“

Chairman’s Statement

Balance

Year 2007 will be pivotal for the HKMC as it seeks to expand new lines of

businesses. The long-term strategy for the Corporation will help to maintain

the viability and ability of the Corporation to provide liquidity to the banks

when necessary and also position the Corporation as a market leader that

can share its expertise and contribute to market development in the region,

thereby reinforcing Hong Kong’s position as an international financial centre. ”� THEHONGKONGMORTGAGECORPORATIONLIMITED

Performance Highlights

Itisgratifyingtonotethat2006turnedouttobearecord

year for theHKMC.Profitafter taxwasa recordhighat

HK$683million,anincreaseof13.5%over2005.Thereturn

onshareholders’equityimprovedto13.9%andcapital-to-

assets ratiowas11.2%.TheCorporationdeclaredafinal

dividendofHK$250million,thesameasin2004and2005.

Otherthanforthefirstyearofoperationthatincurreda

smallstart-uploss,theCorporationhasshownrespectable

profitseveryyear,notwithstandingtheeruptionoftheAsia

financialcrisisin1997andtheSevereAcuteRespiratory

Syndromein2003.TheCorporationhasprovenitselftobe

highlyefficientandresilient,andhasbeenabletoinnovate

during difficult times to overcome the challenges and

continuetomeetitsobjectivesofcontributingtobanking

stability,promotinghomeownershipanddevelopingthe

debtandsecuritisationmarkets.

ThesolidperformanceoftheHKMCthroughtheseyears

haslaidthefoundationforittoberecognisedamongthe

moststablefinancialinstitutionsintheworld.InOctober

2006,theCorporationmadehistoryasthefirstentity,andso

fartheonlyone,tohaveachievedalong-termHongKong

dollarissuerratingoftriple-AbyMoody’s.TheCorporation’s

foreigncurrencyissuerratinghasalsobeenupgradedby

Moody’stoAa1,justanotchbelowthetopratingoftriple-

A.With such strong credit standing, the Corporation is

wellpositionedtoplayamoreactiveandstrategicrolein

promotingthedevelopmentofthedebtandsecuritisation

marketsnotonlyinHongKongbutalsointheregion.

Asset Acquisition

TheHKMCcontinuedinitsroleasaliquidityproviderto

thebanking community, andpurchasedHK$1billionof

residentialmortgagesin2006.Thedecreaseinmortgage

purchasecomparedwith lastyear reflected thatbanks

wereslowtounloadtheirresidentialmortgagesinviewof

theirlowloan-to-depositratioandthecontinuedimproved

performanceofmortgageloans.

ANNUALREPORT2006 �

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The changes in market conditions brought about

an opportunity for broadening and diversifying the

Corporation’sbusinessstrategy. In2006, inresponseto

approachesfromthemarket,theCorporationpurchased

taxiloansvaluedatHK$1.4billionfromthebankingsector

andcommercialmortgage loansvaluedatHK$4billion

fromTheLinkFinanceLimited.

Mortgage Insurance

The Mortgage Insurance Programme operated by the

HKMCcontinuedtohelpfosteringwiderhomeownership

inHongKong.TheCorporation receivedaround12,000

applicationsundertheProgrammeduringtheyear,and

theoutstandingrisk-in-forceincreasedby10.4%toHK$2.9

billion.ThegrowthintheusageoftheProgrammeslowed

downin2006onaccountofarelativelystagnantmortgage

market and a rising interest rate environment that

dampenedmortgagors’demandforhigherleverage.

Debt Issuance

Forthesixthyear,theHKMCisthemostactivecorporate

debtissuerintheHongKongdollarmarket.Thetotaldebt

issuance by the Corporation to institutional investors

under itsDebt IssuanceProgrammewasHK$12billion,

arecordhighfortheCorporation.

InMarch2006theCorporationmadethefirstissueofa

Composite InterestRatepaper inHongKong–HK$100

millionoftwo-yearnotes. IthasenabledbanksinHong

KongtostartofferingCompositeInterestRatemortgage

loansandhenceprovidingmoreconsumerchoices.

UndertheCorporation’sRetailBondIssuanceProgramme,

retailbondsequivalent toa totalvalueofHK$1.3billion

denominatedinHongKongandUSdollarswereofferedto

thepublicinSeptember2006.Therewasstrongdemand

for this retail bond issuance,which includeda ten-year

zero-couponbondthatencouragedlong-termsavings.The

marketmakersappointedbytheCorporationhelptoensure

sufficientliquidityinsuchretailbondstomakeiteasierfor

investorstoliquidatethepaperwhennecessary.

Under the Bauhinia Mortgage-Backed Securitisation

(“MBS”) Programme, the Corporation successfully

launchedanissueinNovemberthatraisedHK$2billion.

This is the first-ever and largest triple-A rated partially

guaranteedissueofHongKongdollarmortgage-backed

securities.With growing interest of investors in highly

rated MBS products from this region, the Corporation

willcontinue todevelop the localsecuritisationmarket

through product innovation and regular issuance

and strengthen Hong Kong’s role as a regional

fundinghub.

� THEHONGKONGMORTGAGECORPORATIONLIMITED

CHairMan’S STaTeMenT

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New Strategy and Direction for 2007

Over the past decade, the HKMC’s hard work and

innovationhaveenabledtheCorporationtodemonstrate

convincinglythattheprimaryobjectivestheCorporation

setout toachievehavebeensuccessfully fulfilled.The

Board of the Corporation has also noted substantial

changesinthebusinessenvironmentthatcallforareview

of the HKMC’s overall business strategy and its future

positioningintheevolvingmarketenvironment.

TheCorporationthereforecommissionedamanagement

consultancy firm to conduct a strategic review of the

Corporation’s businesses, having regard to its primary

objectives,coreactivitiesandchangingmarketconditions.

InSeptember2006,afterintensiveresearchanddialogue

withmajorstakeholders,theconsultancyfirmpresented

itsreportandconfirmedthevisionthattheCorporation

should expand by phases beyond mortgage products

andseektodevelopnewbusinessesinoverseasmarkets

aswell.Thenewbusinessesshould includeacquisition

of quality non-mortgage assets in Hong Kong, such as

autoloans,commercialmortgageloans,andalsocross-

border mortgage loans.The Corporation should also

developmortgageinsurancebusinessinmarketsoutside

HongKong.

Afterdeliberationonthereport,theBoardhasadopted

thereportasabasis for the long-termstrategy for the

Corporation.Thisstrategywillhelptomaintaintheviability

andabilityoftheCorporationtoprovideliquiditytothe

bankswhennecessaryandalsopositiontheCorporation

as a market leader that can share its expertise and

contributetomarketdevelopmentintheregion,thereby

reinforcing Hong Kong’s position as an international

financialcentre.

Year2007willbepivotalfortheHKMCasitseekstoexpand

newlinesofbusinesses.Letmetakethisopportunityto

thankmyfellowdirectors,themanagementandallstaff

oftheCorporationfortheirdedicatedworkin2006andlet

uslookforwardtoanothersuccessfulyearin2007.

Henry TangChairman

ANNUALREPORT2006 �

CHairMan’S STaTeMenT

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