1.         Business Report for 2015

Changes in the Financial Environment

Global economy in Year 2015 failed to meet the expectation, which mainly resulted from the slowing recovery of developed countries and the sliding growth of emerging countries, such as China in particular, whose sluggish economic growth impacted global economy the most. While U.S.A benefited from low oil prices and its stably rebounding job market, its domestic demand was thus escalated. The Federal Reserve System raised interest rates by 25 basis points in December 2015 so the gradual economic recovery is expected. Accelerated economic rebound in Eurozone was witness in the second half of 2015 with concerns over terrorist attacks in France, which might impact tourism and business activities in Europe and further retard the European economic recovery. Emerging economies suffered from considerable capital outflow due to expectation on the rate increase in the U.S.A. Also, prices on international commodities have been incessantly sinking. Thus, Russia and Brazil are trapped in recession. In the meantime, China is currently confronting weaker economy, which forces it to inevitably enforce such quantitative easing monetary policies as RMB depreciation, reserve requirement ratio reduction and interest rate reduction in order to boost its economy and stock market. Domestically, the export decline is increasingly worsening and domestic demand impetus is slowing so the monitoring indicator has been seen the blue light for the 7^th consecutive month since June 2015, a signal to manifest that domestic economic growth is frail and the economy is vulnerable. Hence, Central Bank lowered the interest rate by 25 basis points in September and December respectively to boost the economy.

Apropos of 2016, most institutes of economic forecast expect mild economic recovery, better than 2015. Nonetheless, hidden factors such as business cycles and economic structures will drive the global economic trend toward high uncertainty. In respect of monetary policies, U.S.A may slow its interest rate increasing procedures while Japan, EU and China will sustain their QE policies. Disagreement in monetary policies of main central banks will be seen and will thus further fluctuation in financial markets. The Government, in order to facilitate economic growth, will enforce a wide variety of measures for boosting domestic and foreign demand. According to estimates announced by The Directorate General of Budget, Accounting and Statistics (DGBAS) in February 2016, the economic growth for 2016 is estimated to be 1.47%, slightly rising from 0.75% in 2015 but still vulnerable.

The domestic banking sector, influenced by uncertainty in global circumstances and economic variation, shall still stay cautious while managing risks. Further, enterprise investments turned conservative and the real estate market cooled down so growth in domestic loan will become sluggish. Interest rates continuously lowered by Central Bank narrowed interest spreads. In order to sustain stable profitability, banks will depend more on the growth of overseas business and wealth management. Overall, profitability growth of domestic banks is going to confront severer challenges.

Organizational Change

(1)     For better business management, Fixed-Income Department was merged into Treasury Department in September 2015.

(2)     The Competent Authorities urged banks to set up insurance departments for concurrently offering insurance agency in order to protect consumers’ rights, integrate resources and mitigate taxes. The Board of Directors of the Bank thus resolved in December 2015 to set up Insurance Agent Dept. and, upon completion of according procedures, will consolidate two of our subsidiaries, Yuanta Life Insurance Agent and Yuanta Property Insurance Agent.

Actual Accomplishments in 2015

While suffering weak economy, the Bank adjusted its business structure and sources of profits step by step to zealously maximize capital utilization. As of December 31, 2015, the consolidated asset of the Bank amounted to NT$ 818 billion, a growth of 17% from NT$ 698.9 billion in 2014. Yearly accumulated net income after tax reached NT$ 4,944 million with EPS of NT$ 1.26, a growth of NT$ 402 million or 9% from NT$ 4,542 million of accumulated net income after tax in 2014. NPL Ratio, NPL Coverage Ratio and Loan Coverage Ratio are 0.18%, 719.97% and 1.31% respectively. The Bank successfully sustained quality asset while enjoying continuous profit growth.

The changes in major services are as follows:

Unit: NT$ in billion

Major services are outlined as follows:

(1)   Deposits:

To grasp market dynamics, the Bank launched savings plans in NTD and foreign currencies and promoted payroll transfer service and agency collection and payment services while enhanced the promotion of general current deposits and foreign currency deposits to further enlarge deposit scope and client base.

In 2015, the Bank embraced total average deposits of NT$ 637.3 billion, an increase of NT$ 87.8 billion from NT$ 549.5 billion in 2014. Meanwhile, demand deposits increased by NT$ 31.1 billion, and time deposits increased by NT$ 56.7 billion.

(2)   Loans:

With regard to corporate banking, the Bank persistently promoted various financing projects and, in particular, enhanced the development of business in small-and-medium business enterprise clients and the credit business of OBU. In addition, through cooperating with subsidiary security companies in the Group, the Bank rendered clients with comprehensive financing, cash flow and financial management services to maximize sources of clients.

Concerning consumer banking, the Bank targeted premium client segments for mortgages while special attention was placed to residential purposes so as to maintain above-average growth momentum. Auto loan business was able to grow stably through elevating the market penetration of auto loans and developing car financing business. Its growth outnumbered that of any peer in 2015.

In 2015, the loan volume of the bank totaled NT$ 470.4 billion or an increase of NT$ 51.4 billion from NT$ 419 billion in 2014. This included NT$ 296.2 billion of loans through corporate banking, or 63% of total loan service, and NT$ 174.2 billion through consumer banking, or 37% of total loan.

(3)    Foreign Exchange:

Import and export businesses were slightly weakened due to market factors but the increase in the Bank’s savings in foreign currencies and the advancement of e-channel convenience drove the growth of inward and outward remittance services. The business scope of general foreign exchange has been expanding yearly. Meanwhile, the Bank has been endeavoring to advance staffs’ expertise, expand its remittance network and better its system in hopes for furnishing professional and convenient foreign exchange services.

In 2015, foreign exchange volume of the Bank reached US$ 53 billion, an increase of US$ 19.9 billion from US$ 33.1 billion in 2014. Meanwhile, remittance service weighted 96%, with the import service standing for 3% and the export service for 1%.

(4)    Trust Business:

During Year 2015, custody services were zealously expanded. One fund was added to discretionary mandated custody at the amount of NT$ 1 billion, meanwhile, another fund was added to fund custody at the amount of NT$ 3.2 billion. In custody for foreign capital, 15 clients at the amount of NT$ 2.1 billion were added, and, for discretionary mandated custody, 23 clients at the amount of NT$ 1.6 billion were added.

In 2015, the total balance of trust assets reached NT$ 129.6 billion, an increase of NT$ 15.9 billion from NT$ 113.7 billion at the end of 2014.

(5)    Wealth Management:

In conformity with ‘‘Caring, Considerate and Sincere’’, our spirit for wealth management, the Bank aims to provide premium, comprehensive and diverse products, centering on customer satisfaction and stably promote business growth. Meanwhile, to solidify customer relationship management, the Bank, in 2015, launched the Fortune Family. According to classified client asset, exclusive rights and services to members in each class are rendered so that clients can embrace comprehensive services and customized financial advice.

In 2015, net fee income on wealth management totaled NT$ 1.43 billion, or an increase of NT$ 0.35 billion from NT$ 1.08 billion in 2014.

(6)    Credit Card:

The Bank continued to focus on target clients to expand credit card business. This business model penetrates into existing card holders of high contribution. Also, in 2015, young customers and hedonistic driving lovers were targeted as primary customers to launch Yuanta iCash 2.0 (iCash Co-branded Card) and repackage All New VISA. In order to enhance the user-friendliness of card holders and raise the number of issued credit cards and consumption amount, contactless credit cards were planned.

In 2015, total credit cards in circulation reached 430,000 cards, an increase by 40% from 2014. The active card rate grew to 57% in 2015 from 48% in 2014.

Budget Implementation, Financial Status and Profitability

In 2015, the Bank’s net revenue achieved NT$ 12.93 billion. Compared with the net revenue in 2014 at NT$ 11.40 billion, net revenue increased by NT$ 1.53 billion.

Major differences between 2015 and 2014 are explicated as follows:

(1)   Net interest income amounted to NT$ 7.75 billion or an increase by NT$ 0.75 billion from 2014 as a result of the growth of in deposit and loan volume, the rise in interest rate spreads and the increase in interest revenue from securities investment.

(2)   Net non-interest income was NT$ 5.19 billion and grew by NT$ 0.79 billion from 2014 as a result of the increase in net fee and commission income, trading and foreign exchange.

(3)   Bad debt expense in 2015 amounted to NT$ 0.89 billion, an increase of NT$ 0.13 billion from 2014. Operating expenses in 2014 was NT$ 6.41 billion or an increase of NT$ 0.77 billion from 2014 which included an increase by NT$ 0.22 billion in sales tax.

(4)   In conclusion, the Bank’s net income before tax in 2015 was NT$ 5.64 billion. After deducting income tax at NT$ 0.70 billion, the net income was NT$ 4.94 billion with the budget achieving rate as 91%, or an increase of NT$ 0.4 billion from NT$ 4.54 billion in 2014.

Research and Development

(1)   Financial Supervisory Commission (FSC) launched “Digital Financial Environment 3.0 Building Program” in 2015. During the first phase, 12 services are permitted for online application. According to the security control criteria announced by the competent authority, the Bank completed the development of Yuanta E-Teller within the least possible time and had all the related functions activated by the end of March 2015 in hope for providing financial services of customer satisfaction and convenience. As of December 31, 2015, as high as 26,000 transactions were made on this platform.

(2)   Constructed a customer-greeting system. Centered on customers and introduced differentiated over-the-counter service. In addition, iStation, a hand-held system in the lobby and diverse customer recognition approaches, including over-the-counter ticketing and mobile ticketing, are built and digital pre-filled forms and walking teller services were offered in order to minimize operation costs and maximize banking service efficiency and service quality.

(3)   Built Mobile Financial Consultant System so that financial consultants can dynamically serve more customers through hand-held devices.

(4)   Risk Management:

A.    Credit risk: Persistently constructed and enhance credit risk models, elevated efficiency in credit risk management and fortified concentration risk control and risk pricing mechanism through credit risk data mart and the statement analysis platform.

B.     Market risk: Enhanced the analysis on derivatives, validated valuation models, developed according documentation and researched on calculation of capital charge for general market risk for FX options through Delta-plus approach in order to orientate the market risk management structure and mechanism toward perfection.

C.    Operational risk: Consistently built a comprehensive structure for operational risk management through integration and application of managerial instruments such as Operational Risk Indicator Management System, the self-assessment system for operational risk and control and the operational risk reporting system in order to advance the ability of the Bank to monitor and improve operational risk.

(5)   IT system R&D and upgrade: In order to support the Bank's operation strategies and business development, the Bank implemented new systems and projects, such as Customer-Greeting System, Mobile Financial Advisor System, CTI (Computer Telecommunication Integration), New-Generation ATM Replacement Project (Phase 1), Payment Service Provider Trusted Service Manager (PSP-TSM), Yuanta iCash and iPass Credit Card Module, Cross-border Payment Services (O2O, Online to Offline), Computer System and Information Security Inspection Project, Mobile Device Management System, Anti-Money Laundering (AML) System, and upgraded both the operation system and the hardware facilities for Core-Banking System in order to raise system operation efficiency and security.

2.         Impacts of External Competitive, Regulative and Overall Business Environment

“Digitalization’’ and “Internationalization’’ are among current vital trends in the financial industry. Their critical factors are the innovation ability to improve products and services to satisfy unique demands of unique clients. FSC has been intentionally loosening restrictions to trigger innovation momentum and further advance the ability and competence of the domestic financial industry in new product development through restriction lifting.

Impacts of critical regulation changes are illustrated as follows:

(1)   Amendment on “Template of Standard Form Contract for Home Loan (Auto Loan)” and “Mandatory Provisions to be Included in Standard Form Contract for Home Loan (Auto Loan)”:

On November 12, 2014, FSC announced “Template of Standard Form Contract for Home Loan (Auto Loan)” and “Mandatory Provisions to be Included in Standard Form Contract for Home Loan (Auto Loan)”, which would be enforced as of August 12, 2015. The Bank amended and fully executed according regulations. After such amendment, line of credit for collateral is restricted to the particular debt, unless it is otherwise consented in writing by the collateral provider as needed arise in the future. This amendment impacts the procedures and scope of debt collection in the future.

(2)   Amendment of Article 47-1 of the Banking Act for the Upper Limit of Revolving Interest Rate of Credit Cards:

On February 4, 2015, the resolution of amendment on Article 47-1 of the Banking Act was announced, which stipulates that the interest rate charged by banks on cash card or the interest rate charged by institutions engaging in credit card business on revolving credit shall not exceed 15% per annum. This amendment took effect on September 1^st, 2015. The customers of the Bank’s credit card business mostly make full payment so this amendment affects interest revenue in a very little manner.

(3)   Central Bank Approved Banks to Issue Negotiable Certificates of Deposit in Foreign Currencies:

As of July 31, 2015, Central Bank permitted Domestic Banking Unit (DBU) to issue Negotiable Certificates of Deposit (NCD) in foreign currencies. Central Bank also developed Directions for Issuance of Foreign-currency Denominated Negotiable Certificate of Deposit by Banks and deleted the provision that deposits in foreign currencies shall not be conducted in NCD from Directions Governing Banking Enterprises for Operating Foreign Exchange Business. This measure allows banks to increase financing sources in foreign currencies and provides enterprises and individuals with investment vehicles balanced between capital liquidity and profitability.

(4)   Digital Financial Environment 3.0 Building Program of FSC:

On Januray 13, 2015, FSC announced and activated Digital Financial Environment 3.0 Building Program. This program allows current deposit customers to enjoy financial services in the current online banking and mobile banking. Also, application for 12 common services is available online, which includes closure of accounts, designation of receiving accounts, accepting fax instruction for debit from customers’ accounts, the increase of personal unsecured loan, mortgage or auto loan without guarantors, application for credit cards, credit card installment payment, opening trust account and Knowing Your Customer (KYC) due diligence procedure, online agreement with trust business recommendation or discontinuance of recommendation, and cross-selling business. The Bank made the running on March 30, 2015 to launch Yuanta E-Teller, an online financial service, to render customers with a convenient channel for services and promote and enhance the Bank’s business development.

(5)   FSC Intensified Management of Banks for Transaction Risk from Complicated and Risky Derivatives:

In order to solidify banks’ risk control over derivatives services, product transaction conditions and product sale management, FSC, in conjunction with the banking sector and The Bankers Association, developed practical measures which feature intense managerial mechanism and required banks fully understand clients, cautiously assess line of credit and ensure the appropriateness and suitability between products and clients’ risk acceptance ability in order to sustain the sound development of banks. The Bank will echo the amendment made by competent authorities and adjust according internal operation procedures in addition to intensifying trainings on legal compliance of personnel so that the Bank can further its business while observing regulations.

(6)    FSC announced The Act Governing Electronic Payment Institutions:

On February 4, 2015, FSC announced The Act Governing Electronic Payment Institutions, which took effect on May 3, 2015 to consist with regulations developed in 2015 and the update provisions and regulate business operation and development so that safe and convenient capital transfer services can be offered. The said regulations developed in 2015 include Regulations Regarding Paragraph 2, Article 3 of the Act Governing Electronic Payment Institutions, Regulations Governing Cooperating with or Assisting Foreign Institutions in Engaging in Activities Associated with Electronic Payment Business within the Territory of the Republic of China, Regulations Governing Identity Verification Mechanism and Transaction Limits for Users of Electronic Payment Institutions, Regulations Governing the Dedicated Deposit Account of Electronic Payment Institutions, Regulations Regarding Paragraph 6, Article 21 of the Act Governing Electronic Payment Institutions, Regulations Governing the Standards for Information System and Security Management of Electronic Payment Institutions, Implementation Rules for the Internal Audit and Internal Control System of Electronic Payment Institutions, Rules Governing the Administration of Electronic Payment Business and Regulations Governing the Organization and Administration of Sinking Fund Established by Electronic Payment Institutions.

The Bank acquired approval from FSC on September 21, 2015 to be an institute which concurrently operates mobile payment. The Bank is dedicated to launch services including collecting and making payments for real transactions as an agent, accepting deposits of funds as stored value funds and transferring funds between e-payment accounts.

(7)    Amendment on The Financial Institutions Merger Act:

On December 9, 2015, amendment on The Financial Institutions Merger Act was announced. Amendments on tax preference measures in Article 13 include transferred securities are exempted from securities exchange tax, any goods or labor services transferred are deemed as not falling within the scope of imposition of business tax, the scope for the deferred land value increment tax is enlarged to cover all land owned by the extinguished institution and the goodwill generated due to merger may be equally amortized within 15 years instead of 5 years. The amended provisions took effect on the announcement date and are expected to mitigate costs of mergers of financial institutes.

(8)    Amendment on Article 74 of the Banking Act: :

On January 22, 2015, to expedite internationalization of the banking sector in Taiwan, Legislative Yuan passed the amendment on Article 74 of the Banking Act. The upper limit on reinvestment of banks was amended from 40% of paid-in capital to 40% of net value in order to boost capital momentum of domestic banks for foreign acquisition.

3.         Latest Credit Ratings

4.         Business Plan in 2016 and Outlook

In 2016, on the premises of controlling risk more cautiously and maintaining asset quality, the Bank aims to develop our services in the balanced manner and advance the Bank's services to the appropriate economic scale and market leadership. Meanwhile, the Bank will also raise its profitability through better capital utilization. It is planned to center the core business goals on fortifying its client base, focusing on the niche service and enhancing its pricing capability. The Bank's operation plans are summarized as follows:

(1)       Business Development:

A.    According to dynamics of domestic and foreign financial markets and client demands, the Bank will launch according products and marketing activities, strengthen the relationship with target clients, penetrate new business with potential clients, broaden sources of clients and fortify the base for business development.

B.     In respect of corporate banking, the Bank will not only actively participate in syndicated loans and strive to be the lead manager, but also better develop businesses with small-and-medium enterprise clients in order to raise earnings yield and fee income.

C.    With regard to consumer banking, mortgage business will be orientated to residential purposes and revolving mortgage will be promoted more. Segmentation strategies will be still employed to promote credit card services in order to escalate the number of active credit cards and transaction amount.

D.    Wealth management business will be operated with ‘‘Caring, Considerate and Sincere’’ as the Bank's business spirit to render clients with premium financial products and services and, with the image of a wealth management professional, maximize our brand awareness and market share.

(2)       Channel Development:

To grasp the trend of the mobile network and changes in consumer habits, the Bank will engage itself more in virtualization and transformation of physical channels, advance the user-friendliness of the e-channels and explore the business opportunities electronic payment. In the overseas market, the Bank currently owns a subsidiary in Philippine and a representative office in Myanmar and is finishing the acquisition of the subsidiary in Korea. With full commitment to operating overseas business offices, the Bank aims to maximize its contribution to profit year by year.

(3)       Risk Management:

Through risk model and database construction, the Bank will fortify its managerial capability in credit, market and operational risks, develop insights in trends of industrial and national risks and establish risk warning mechanism in order to effectively minimize possible risk.

(4)       Personnel Training:

Utterly perform employee orientation and on-the-job training. Through job rotation, the Bank plans to cultivate multi-functional talents and intensify trainings on international professionals and digital finance professionals to well prepare the Bank for future developments and demands for internationalization and thus lay the foundation for sustainability of the Bank.