3/3: Hang Seng 1H04 PT 3

HSBC Holdings PLC 02 August 2004 Current, savings and other deposit accounts Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Customer deposit accounts: - current accounts 51,928 38,854 48,568 - savings accounts 206,626 165,717 205,769 - time and other deposits 159,954 204,445 177,634 Certificates of deposit in issue 9,862 10,014 7,927 Other debt securities in issue - 53 15 428,370 419,083 439,913 Customer deposit accounts Repayable on demand 283,329 232,393 281,296 With agreed maturity dates or periods of notice, by remaining maturity: - three months or less but not repayable on demand 117,668 166,328 139,123 - one year or less but over three months 10,736 9,029 7,474 - five years or less but over one year 6,347 1,266 3,720 - over five years 428 - 358 418,508 409,016 431,971 Certificates of deposit in issue Remaining maturity: - three months or less but not repayable on demand 208 2,121 908 - one year or less but over three months 2,994 2,981 1,132 - five years or less but over one year 6,081 4,727 5,685 - over five years 579 185 202 9,862 10,014 7,927 Other debt securities in issue Remaining maturity: - three months or less but not repayable on demand - - 15 - one year or less but over three months - 53 - - 53 15 428,370 419,083 439,913 Current, savings and other deposit accounts, including certificates of deposit in issue decreased by HK$11.5 billion, or 2.6 per cent, to HK$428.4 billion, compared with HK$439.9 billion at 31 December 2003. Customer deposit accounts fell HK$13.5 billion as customers continued to shift funds from HK dollar and US dollar time deposits to savings and current accounts and other financial investments in the low interest rate environment. Certificates of deposit rose by HK$1,935 million, or 24.4 per cent, to HK$9.9 billion, including those issued to the retail market. Deposits from banks Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Repayable on demand 2,140 854 654 With agreed maturity dates or periods of notice, by remaining maturity: - three months or less but not repayable on demand 3,928 1,439 448 - one year or less but over three months 14 66 100 6,082 2,359 1,202 Other liabilities Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Short positions in securities 2,657 5,604 1,514 Unrealised losses on off-balance sheet interest rate, exchange rate and other derivative contracts which are marked to market 761 1,072 1,277 Current taxation 1,023 921 523 Deferred taxation 953 601 643 Items in the course of transmission to other banks 5,162 4,030 3,968 Accruals and deferred income 1,548 1,531 2,155 Provisions for other liabilities and charges 387 384 363 Long-term liabilities attributable to policy holders 6,342 3,763 4,982 Other 1,045 944 3,722 19,878 18,850 19,147 Other liabilities increased by HK$731 million, or 3.8 per cent, to HK$19,878 million, compared with HK$19,147 million at 31 December 2003, reflecting the increase in long-term liabilities attributable to policy holders, short positions in securities and items in the course of transmission to other banks. Shareholders' funds Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Share capital 9,559 9,559 9,559 Retained profits 21,895 20,504 19,720 Premises and investment properties revaluation reserves 7,054 5,906 5,813 Long-term equity investment revaluation reserve 635 647 1,009 Capital redemption reserve 99 99 99 Total reserves 29,683 27,156 26,641 39,242 36,715 36,200 Proposed dividends 2,103 4,015 3,441 Shareholders' funds 41,345 40,730 39,641 Return on average shareholders' funds 30.9% 24.4% 22.5% There was no purchase, sale or redemption of the bank's listed securities by the bank or any of its subsidiaries during the first half of 2004. Shareholders' funds (excluding proposed dividends) rose by HK$3,042 million, or 8.4 per cent, to HK$39,242 million at 30 June 2004. Retained profits for the first half of 2004 rose by HK$2,175 million. Premises and investment properties revaluation reserves rose by HK$1,241 million, reflecting the rise in the property market. The disposal of long-term equities led to a reduction of HK$374 million in the long-term equity investment revaluation reserve. The return on average shareholders' funds was 30.9 per cent, compared with 24.4 per cent and 22.5 per cent for the first and second half of 2003 respectively, reflecting the growth in attributable profit. Capital resources management Analysis of capital base and risk-weighted assets Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Capital base Tier 1 capital - share capital 9,559 9,559 9,559 - retained profits 21,193 19,919 19,084 - capital redemption reserve 99 99 99 - less : goodwill (795) - - - total 30,056 29,577 28,742 Tier 2 capital - premises and investment properties revaluation reserves 4,965 4,160 4,096 - long-term equity investment revaluation reserve 422 459 688 - general provisions 403 1,101 1,101 - total 5,790 5,720 5,885 Unconsolidated investments and other deductions (2,122) (1,404) (1,283) Total capital base after deductions 33,724 33,893 33,344 Risk-weighted assets On-balance sheet 245,792 226,484 234,251 Off-balance sheet 15,591 14,243 15,047 Total risk-weighted assets 261,383 240,727 249,298 Total risk-weighted assets adjusted for market risk 263,236 241,300 253,326 Capital adequacy ratios After adjusting for market risk - tier 1^ 11.4% 12.3% 11.3% - total^ 12.8% 14.0% 13.2% Before adjusting for market risk - tier 1 11.5% 12.3% 11.5% - total 12.9% 14.1% 13.4% ^The capital ratios take into account market risks in accordance with the relevant Hong Kong Monetary Authority guideline under the Supervisory Policy Manual. The total capital ratio fell by 0.4 percentage points to 12.8 per cent at 30 June 2004, compared with 13.2 per cent at 31 December 2003. The capital base rose by 1.1 per cent, mainly due to the rise in premises and investment properties revaluation reserves and the increase in retained profits, partly offset by the deduction of the cost of the shareholding in Industrial Bank Co., Ltd (IB). Risk-weighted assets adjusted for market risk grew by 3.9 per cent, mainly attributable to the increase in advances to customers and in debt securities holding. The tier 1 capital ratio rose marginally by one basis point to 11.4 per cent, as a result of the growth in retained profits after the deduction of goodwill on acquisition of the shareholding in IB. Liquidity ratio The average liquidity ratio for the period, calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance, is as follows: Half-year ended Half-year ended Half-year ended 30Jun04 30Jun03 31Dec03 The bank and its major banking subsidiaries 48.1% 45.0% 47.4% Reconciliation of cash flow statement a. Reconciliation of operating profit to net cash flow from operating activities Half-year ended Half-year ended Figures in HK$m 30Jun04 30Jun03 Operating profit 6,859 5,617 Net interest income (4,711) (5,220) Dividend income (76) (37) Provisions for bad and doubtful debts (763) 456 Depreciation 153 171 Amortisation of long-term investment 241 17 Advances written off net of recoveries (464) (700) Interest received 4,589 5,413 Interest paid (1,161) (1,462) Operating profit before changes in working capital 4,667 4,255 Change in cash and short-term funds (265) 889 Change in placings with banks maturing after one month 12,714 3,181 Change in certificates of deposit (1,729) 676 Change in securities held for dealing purposes 52 151 Change in advances to customers (16,086) (1,365) Change in amounts due from immediate holding company and fellow subsidiary companies 2,609 (357) Change in other assets (999) (1,213) Change in customer deposit accounts (13,463) 11,325 Change in debt securities in issue 1,920 (5,935) Change in deposits from banks 4,880 1,287 Change in amounts due to immediate holding company and fellow subsidiary companies 5,118 (858) Change in other liabilities (77) 3,487 Elimination of exchange differences and other non-cash items 1,697 (5,399) Cash generated from operating activities 1,038 10,124 Taxation paid (212) (11) Net cash inflow from operating activities 826 10,113 b. Analysis of the balances of cash and cash equivalents Figures in HK$m At 30Jun04 At 30Jun03 Cash in hand and balances with banks and other financial institutions 5,945 4,014 Money at call and placings with banks maturing within one month 55,865 61,574 Treasury bills 641 1,363 Certificates of deposit 1,069 229 63,520 67,180 Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 30Jun04 Contingent liabilities: Guarantees 10,905 10,641 3,580 Commitments: Documentary credits and short-term trade-related transactions 9,392 1,878 1,873 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 72,099 - - - one year and over 20,649 10,324 9,382 Other 165 165 74 102,305 12,367 11,329 Exchange rate contracts: Spot and forward foreign exchange 76,742 762 220 Other exchange rate contracts 29,534 372 123 106,276 1,134 343 Interest rate contracts: Interest rate swaps 119,216 1,364 316 Other interest rate contracts 6,576 64 28 125,792 1,428 344 Other derivative contracts 36 3 1 Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 30Jun03 Contingent liabilities: Guarantees 10,974 10,795 3,650 Commitments: Documentary credits and short-term trade-related transactions 7,142 1,429 1,422 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 64,708 - - - one year and over 19,539 9,770 8,444 Other 38 38 38 91,427 11,237 9,904 Exchange rate contracts: Spot and forward foreign exchange 84,812 1,072 264 Other exchange rate contracts 42,140 379 86 126,952 1,451 350 Interest rate contracts: Interest rate swaps 78,220 1,366 336 Other interest rate contracts 13,281 6 3 91,501 1,372 339 Other derivative contracts 108 4 1 Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec03 Contingent liabilities: Guarantees 12,401 12,143 3,622 Commitments: Documentary credits and short-term trade-related transactions 8,098 1,620 1,613 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 69,099 - - - one year and over 19,623 9,811 8,949 Other 160 160 62 96,980 11,591 10,624 Exchange rate contracts: Spot and forward foreign exchange 76,408 1,080 322 Other exchange rate contracts 33,160 401 141 109,568 1,481 463 Interest rate contracts: Interest rate swaps 91,629 1,300 315 Other interest rate contracts 17,578 45 21 109,207 1,345 336 Other derivative contracts 297 9 2 The tables above give the nominal contract, credit equivalent and risk-weighted amounts of off-balance sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted amounts. These are assessed in accordance with the Third Schedule of the Hong Kong Banking Ordinance on capital adequacy and depend on the status of the counterparty and the maturity characteristics. The risk weights used range from 0 per cent to 100 per cent for contingent liabilities and commitments, and from 0 per cent to 50 per cent for exchange rate, interest rate and other derivative contracts. Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers. These transactions are, therefore, subject to the same credit origination, portfolio maintenance and collateral requirements as for customers applying for loans. As the facilities may expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements. Off-balance sheet financial instruments arise from futures, forward, swap and option transactions undertaken in the foreign exchange, interest rate and equity markets. The contract amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date and do not represent amounts at risk. The credit equivalent amount of these instruments is measured as the sum of positive mark-to-market values and the potential future credit exposure in accordance with the Third Schedule of the Hong Kong Banking Ordinance. Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Replacement cost Exchange rate contracts 702 738 876 Interest rate contracts 979 1,072 997 Other derivative contracts 2 1 - 1,683 1,811 1,873 The replacement cost of contracts represents the mark-to-market assets on all contracts (including non-trading contracts) with a positive value and which have not been subject to any bilateral netting arrangement. Cross border claims Cross border claims include receivables and loans and advances, balances due from banks and holdings of certificates of deposit, bills, promissory notes, commercial paper and other negotiable debt instruments and also include accrued interest and overdue interest on these assets. Claims are classified according to the location of the counterparties after taking into account the transfer of risk. For a claim guaranteed by a party situated in a country different from the counterparty, the risk will be transferred to the country of the guarantor. For a claim on the branch of a bank or other financial institution, the risk will be transferred to the country where its head office is situated. Claims on individual countries or areas, after risk transfer, amounting to 10 per cent or more of the aggregate cross border claims are shown as follows: Bank & other Public financial sector Figures in HK$m institutions entities Other Total At 30Jun04 Asia-Pacific excluding Hong Kong: - Australia 18,865 214 1,063 20,142 - other 22,461 1,264 6,575 30,300 41,326 1,478 7,638 50,442 The Americas: - Canada 17,502 6,009 793 24,304 - United States 10,006 3,740 6,249 19,995 - other 19 762 4,528 5,309 27,527 10,511 11,570 49,608 Western Europe: - Germany 13,906 348 387 14,641 - United Kingdom 21,037 16 5,900 26,953 - other 44,048 1,890 3,981 49,919 78,991 2,254 10,268 91,513 Bank & other Public financial sector Figures in HK$m institutions entities Other Total At 30Jun03 Asia-Pacific excluding Hong Kong: - Australia 19,793 151 1,304 21,248 - other 21,832 804 3,238 25,874 41,625 955 4,542 47,122 The Americas: - Canada 16,608 8,945 264 25,817 - United States 8,868 6,524 3,508 18,900 - other 5 - 4,661 4,666 25,481 15,469 8,433 49,383 Western Europe: - Germany 20,595 1,069 402 22,066 - United Kingdom 22,395 16 3,551 25,962 - other 46,022 2,071 3,531 51,624 89,012 3,156 7,484 99,652 At 31Dec03 Asia-Pacific excluding Hong Kong: - Australia 19,251 170 1,362 20,783 - other 23,543 1,377 3,749 28,669 42,794 1,547 5,111 49,452 The Americas: - Canada 17,982 10,527 686 29,195 - United States 8,047 6,672 5,090 19,809 - other 4 543 4,351 4,898 26,033 17,742 10,127 53,902 Western Europe: - Germany 20,417 863 371 21,651 - United Kingdom 20,378 16 4,091 24,485 - other 54,061 1,601 4,144 59,806 94,856 2,480 8,606 105,942 Additional information 1. Accounting policies This news release has been prepared on a basis consistent with the accounting policies adopted in the 2003 financial statements. 2. Comparative figures Certain comparative figures have been reclassified to conform with the current period's presentation. 3. Property revaluation A revaluation of Hang Seng's premises and investment properties in the Hong Kong SAR was performed in June 2004 to reflect property market movements in the first half of 2004. The valuation was conducted by Chesterton Petty Limited, an independent professional valuer, and carried out by qualified valuers who are members of the Hong Kong Institute of Surveyors. The basis of the valuation of premises was open market value for existing use. The basis of the valuation for investment properties was open market value. The property revaluation has resulted in a surplus of HK$1,705 million, of which HK$1,389 million (net of deferred tax amounting to HK$197 million) has been credited to the bank's revaluation reserves at 30 June 2004. The remaining amount of HK$119 million has been credited to the profit and loss account, being reversal of the previous revaluation deficit which had arisen when the market value of certain premises fell below depreciated historical cost. 4. Market risk Market risk is the risk that foreign exchange rates, interest rates or equity and commodity prices will move and result in profits or losses to Hang Seng. Market risk arises on financial instruments which are valued at current market prices (mark-to-market basis) and those valued at cost plus any accrued interest (accrual basis). Hang Seng's market risk arises from customer-related business and from position taking. Market risk is managed within risk limits approved by the Board of Directors. Risk limits are set by product and risk type with market liquidity being a principal factor in determining the level of limits set. Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits, as well as value-at-risk (VAR) limits at a portfolio level. Hang Seng adopts the risk management policies and risk measurement techniques developed by the HSBC Group. The daily risk monitoring process measures actual risk exposures against approved limits and triggers specific action to ensure the overall market risk is managed within an acceptable level. VAR is a technique which estimates the potential losses that could occur on risk positions taken due to movements in market rates and prices over a specified time horizon and to a given level of confidence. The model used by Hang Seng calculates VAR on a variance/covariance basis, using historical movements in market rates and prices, a 99 per cent confidence level and a 10-day holding period and generally takes account of correlations between different markets and rates. The movement in market prices is calculated by reference to market data for the last two years. Aggregation of VAR from different risk types is based upon the assumption of independence between risk types. In recognition of the inherent limitations of VAR methodology, stress testing is performed to assess the impact of extreme events on market risk exposures. Hang Seng has obtained approval from the Hong Kong Monetary Authority (HKMA) for the use of its VAR model to calculate market risk for capital adequacy reporting and the HKMA has expressed itself satisfied with Hang Seng's market risk management process. Hang Seng's VAR for all interest rate risk and foreign exchange risk positions and on individual risk portfolios during the first halves of 2004 and 2003 are shown in the tables below. VAR Minimum Maximum Average during during for the the the Figures in HK$m At 30Jun04 period period period VAR for all interest rate risk and foreign exchange risk 349 250 607 387 VAR for foreign exchange risk (trading) 37 35 58 43 VAR for interest rate risk: - trading 4 1 8 4 - accrual 348 245 605 386 Minimum Maximum Average during during for the the the Figures in HK$m At 30Jun03 period period period VAR for all interest rate risk and foreign exchange risk 409 187 409 276 VAR for foreign exchange risk (trading) 3 2 4 3 VAR for interest rate risk: - trading 8 1 11 4 - accrual 402 187 402 275 The average daily revenue earned from market risk-related treasury activities for the first half of 2004, including accruals book net interest income and funding related to dealing positions, was HK$10 million (HK$8 million for the first half of 2003). The standard deviation of these daily revenues was HK$5 million (HK$4 million for the first half of 2003). An analysis of the frequency distribution of daily revenues shows that out of 122 trading days in the first half of 2004, losses were recorded on only two days and the maximum daily loss was HK$6 million. The most frequent result was a daily revenue of between HK$6 million and HK$10 million, with 62 occurrences. The highest daily revenue was HK$38 million. Hang Seng's foreign exchange exposures mainly comprise foreign exchange dealing by Treasury and currency exposures originated by its banking business. The latter are transferred to Treasury where they are centrally managed within foreign exchange position limits approved by the Board of Directors. The average one-day foreign exchange profit for the first half of 2004 was HK$4 million (HK$2 million for the first half of 2003). Structural foreign exchange positions arising from capital investment in subsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi as set out in Note 5 on page 54, are managed by the Asset and Liability Management Committee (ALCO). Interest rate risk arises in both the treasury dealing portfolio and accruals books, which are managed by Treasury under limits approved by the Board of Directors. The average daily revenue earned from treasury-related interest rate activities for the first half of 2004 was HK$6 million (HK$6 million for the first half of 2003). 5. Foreign currency positions Foreign currency exposures include those arising from dealing, non-dealing and structural positions. At 30 June 2004, the US dollar was the only currency in which Hang Seng had a non-structural foreign currency position which exceeded 10 per cent of the total net position in all foreign currencies. Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 US dollar non-structural position Spot assets 166,456 158,081 162,330 Spot liabilities (161,751) (149,899) (151,706) Forward purchases 41,452 44,594 40,537 Forward sales (34,390) (41,066) (35,587) Net options positions (2) - - Net long non-structural position 11,765 11,710 15,574 At 30 June 2004, Hang Seng's major structural foreign currency positions were US dollar and renminbi. At 30Jun04 At 30Jun03 At 31Dec03 % of % of % of total net total net total net structural structural structural HK$m position HK$m position HK$m position Structural position US dollar 852 29.7 887 85.7 841 68.5 Renminbi 1,910 66.6 95 9.2 282 23.0 6. Material related-party transactions (a) Immediate holding company and fellow subsidiary companies During the first half of 2004, Hang Seng entered into transactions with its immediate holding company and fellow subsidiary companies in the ordinary course of its interbank activities including the acceptance and placement of interbank deposits, correspondent banking transactions and off-balance sheet transactions. The activities were priced at the relevant market rates at the time of the transactions. Hang Seng participated, in its ordinary course of business, in certain structured finance deals arranged by its immediate holding company. Hang Seng used the IT of, and shared an automated teller machine network with, its immediate holding company and used certain processing services of a fellow subsidiary on a cost recovery basis. Hang Seng also maintained a staff retirement benefit scheme for which a fellow subsidiary company acts as insurer and administrator and the bank acted as agent for the marketing of Mandatory Provident Fund products and the distribution of retail investment funds for two fellow subsidiary companies. The premiums, commissions and other fees on these transactions are determined on an 'arm's length' basis. The aggregate amount of income and expenses arising from these transactions during the period, the balances of amounts due to and from the relevant related parties, and the total contract sum of off-balance sheet transactions at the period-end are as follows: Income and expenses for the period Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun04 30Jun03 31Dec03 Interest income 50 96 99 Interest expense 22 5 12 Other operating income 92 39 205 Operating expenses 300 296 322 Balances at period-end Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Total amount due from 5,777 7,596 13,715 Total amount due to 7,530 757 2,412 Total contract sum of off-balance sheet transactions 44,887 33,172 35,121 (b) Associated companies Hang Seng maintained an interest-free shareholders' loan to an associated company. The balance at 30 June 2004 was HK$233 million (HK$217 million at 30 June 2003 and HK$229 million at 31 December 2003). (c) Ultimate holding company During the first half of 2004, no transaction was conducted with the bank's ultimate holding company (same as 2003). (d) Key management personnel During the first half of 2004, no material transaction was conducted with key management personnel of Hang Seng and its holding companies and parties related to them (same as 2003). 7. Statutory accounts The information in this news release does not constitute statutory accounts. The statutory accounts for the year ended 31 December 2003 have been delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 1 March 2004. The Annual Report and Accounts for the year ended 31 December 2003, which includes the statutory accounts, can be obtained on request from the Company Secretary Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from Hang Seng Bank's website http://www.hangseng.com. 8. Ultimate holding company Hang Seng Bank is an indirectly-held, 62.14 per cent-owned subsidiary of HSBC Holdings plc. 9. Statement of compliance This news release has been prepared in accordance with Hong Kong Statement of Standard Accounting Practice 25 'Interim Financial Reporting'. It also complies with the module on 'Interim Financial Disclosure by Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority in November 2002. 10. Register of shareholders The Register of Shareholders of Hang Seng Bank will be closed on Tuesday, 24 August 2004, during which no transfer of shares can be registered. In order to qualify for the second interim dividend, all transfers, accompanied by the relevant share certificates, must be lodged with the bank's Registrars, Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration not later than 4:00 pm on Monday, 23 August 2004. The second interim dividend will be payable on Thursday, 2 September 2004 to shareholders on the Register of Shareholders of the bank on Tuesday, 24 August 2004. 11. Proposed timetables for the remaining quarterly dividends for 2004 Third interim dividend for 2004 Fourth interim dividend for 2004 Announcement 8 November 2004 28 February 2005 Book close date 17 December 2004 16 March 2005 Payment date 5 January 2005 24 March 2005 12. News release Copies of this news release may be obtained from the Company Secretary Department, Level 10, 83 Des Vouex Road Central, Hong Kong; or from Hang Seng's website http://www.hangseng.com. The 2004 Interim Report and Accounts will be available from the same website on Monday, 2 August 2004 and will also be published on the website of The Stock Exchange of Hong Kong Limited in due course. Printed copies of the 2004 Interim Report will be sent to shareholders in late August 2004. This information is provided by RNS The company news service from the London Stock Exchange

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