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SCMP Reporter

CCB hits back over 'poor disclosure' claims Lender digs in as its share price slides amid queries on tax rate and forex loss

China Construction Bank (CCB), the nation's third-largest lender, has  refuted accusations of insufficient disclosure in its maiden annual results announcement since listing in October last year.

The rebuttal came  as the bank's Hong Kong-quoted share price had slid 4.86 per cent since the results announcement on April 6 after some analysts  took aim at its lower than expected effective tax rate and 1.3 billion yuan foreign currency dealing loss.

'We solemnly declare that, as a publicly listed bank, we have strictly followed the information disclosure rules of the Hong Kong stock exchange and domestic regulatory authorities,'   spokesman Xi Deyan said in a statement sent via e-mail.

Both issues were addressed in the company's detailed results announcement on April 7, a day after  the first briefings were given to the media and analysts, Mr Xi said.

CCB was the first of the Big Four state-owned commercial banks to go public.

The lender's share price,  which has gained 45.7 per cent on the initial public offer  price, is seen as  a benchmark for the proposed  listings of its other Big Four  peers.

CCB's information disclosure has been closely watched by sceptics who doubt the pace of state banks' corporate governance improvements.

On April 6, CCB announced a 47.1 billion yuan net profit for the  year to December.

Although this was 4 per cent lower than the 2004 figure, the reported net profit  was 12 per cent above the management's own forecast in the listing prospectus and the $44.95 billion mean estimate of 21 brokers polled by data provider Thomson Financial before the results were released.

However, investment bank Goldman Sachs said in an April 7 research note:  'Disclosure of financial data to allow any deeper analysis was disappointing.'

A Citigroup report on the same day  criticised CCB management for not explaining the difference of the bank's effective income tax rate of 20.6 per cent in the second half last year and the investment bank's own projection of 40.2 per cent based on China's standard tax rates.

'[Its] forex loss of 1.3 billion yuan (the second-half loss was 1.9 billion yuan) was surprising given the assurance [in the prospectus] that the bank had hedged  [its share sale] proceeds exposure,' the report added.

Goldman is helping arrange the  initial offering of Bank of China, the country's second-largest commercial lender,  scheduled for  next month.

Citigroup was initially hired, but later dropped, as a bookrunner for CCB's public share sale last year.

Investment banks have insisted their research functions are independent from the investment banking operations.

CCB attributed the lower tax rate last year to the  increase in its tax deduction limit on staff expenses  to 16.65 billion yuan by the Ministry of Finance  and State Administration of Taxation.

The change reduced income tax liability arising from non-tax-deductible staff costs by 89.6 per cent year on year to 403 million yuan in the  year to December,  the results announcement said.

The bank's tax-exempt staff costs in future  would be based on last year's level and indexed to actual revenue and net profit growth,  the finance ministry and tax authorities said  last month.

The same policy has been granted to other offshore-listed mainland financial institutions, including Bank of Communications and China Life Insurance, to help them improve their staff incentive systems and retain talent.

CCB's announcement attributed the  foreign exchange loss to its  US dollar-denominated assets since the yuan's  almost 2.5 per cent  gain  against the US dollar   after revaluation in July last year. The loss was also substantially reduced by the bank's use of exchange-rate hedging derivatives.

In January last year, the bank entered an option to sell up to US$22.5 billion - the amount of the state capital injection in late 2003 - next year to its dominant state shareholder, China SAFE Investments, at the pre-appreciation exchange rate of 8.2769 yuan to the US dollar.

The arrangement has cushioned  the lender's capital against yuan appreciation, but the foreign currency portfolio of its overseas branches remains exposed.

The foreign currency dealing loss also included the costs of hedging instruments to reduce exposure to currency risks, Mr Xi said.

A report by China International Capital Corp, which co-sponsored CCB's  initial offering last year, projected that future yuan appreciation and the premium cost of the China SAFE option to offset  the bank's foreign exchange  gains would lead to a net exchange loss of 1.8 billion yuan this year and 3.8 billion yuan next year.

Senior management  began a two-week roadshow after the results announcement to meet major institutional investors in Asia, Europe and the United States.

in the spotlight

CCB says it strictly follows information disclosure rules

Share price slips 4.86 per cent since earnings announcement

Analysts question quality of data on tax rate and forex loss



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We play by the rules, CCB tells disclosure critics