2009-03-19

Profit before Provision and Taxes rose 41%，Special Steps Bring NPL Ratio Below 1%;

Basic Business Continues Healthy Growth

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[Shenzhen, China] 18:00 March 19, 2008

　　Shenzhen Development Bank (“SDB”; SZSE 000001) filed its 2008 Annual Report on March 19 with the Shenzhen Stock Exchange. The results reported were consistent with the pre-announcement filed on 2009/01/12. The full text and the summary of 2008 Full Year Report are available at www.cninfo.com.cn. This press release, which is posted at www.sdb.com.cn, summarizes key items of 2008 results, along with management comments, appended with Income Statement Summary.‎

　　Profit before Provision and Taxes in 2008 rose 41% over 2007. In accordance with regulatory guidance for medium-sized banks, in light of domestic and international financial and economic conditions, the Bank recorded a special large provision of approximately 5.6 billion Yuan and large write-offs of 9.4 billion Yuan in the fourth quarter of 2008, thus resolved the Bank’s historical portfolio of NPLs. As of end 2008, the total amount of Non Performing Loans (NPLs) was reduced to only 1.9 billion Yuan and the NPL ratio to 0.68%. The balance of credit provision as of 2008/12/31 reached 105% of the remaining balance of NPLs. Operating profit before provision and tax rose 41% Year on Year (‘YOY’) but due to this special program, the net profit of 2008 Full Year declined to 614 million Yuan, down 77% YOY. The Bank also announced that business growth YTD 2009 has been good and healthy, and Net Profit YTD 2009 is estimated higher YOY.

　　SDB continued its good and healthy business growth and delivered strong results while uncertainties emerged in China amid global economic downturn in 2008. The Bank achieved robust growth in Profit before Provision and Tax of 41%, mostly due to solid growth in deposits, loans, and net fee income. The one-off large provision and write-offs of legacy NPLs, while leading to Net Profit down 77% from the prior year, also have led to unprecedentedly healthy balance-sheet asset mix and the historical NPL overhang was essentially eliminated. The Capital Adequacy Ratio (‘CAR’) at 12/31/2008 was 8.58%, maintaining the level above the 8% regulatory requirement, and more capital raising plans are underway. Fundamentally, the Bank has been actively investing in human resources, IT infrastructure, and outlet expansion, and has made substantial improvement in management and business processes, aiming at a solid and sustainable growth for the future.

Special Provision and Write-off in 4Q

　　Although the provision led to a profit decline in the reporting period, the Bank was significantly relieved from the historical burden of NPLs. Almost all of the written-off NPLs were legacy NPLs carried from before 2005. After the write-off, the NPL balance was only 1,928 million yuan as of end of 2008, down from 12,475 million yuan end 2007, and all NPLs fell in the “Sub-standard” category – the lightest degree of classification. The NPL ratio was 0.68%, significantly lower than 4.3% and 5.6% as of 09/30/2008 and end 2007 respectively. The new record low NPL ratio at yearend 2008 is also lower than that of any listed bank in China as of end September 2008.

　　The bank has continued its efforts in NPL collection. In 2008, the bank collected 1.7 bn yuan from NPLs, mostly collected in cash. The net new NPLs added to the portfolio in the 4th quarter before the special write-offs were about 300 million Yuan, around 0.1% of total lending balance of the Bank as of end 2008. The new loans made after YE 2004 have maintained very good quality and the NPL ratio is well below 1%. The Bank has made special efforts to keep good asset quality while the uncertainties in economy presented more challenges to enterprises in 2008.

　　The NPL provision coverage ratio was 105% at yearend 2008, compared with 48% a year ago, and the Provision Sufficiency Ratio was 365%, compared with 127% at 12/31/2007.

Steady Fundamental Profit Performance

Highlights of 2008FY Income Statement

　　The bank recorded 12,598 million Yuan Net Interest Income in 12 months of 2008, up 31% from full year 2007, as Average Interest Earning Assets increased by 35%. The Net Interest Margin for 2008 FY was 3.02%, down 8 bps from 3.10% in 2007, affected by several PBC interest rate cuts since 3Q 2008, increasing low risk inter-bank portfolio proportion with relatively lower yields, and increasingly strong cash position. Non-Interest Income rose to 1,915 million Yuan, out of which net commission and fee income was 851 mm yuan, up 64% YOY, driven by significant growth in transaction settlement and bank card business. The Bank’s initiative to invest in government bonds in the year made important contribution to other operating income increase of 56% YOY. The Operating Cost/Income ratio was down 3 percentage points from 39% FY 2007 to 36% FY 2008. Operating Expenses increased 24% YOY, compared to 34% increase in revenue, mainly driven by continued input into human resources, business development, IT infrastructure and process improvement. Operating Profit before Provision and Tax rose 41% to 8,138 million Yuan YOY. After asset provision 2008 Full Year of 7,334 million Yuan, 3.6 times that of FY 2007, Profit before Tax showed 79% decline from 2007. The effective Tax Rate declined from 29.7% in 2007 to 22.5% in 2008, as a result of income tax policy change and tax credits due to treatment of NPL.

　　SDB recorded 614 mm Yuan Net Profit Full Year 2008, down 77% YOY. EPS was 0.20 yuan, down 79% YOY and Return on Weighted Average Equity declined to 4.32%, as a result of the special provisions.

　　The Bank did not invest in any subprime assets or other such instruments issued by overseas financial institutions and was thus not directly affected by the subprime crisis or the recent difficulties of overseas financial institutions.

　　SDB advanced a few key projects to enhance its management efficiency in 2008. With the help of top international consulting firms, the Bank further streamlined and clarified its organization structure, function responsibilities, key business processes, benchmarking top-ranked commercial banks, aiming at building solid foundation for future growth. The Bank also took steps to improve efficiency, customer service and internal control at the branch level through operational optimization programs.

Strong growth in key initiatives

　　In business growth, 2008 witnessed a substantial increase in SDB’s outlets of 29, with total number of branch outlets increased to 282. Total Assets as of the end of 2008 was 474.4 bn yuan, up 35% YOY. Total deposits grew 28% to 360.5 billion Yuan while general loans excluding NPLs grew 38.8 billion Yuan or 19% YOY. With very strong growth in deposits, the liquidity of the Bank has been very strong, with Liquidity Ratio about 40%, well in excess of the regulatory requirement of 25%.

Balance Sheet Highlights:

　　In 2008, SDB further enhanced its brand image in “Supply Chain Finance”, one of its key strategic initiatives, through professional services and products, including “1+N” Supply Chain financing services, factoring, “Receivable Pool” financing. Total number of trade finance customers increased by 30%, while total on- and off- balance sheet credits grew 10%, despite a business decline in trade and manufacturing in 4Q 2008. Expansion of trade financing also boosted the development of other business. Total commercial deposits increased 26% YOY, while total commercial loans grew 33% YOY, partly due to particularly strong growth in bill business. The credit quality of trade finance has proven very high despite some difficulties in a few industries due to economic downturn.

　　The Bank’s retail business also found its path for a robust growth in 2008. Retail deposits grew 42% YOY, record high in history, while Retail loans grew 16% YOY. The Number of new VIP customers grew 56%. Credit card business experienced a fast expansion, with effective cards issued up 60% to 3 million, and credit card advances up 85% to 3.7 billion Yuan. The retail loan portfolio has maintained good credit quality as the Bank took deliberate differentiated credit policies toward different real estate markets in 2008. The Bank also made good progress in Retail CRM system construction and Sales Force Enhancement (SFE), and put more focus on product innovation, marketing and cross-selling. The bank received regulators’ approval to conduct fund custody business in 2008 and initiated funds for custody. SDB’s retail brand image was further recognized by the public and received 20 public awards for its retail business, including “Best Chinese Retail Bank” and “Best Wealth Management Bank”.

CAR Further Improved

　　‎2008 witnessed for the first time in recent years both the Bank’s Capital Adequacy Ratio (CAR) and Core CAR exceeding regulatory requirement, with CAR at 8.58% and CCAR at 5.27% respectively as of end of 2008, as a result of the bank’s programs to supplement its core and tier 2 capital. In late March 2008, SDB added on its tier 2 capital 6.5 billion Yuan through subordinate debt issue in inter-bank bond market. Later in June, 2008, the bank successfully added another 1.8 billion to its tier 1 capital due to exercise of the 2nd batch of call warrants. Another 1.5 billion Yuan sub-debt was issued in October. Despite the special provision in 4Q, the Bank managed its CAR above 8% at yearend 2008. In October, the Shareholders’ Meeting approved the issuance of up to 10 billion Yuan sub debt and the extension of up to 8 billion Yuan hybrid capital within the next three years, with intent to further improvement in CAR in 2009. It is expected that with addition to equity from profit generation, and with continuous supplement tier 2 capital, the Bank’s CAR can be built further and maintained at a level to enable the Bank to embrace more business opportunities for its growth in the long run.

Looking Ahead

　　The Bank recognizes the uncertainties in the economy in 2009, but has been preparing in risk management, fine-tuning of business strategies and focus, and emphasis on investment for long run development. The Bank will also make special efforts in collections of NPLs and written-off loans, while keeping high credit standards to ensure credit quality for new loans.

　　The overall business of the Bank YTD 2009 has been stable and sound. The Bank has achieved continuous strong growth in deposits, both commercial and retail. From late 2008, after PBC relieved the lending limit on banks, in response to the government stimulus program, the bank initiated new lending programs and loans achieved good growth. However, in light of uncertainties in the economy, the Bank has been giving special attention to matters of credit quality, as a condition of loan growth.

　　Net profit for the first 2 months of 2009 exceeded that of the same period in 2008. As announced, Net interest income in the first 2 months in 2009 achieved single digit percentage growth compared with the same period in 2008, due to good growth in average earning assets and improvements in the balance sheet more than offsetting some decline in NIM. The Bank expects the NIM to decline in future quarters of 2009 as a result of the interest rate reduction by PBOC in late 2008 as well as increases in the Bank’s portfolio of interbank assets, resulting largely from strong deposit growth. The bank hopes to help offset part of the effect of spread pressure by growth of good assets, combined with appropriate management of the balance sheet.

　　Even though NPL increase in the first 2 months of 2009 amounted to less than 0.05% of total loans and NPL ratio has no material change, the Bank made appropriate additions to credit provisions in light of the economy, and the Provision Coverage Ratio and Provision Sufficiency Ratios both increased from the figures of 2008/12/31.

　　The Bank plans to release First Quarter Report in late April.

　　The Bank expects solid fundamental business in 2009 with more investment in outlet expansion and adaptable business strategies.

About SDB

　　Shenzhen Development Bank, the first joint-stock owned company to list on the Shenzhen Stock Exchange (SZSE 000001), is a national bank headquartered in Shenzhen, with RMB 474.4 billion Yuan in assets. SDB provides a broad range of services to commercial, retail, and government customers, through 282 branches and sub-branches in 18 major cities across China. 16.76% of the Bank’s shares are owned by Newbridge Asia AIV III, L.P.

　　Selected balance sheet items at 2008-9-30:

　　　　- Total Deposits: ￥360.5 billion

　　　　- Total Lending: ￥283.7 billion

　　　　- Total Assets: ￥474.4 billion

Summary Income statement 2008FY (Audited)

In million Rmb Yuan except for per share data

　　The 2008 financial statements of SDB were audited by the E&Y Huaming CPA in accordance with domestic accounting standards, and this press release reflects figures from that audit. The bank’s accounts were also audited by Ernst & Young, in accordance with international accounting.