| Financial Instruments And Risks | 4 Financial instruments and risks The Group’s activities expose it to a variety of market risks (comprising foreign currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. Risk management is carried out by the senior management of the Group.
4.1 Financial risk factors
4.1.1 Market risk Market risk is the risk of changes in fair value of financial instruments and future cash flows from fluctuation of market prices, which includes two types of risks from volatility of foreign exchange rates (foreign currency risk), and market interest rates (interest rate risk).
(a) Foreign currency risk Foreign currency risk is the risk of loss resulting from changes in foreign currency exchange rates. Fluctuations in exchange rates between the RMB and other currencies in which the Group conducts business may affect its financial position and results of operations. The foreign currency risk assumed by the Group mainly comes from movements in the USD/RMB exchange rates. The Company and major overseas intermediate holding companies’ functional currency is USD. They are mainly exposed to foreign exchange risk arising from their cash and cash equivalents and loans to subsidiaries denominated in RMB. The Group has entered into spot-forward USD/RMB currency swaps to manage its exposure to foreign currency risk arising from loans to subsidiaries dominated in RMB. The subsidiaries of the Group are mainly operating in mainland China with most of the transactions denominated in RMB. The Group considers that business in mainland China is not exposed to any significant foreign exchange risk as there are no significant financial assets or liabilities of these subsidiaries denominated in the currencies other than RMB. The table below illustrates the impact of an appreciation or depreciation of RMB spot and forward rates against USD by 5% on the Group’s profit before income tax expenses.
As of December 31,
2020 2021
RMB’000 RMB’000
5% appreciation of RMB 131,228 699,049
5% depreciation of RMB (131,228 ) (699,049 )
(b) Interest rate risk Interest rate risk is the risk that the fair value/future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest on floating rate instruments is repriced at intervals of less than one year. Interest on fixed interest rate instruments is priced at inception of the financial instruments and is fixed until maturity. Floating rate instruments expose the Group to cash flow interest rate risk, whereas fixed rate instruments expose the Group to fair value interest risk. The Group’s interest rate risk mainly arises from fixed rate instruments including cash at bank, accounts and other receivables and contract assets, loans to customers, accounts and other payables and contract liabilities, etc. The Group’s interest rate risk policy requires it to manage interest rate risk by managing the maturities of interest-bearing financial assets and interest-bearing financial liabilities. The following table sets out the Group’s financial assets and financial liabilities exposed to interest rate risk by repricing date, contractual maturity date or expected maturity date (whichever is the earlier):
As of December 31, 2020
Less than 3 months 3 months to 1 1-2 2-3 More than 3 years Overdue No interest Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
ASSETS
Cash at bank 23,785,651 56,444 6,190 310,283 — — — 24,158,568
Restricted cash 23,029,588 — — — — — — 23,029,588
Financial assets at fair value through profit or loss 966,000 5,421,035 9,230,584 1,399,389 848,231 1,260,315 15,298,343 34,423,897
Financial assets at amortized cost 1,204,990 1,683,332 1,816,323 803,062 — 1,056,262 — 6,563,969
Financial assets purchased under reverse repurchase agreements 700,007 — — — — — — 700,007
Accounts and other receivables and contract assets — — — — — — 23,325,978 23,325,978
Loans to customers 27,757,023 54,104,955 30,195,692 6,559,344 — 1,208,800 — 119,825,814
Total financial assets 77,443,259 61,265,766 41,248,789 9,072,078 848,231 3,525,377 38,624,321 232,027,821
(b) Interest rate risk (Continued) The following table sets out the Group’s financial assets and financial liabilities exposed to interest rate risk by repricing date, contractual maturity date or expected maturity date (whichever is the earlier): (Continued)
As of December 31, 2020
Less than 3 months 3 months to 1 1-2 years 2-3 years More than 3 years Overdue No interest Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
LIABILITIES
Payable to platform investors — — — — — — 9,114,906 9,114,906
Borrowings 8,778,581 1,536,475 389 — — — — 10,315,445
Accounts and other payables and contract liabilities — — — — — — 5,483,757 5,483,757
Payable to investors of consolidated structured entities 24,875,127 50,551,124 29,978,064 4,963,403 — — — 110,367,718
Financing guarantee liabilities — — — — — — 748,674 748,674
Lease liabilities 140,889 400,965 316,653 103,387 17,525 — — 979,419
Convertible promissory note payable — — — 10,117,188 — — — 10,117,188
Optionally convertible promissory notes — — — 7,530,542 — — — 7,530,542
Total financial liabilities 33,794,597 52,488,564 30,295,106 22,714,520 17,525 — 15,347,337 154,657,649
Nominal amount of interest rate swap (8,417,121 ) — — 8,417,121 — — — —
Total interest rate sensitivity gap 52,065,783 8,777,202 10,953,683 (22,059,563 ) 830,706 3,525,377 23,276,984 77,370,132
(b) Interest rate risk (Continued) The following table sets out the Group’s financial assets and financial liabilities exposed to interest rate risk by repricing date, contractual maturity date or expected maturity date (whichever is the earlier): (Continued)
As of December 31, 2021
Less than 3 months 3 months to 1 year 1-2 years 2-3 years More than 3 years Overdue No interest Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
ASSETS
Cash at bank 29,263,128 70,579 363,691 1,538,551 3,507,239 — — 34,743,188
Restricted cash 27,792,006 554,499 1,786,219 306,371 14,444 — — 30,453,539
Financial assets at fair value through profit or loss 12,544,935 3,459,334 919,458 262,969 — 1,164,095 12,672,420 31,023,211
Financial assets at amortized cost 1,168,502 500,740 920,815 107,676 — 1,086,880 — 3,784,613
Financial assets purchased under reverse repurchase agreements 5,527,177 — — — — — — 5,527,177
Accounts and other receivables and contract assets — — — — — — 22,344,773 22,344,773
Loans to customers 51,563,466 98,295,888 51,345,667 11,182,096 1,002 2,583,991 — 214,972,110
Total financial assets 127,859,214 102,881,040 55,335,850 13,397,663 3,522,685 4,834,966 35,017,193 342,848,611
The following table sets out the Group’s financial assets and financial liabilities exposed to interest rate risk by repricing date, contractual maturity date or expected maturity date (whichever is the earlier): (Continued)
As of December 31, 2021
Less than 3 months 3 months to 1 year 1-2 years 2-3 years More than 3 years Overdue No interest Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
LIABILITIES
Payable to platform investors — — — — — — 2,747,891 2,747,891
Borrowings 13,074,069 12,853,348 — — — — — 25,927,417
Accounts and other payables and contract liabilities — — — — — — 8,814,255 8,814,255
Payable to investors of consolidated structured entities 46,086,474 95,848,045 48,048,309 5,463,312 — — — 195,446,140
Financing guarantee liabilities — — — — — — 2,697,109 2,697,109
Lease liabilities 141,719 322,317 238,250 83,166 9,092 — — 794,544
Convertible promissory note payable — — 10,669,498 — — — — 10,669,498
Optionally convertible promissory notes — — 7,405,103 — — — — 7,405,103
Total financial liabilities 59,302,262 109,023,710 66,361,160 5,546,478 9,092 — 14,259,255 254,501,957
Nominal amount of interest rate swap (8,224,653 ) — 8,224,653 — — — — —
Total interest rate sensitivity gap 76,781,605 (6,142,670 ) (19,249,963 ) 7,851,185 3,513,593 4,834,966 20,757,938 88,346,654
The Group performs interest rate sensitivity analysis on profit for the Group by measuring the impact of a change in interest rate of financial assets, liabilities and interest rate derivative instruments. The table below illustrates the impact to profit before tax of the coming year as of each reporting date based on the structure of interest-bearing assets, liabilities and interest rate derivative instruments as of December 31, 2020 and 2021, caused by a parallel shift of 100 basis points in interest rates.
As of December 31,
2020 2021
RMB’000 RMB’000
Change in interest rate
-100 basis points (488,490 ) (648,804 )
+100 basis points 488,490 648,804 In the sensitivity analysis, the Group adopts the following assumptions when determining business conditions and financial index:
• The fluctuation rates of different interest-bearing assets and liabilities are the same;
• All assets and liabilities are re-priced
• Analysis is based on static gap on reporting date, regardless of subsequent changes;
• No consideration of impact on customers’ behavior resulting from interest rate changes;
• No consideration of impact on market price resulting from interest rate changes;
• No consideration of actions taken by the Group. Therefore, the actual changes of net profit may differ from the analysis above.
4.1.2 Credit risk Credit risks refer to the risk of losses incurred by the inabilities of debtors or counterparties to fulfill their contractual obligations or by the adverse changes in their credit conditions. The Group is exposed to credit risks primarily associated with its deposit arrangements with commercial banks, financial assets at fair value through profit or loss, accounts and other receivables, loans to customers, etc. The Group uses a variety of controls to identify, measure, monitor and report credit risk. Credit risk management The Group’s financial assets at fair value through profit or loss mainly include trust products, wealth management products, asset management plans and other equity investments. The Group executes due diligence, assesses counterparties’ qualification and manages credit risks of existing investments. The Group has formulated a complete set of credit management processes and internal control mechanisms, so as to carry out whole process management of credit business. Credit management procedures for its retail loans comprise the processes of credit origination, credit review, credit approval, disbursement, post-disbursement monitoring and collection. Risks arising from financing guarantee contracts and loan commitments are similar to those associated with loans. Transactions of financing guarantee contracts and loan commitments are, therefore, subject to the same portfolio management and the same requirements for application and collateral as loans to customers. To those accounts and other receivables and contract assets, there are policies to control the credit risk exposures. The Group evaluates the possibility of guarantee from third parties, credit record and other factors such as current market condition. The Group monitors customer credit records at regular intervals, and takes action such as official notifications, shortening credit periods or cancelling credit periods etc. to ensure the Group’s credit risk remains under control when the customers with bad credit records are identified. Credit exposure Without taking collateral and other credit enhancements into consideration, for on-balance contracts
As of December 31,
2020 2021
RMB’000 RMB’000
On-balance
Cash at bank 24,158,568 34,743,188
Restricted cash 23,029,588 30,453,539
Financial assets at fair value through profit or loss 34,423,897 31,023,211
Financial assets at amortized cost 6,563,969 3,784,613
Financial assets purchased under reverse repurchase agreements 700,007 5,527,177
Accounts and other receivables and contract assets 23,325,978 22,344,773
Loans to customers 119,825,814 214,972,110
232,027,821 342,848,611
Off-balance
Financing guarantee contracts 20,969,026 64,731,369
Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the types of collateral and the valuation parameters. The collateral obtained are typically residential properties. Management monitors the market value of the collateral, adjusts credit limits when needed and performs an impairment valuation when applicable. It is the Group’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding balance. In general, the Group does not occupy repossessed properties for business use. Expected credit loss Credit risk measurement The estimation of credit exposure for risk management purposes is complex and requires the use of models, as the exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties. The Group measures credit risk using Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). This is similar to the approach used for the purposes of measuring ECL under IFRS 9. Measurement of ECL IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarized below:
• A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk continuously monitored by the Group.
• If a significant increase in credit risk (‘SICR’) since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit-impaired.
• If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’. Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on ECL on a lifetime basis.
• A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward- looking information. Purchased or originated credit-impaired financial assets (“POCI”) are those financial assets that are credit- impaired on initial recognition. Their ECL is always measured on a lifetime basis (Stage 3). The following diagram summarizes the impairment requirements under IFRS 9 (other than POCI). Change in credit quality since initial recognition
Stage 1 Stage 2 Stage 3
(Initial recognition) (Significant increase in credit (Credit-impaired assets)
risk since initial recognition)
12-month Lifetime ECL Lifetime ECL The key judgements and assumptions adopted by the Group in addressing the requirements of the standard are discussed below:
(a) Significant increase in credit risk (SICR) For loans to customers, the Group considers a loan to have experienced a significant increase in credit risk if the borrower is more than 30 days (including 30 days) past due on its contractual payments. No qualitative criteria is considered by the Group since the Group monitors the risk of borrowers purely based on the overdue period. For other financial assets measured at amortized cost, the Group considers various reasonable supporting information to judge if there is significant increase in credit risk, including the forward-looking information, when determining the ECL staging for financial assets. The criteria used to identify SICR are monitored and reviewed periodically for appropriateness by the credit risk team.
(b) Definition of default and credit-impaired assets For loans to customers, the Group defines a financial instrument as in default, which is fully aligned with the definition of credit-impaired if the borrower is more than 90 days (including 90 days) past due on its contractual payments. No qualitative criteria is considered by the Group since the Group monitors the risk of borrowers purely based on the overdue period. The criteria above are consistent with the definition of default used for internal credit risk management purposes. The default definition has been applied consistently to model the Probability of Default (PD), Exposure at Default (EAD) and Loss given Default (LGD) throughout the Group’s expected loss calculations.
(c) Measuring ECL – Explanation of inputs, assumptions and estimation techniques The ECL is measured on either a 12-month
• PD represents the likelihood of a borrower defaulting on its financial obligation (as mentioned in “Definition of default and credit-impaired assets” above), either over the next 12 months (12M PD), or over the remaining lifetime (Lifetime PD) of the obligation.
• Loss Given Default (LGD) represents the Group’s expectation of the extent of loss on a defaulted exposure. LGD varies by type and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default (EAD).
• EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months (12M EAD) or over the remaining lifetime (Lifetime EAD). For example, for a revolving commitment, the Group includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur. The ECL is determined by projecting the PD, LGD and EAD for each future month and for each individual exposure or collective segment. These three components are multiplied together and adjusted for the likelihood of survival (i.e. the exposure has not prepaid or defaulted in an earlier month). The Lifetime PD is developed by applying a maturity profile to the current 12M PD. The maturity profile looks at how defaults develop on a portfolio from the point of initial recognition throughout the lifetime of the loans. The maturity profile is based on historical observed data and is assumed to be the same across all assets within a portfolio. This is supported by historical analysis. The 12-month 12-month The 12-month Forward-looking economic information is included in determining the 12-month There have been no significant changes in estimation techniques during the years ended December 31, 2019, 2020 and 2021.
(d) Forward-looking information incorporated in the ECL models The Group has developed macro-economic forward-looking adjustment model by establishing a pool of macro-economic indicators, preparing data, filtering model factors and adjusting forward-looking elements, and the indicators include gross domestic product (GDP) year on year percentage change, customer price index (CPI) year on year percentage change and other macro-economic variables. Through regression analysis, the relationship among these economic indicators in history with PD is determined, and PD then determined through forecasting economic indicators. The forecasting methods and critical assumptions applied had no material changes during the years ended December 31, 2019, 2020 and 2021. In 2019, 2020 and 2021, the Group collected 10-year non-linearity The impact of these economic indicators on PD varies to different businesses. The Group comprehensively considers internal and external data, future forecasts and statistical analysis to determine the relationship between these economic indicators with PD. The Group evaluates and forecasts these economic indicators at least annually at balance sheet date, and regularly evaluates the results based on changes in macroeconomics. The Group considered different macroeconomic scenarios. As of December 31, 2020 and 2021, the key macroeconomic assumptions used to estimate expected credit losses are listed below.
As of December 31,
2020 2021
GDP – year on year percentage change 5.0 %-7.5% 5.0%-6.2 %
CPI – year on year percentage change 1.2 %-2.8% 2.3%-2.6 %
Broad measure of money supply (M1) – year on year percentage change 3.7 %-7.9% 8.1%-9.1 % Similar to other economic forecasts, the forecasts of economic indicators have high inherent uncertainties and therefore actual results maybe significantly different from the forecasts. The Group considered above forecasts as its best estimate as of December 31, 2020 and 2021. Sensitivity analysis Expected credit losses are sensitive to the parameters used in the model, the macro-economic variables of the forward-looking forecast, the weight probabilities in the three scenarios, and other factors considered in the application of expert judgement. Changes in these input parameters, assumptions, models, and judgements will have an impact on the measurement of expected credit losses. The Group has the highest weight of the base scenario. The loans to customers and financing guarantee contracts assumed that if the weight of the upside scenario increased by 10% and the weight of the base scenario reduced by 10%, the Group’s ECL impairment provision as of December 31, 2020 and 2021 would be reduced by RMB5 million and RMB15 million, respectively; if the weight of the downside scenario increased by 10% and the weight of the base scenarios reduced by 10%, the Group’s ECL impairment provision as of December 31, 2020 and 2021 would be increased by RMB6 million and RMB32 million, respectively. The following table shows the changes of ECL impairment provision on loans to customers and financing guarantee liabilities related to ECL assuming the financial assets in stage 2 reclassified to stage 1 due to significant improvement in credit risk.
As of December 31,
2020 2021
RMB’000 RMB’000
Total ECL and financing guarantee liabilities under assumption of reclassification of financial instruments from stage 2 to stage 1 1,541,542 4,897,881
Total ECL and financing guarantee liabilities related to ECL recognized in the consolidated balance sheet 1,737,879 5,450,980
Difference-amount (196,337 ) (553,099 )
Difference-ratio -13 % -10 %
Maximum exposure to credit risk before collateral held or other credit enhancements The following presents the credit risk exposure of the financial instruments under the scope of expected credit loss mentioned in Measurement of ECL without considering guarantee or any other credit enhancement measures:
As of December 31, 2020
Stage I Stage II Stage III POCI Maximum
(in RMB’000)
Book value
On-balance
Financial assets at amortized cost 5,507,707 — 974,887 81,375 6,563,969
Loans to customers 119,087,728 644,478 93,608 — 119,825,814
Total 124,595,435 644,478 1,068,495 81,375 126,389,783
Off-balance
Financing guarantee contracts 20,898,499 70,527 — — 20,969,026
As of December 31, 2021
Stage I Stage II Stage III POCI Maximum
(in RMB’000)
Book value
On-balance
Financial assets at amortized cost 2,697,852 — 584,739 502,022 3,784,613
Loans to customers 213,665,161 1,263,965 42,984 — 214,972,110
Total 216,363,013 1,263,965 627,723 502,022 218,756,723
Off-balance
Financing guarantee contracts 64,416,918 314,451 — — 64,731,369
For other on-balance sheet financial assets, the maximum credit risk exposure is their net carrying amount.
4.1.3 Liquidity risk Liquidity risk is the risk of not having access to sufficient funds or being unable to liquidate a position in a timely manner at a reasonable price to meet the Group’s obligations as they become due. The Group aims to maintain sufficient cash at bank and marketable securities. Due to the dynamic nature of the underlying businesses, the Group maintains flexibility in funding by maintaining adequate cash at bank. The following table analyses the Group’s financial liabilities into relevant maturity grouping based on the remaining period at the end of each reporting period to the contractual or expected maturity date. The amounts disclosed in the table are undiscounted contractual or expected cash flows including interests with financial liabilities denominated in foreign currencies translated into RMB using the spot rate as of balance sheet date:
As of December 31, 2020
Repayable on demand or undated Within 1 year 1 to 2 years 2 to 3 years Over 3 years Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Financial liabilities -
Payable to platform investors 9,114,906 — — — — 9,114,906
Borrowings — 2,227,487 120,537 8,462,547 — 10,810,571
Accounts and other payables and contract liabilities 5,483,757 — — — — 5,483,757
Payable to investors of consolidated structured entities 14,947 79,283,191 31,007,485 5,058,213 — 115,363,836
Financing guarantee liabilities 20,969,026 — — — — 20,969,026
Lease liabilities — 573,840 330,146 106,282 17,941 1,028,209
Convertible promissory note payable — 101,854 94,019 12,818,864 — 13,014,737
Optionally convertible promissory notes — 453,203 453,203 8,006,590 — 8,912,996
35,582,636 82,639,575 32,005,390 34,452,496 17,941 184,698,038
As of December 31, 2021
Repayable on demand or undated Within 1 year 1 to 2 years 2 to 3 years Over 3 years Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Financial liabilities -
Payable to platform investors 2,747,891 — — — — 2,747,891
Borrowings — 16,717,997 9,628,462 — — 26,346,459
Accounts and other payables and contract liabilities 8,814,255 — — — — 8,814,255
Payable to investors of consolidated structured entities 45,628 148,079,478 49,505,033 5,570,774 — 203,200,913
Financing guarantee liabilities 64,731,369 — — — — 64,731,369
Lease liabilities — 484,497 248,770 85,180 9,329 827,776
Convertible promissory note payable — 91,869 12,502,777 — — 12,594,646
Optionally convertible promissory notes — 442,840 7,823,510 — — 8,266,350
76,339,143 165,816,681 79,708,552 5,655,954 9,329 327,529,659
4.2 Capital management The Group’s capital requirements are primarily dependent on the scale and the type of business that it undertakes, as well as the industry and geographic location in which it operates. The primary objectives of the Group’s capital management are:
• To comply with the capital requirements set by the regulators of the markets where the Group operates.
• To safeguard the Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and to maximize shareholders’ value.
• To maintain a strong capital base to support the development of its business. The Group adopts administrative measures issued by the regulators of subsidiaries with financial licenses. To meet these requirements, the Group monitor its capital adequacy ratio and the usage of regulatory capital on a quarterly basis and operate and manage assets at all levels in accordance with the provisions of these measures. The Group monitors capital by regularly reviewing the total equity attributable to owners’ of the Company. Adjustments to current capital structure are made in light of changes in economic conditions and risk characteristics of the Group’s activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid, return capital to ordinary shareholders or issue capital securities.
4.3 Group’s maximum exposure to structured entities The Group uses structured entities in the normal course of business for a number of purposes, for example, structured transactions for customers, to provide finance to public and private sector infrastructure projects, and to generate fees from managing assets on behalf of third-party investors. These structured entities are financed through the issue of notes or units to investors. Refer to Note 2 and Note 5.7 for the Group’s consolidation consideration related to structured entities. The following table shows the Group’s maximum exposure to the unconsolidated structured entities representing the Group’s maximum possible risk exposure that could occur as a result of the Group’s arrangements with structured entities. The maximum exposure of the Group in these unconsolidated structure entities is contingent in nature and approximates the sum of accounts receivables from unconsolidated structure entities and direct investments made by the Group.
As of December 31, 2020
(In RMB’000) Size Carrying amount of investment in structured entities Group’s maximum Interest held by
Unconsolidated structured products managed by third parties (a) NA 10,367,052 10,367,052 Investment income
Unconsolidated structured products managed by affiliated entities (a) NA 19,352,780 19,409,204 Investment income/ service fee
Unconsolidated structured products serviced by the Group 57,777,571 — 711,058 Service fee
As of December 31, 2021
(In RMB’000) Size Carrying amount of investment in structured entities Group’s maximum Interest held by
Unconsolidated structured products managed by third parties (a) NA 8,661,387 8,661,387 Investment income
Unconsolidated structured products managed by affiliated entities (a) NA 12,219,226 12,219,226 Investment income
Unconsolidated structured products serviced by the Group 18,178,437 — 1,428,320 Service fee
These unconsolidated structured products mainly include assets management plans, trust plans, mutual funds, private fund and bank wealth management products which are all classified in financial assets at amortized cost or financial assets at fair value through profit or loss.
(a) The information about the size of these unconsolidated structured products cannot be acquired from open market.
4.4 Fair value estimation The Group’s main financial instruments carried at fair value are financial assets at fair value through profit or loss. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation techniques: Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The primary quoted market price used for financial assets held by the Group is the current bid price. Financial instruments included in Level 1 comprise primarily equity investments, fund investments and bond investments traded on stock exchanges and open-ended mutual funds. Level 2: Valuation techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly (such as price) or indirectly (such as calculated based on price). These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. Level 3: Other valuation techniques which use any inputs which have a significant effect on the recorded fair value that are not based on observable market data (unobservable inputs). The level of fair value calculation is determined by the lowest level input with material significance in the overall calculation. As such, the significance of the input should be considered from an overall perspective in the calculation of fair value. Valuation methods for Level 2 and Level 3 financial instruments: For Level 2 financial instruments, valuations are generally obtained from third party pricing services for identical or comparable assets, or through the use of valuation methodologies using observable market inputs, or recent quoted market prices. Valuation service providers typically gather, analyze and interpret information related to market transactions and other key valuation model inputs from multiple sources, and through the use of widely accepted internal valuation models, provide a theoretical quote on various securities. For Level 3 financial instruments, fair value is determined using valuation methodologies such as discounted cash flow models and other similar techniques. Inputs used in these valuation techniques are generally unobservable. The following table sets forth the financial instruments recorded at fair value by level of the fair value hierarchy:
As of December 31, 2020 Level 1 Level 2 Level 3 Total
RMB’000 RMB’000 RMB’000 RMB’000
Unlisted Securities
Financial assets at fair value through profit or loss
Asset management plans — 9,328,168 424,082 9,752,250
Trust plans — 9,106,125 820,912 9,927,037
Private fund and other equity investments — 4,617,756 6,268 4,624,024
Mutual funds 3,199,106 — — 3,199,106
Corporate bonds — 3,029,174 15,233 3,044,407
Bank wealth management products — 2,091,730 — 2,091,730
Structured deposit |
