admitted the collapse of Guangdong International Trust and Investment Corp (Gitic) had made the bank's problem-loan collection efforts more difficult. Provisions for bad and doubtful debts rose 171.85 per cent to $571.11 million, accounting for 83.7 per cent of the pre-provisions operating profit of $681.78 million. Non-performing loans (NPLs) - on which interest is placed in suspense - jumped from the previous year's $592.69 million, or 2.97 per cent of total loans, to $2.11 billion, or 8.18 per cent of the total. These NPLs were covered by $657.51 million in collateral value and $679.38 million in specific provisions, equivalent to a coverage ratio of just 63 per cent, much lower than its peers. Mr Cai said many of these NPLs had been originated by the previous management and the bank planned to intensify its debt collection efforts by setting up a collection centre in Guangzhou. The bank revealed it had lent $8.32 billion, or 32.2 per cent of its loan book, to mainland-related entities, of which $4.33 billion went to red-chip companies and $2.08 billion to mainland-incorporated entities. Mr Cai said only $744 million of the $8.32 billion had repayments overdue for more than three months. Unlike other banks, Citic Ka Wah had not made any across-the-board provisions to its $351 million exposure to the Itic sector. Mr Cai confirmed the bank had no exposure to Gitic. Operating expenses rose by a rapid 25.6 per cent to $480.64 million, much of which was spent re-launching the bank's corporate identity and refurbishing branches. The bank continued to lend aggressively to red chips in Hong Kong and also to residential mortgages, fuelling the 32.34 per cent growth in total loans to $26.13 billion. Mr Cai said increasing lending to quality red-chips and 'first-line' blue chips was one of the bank's strategies in diversifying its loan portfolio. This strategy boosted the 'other items' of the bank's loan portfolio - mainly lending to conglomerates - by 211.6 per cent to $5.41 billion. Residential mortgages saw an equally rapid 67 per cent expansion to $6.04 billion. This aggressive credit expansion weakened the bank's capital adequacy ratio to 20.57 per cent from the previous 24.18 per cent. Battered by high funding costs last year, the bank's net interest margin was trimmed to 1.56 per cent from 2.23 per cent a year ago. The return on shareholders' funds suffered an even harder hit, declining from 15.53 per cent in 1997 to just 2.1 per cent.