3/4: HANG SENG FY04 PT 3

HSBC Holdings PLC 28 February 2005 Other assets Figures in HK$m At 31Dec04 At 31Dec03 Unrealised gains on off-balance sheet interest rate, exchange rate and other derivative contracts which are marked to market 1,507 1,664 Deferred taxation 11 52 Items in the course of collection from other banks 4,456 3,244 Prepayments and accrued income 2,350 2,179 Long-term assurance assets attributable to policy holders 8,291 4,982 Other accounts 3,763 3,815 20,378 15,936 Remaining maturity: - three months or less 9,165 8,811 - one year or less but over three months 1,121 770 - five years or less but over one year 928 183 - over five years 9,133 6,135 20,347 15,899 - overdue^ -- six months or less but over three months 4 5 -- one year or less but over six months 3 8 -- over one year 24 24 31 37 20,378 15,936 ^ Represented mainly by overdue interest receivable included under 'Prepayments and accrued income'. Other assets increased by HK$4,442 million, or 27.9 per cent, to HK$20,378 million, compared with HK$15,936 million at 31 December 2003. Long-term assurance assets attributable to policy holders increased by 66.4 per cent as the insurance fund of Hang Seng Life Limited (HSLL) continued to grow from both new policies taken out, and from the renewal of existing policies. Current, savings and other deposit accounts Figures in HK$m At 31Dec04 At 31Dec03 Customer deposit accounts: - current accounts 57,290 48,568 - savings accounts 224,893 205,769 - time and other deposits 165,123 177,634 Certificates of deposit in issue 15,464 7,927 Other debt securities in issue 646 15 463,416 439,913 Customer deposit accounts Repayable on demand 304,453 281,296 With agreed maturity dates or periods of notice, by remaining maturity: - three months or less but not repayable on demand 128,752 139,123 - one year or less but over three months 7,707 7,474 - five years or less but over one year 5,741 3,720 - over five years 653 358 447,306 431,971 Certificates of deposit in issue Remaining maturity: - three months or less but not repayable on demand 252 908 - one year or less but over three months 7,698 1,132 - five years or less but over one year 6,757 5,685 - over five years 757 202 15,464 7,927 Other debt securities in issue Remaining maturity: - three months or less but not repayable on demand 646 15 646 15 463,416 439,913 Current, savings and other deposit accounts, including certificates of deposit and other debt securities in issue, increased by HK$23.5 billion, or 5.3 per cent, to HK$463.4 billion, compared with HK$439.9 billion at 31 December 2003. Customer deposit accounts rose by HK$15.3 billion, or 3.6 per cent. The growth was mainly recorded in savings and current accounts while time deposits fell in the low interest rate environment. Certificates of deposit and other debt securities in issue rose by HK$8.2 billion, or 102.8 per cent, to HK$16.1 billion. The above accounts include structured deposits, certificates of deposit, and other instruments with returns linked to currency, interest rate and other market indices, totalling HK$10.7 billion. A growth of 97.2 per cent was recorded as new products were introduced to satisfy customer demand for yield enhancement products in the low interest rate environment. Deposits from banks Figures in HK$m At 31Dec04 At 31Dec03 Repayable on demand 2,251 654 With agreed maturity dates or periods of notice, by remaining maturity: - three months or less but not repayable on demand 6,380 448 - one year or less but over three months - 100 8,631 1,202 Other liabilities Figures in HK$m At 31Dec04 At 31Dec03 Short positions in securities 5,840 1,514 Unrealised losses on off-balance sheet interest rate, exchange rate and other derivative contracts which are marked to market 965 1,277 Current taxation 514 523 Deferred taxation 1,041 643 Items in the course of transmission to other banks 6,136 3,968 Accruals 2,188 2,155 Provisions for other liabilities and charges 397 363 Long-term liabilities attributable to policy holders 8,291 4,982 Other 3,241 3,722 28,613 19,147 Other liabilities increased by HK$9,466 million, or 49.4 per cent, to HK$28,613 million compared with HK$19,147 million at 31 December 2003. Long-term liabilities attributable to policy holders rose by 66.4 per cent as the insurance fund of HSLL continued to grow from both new policies taken out, and from the renewal of existing policies. The growth in other liabilities was also attributable to the increase in short positions in securities, mainly in government exchange fund bills, and items in the course of transmission to other banks. Shareholders' funds Figures in HK$m At 31Dec04 At 31Dec03 Share capital 9,559 9,559 Retained profits 21,395 19,720 Premises and investment properties revaluation reserves 7,564 5,813 Long-term equity investment revaluation reserve 935 1,009 Capital redemption reserve 99 99 Total reserves 29,993 26,641 39,552 36,200 Proposed dividends 3,633 3,441 Shareholders' funds 43,185 39,641 Return on average shareholders' funds 27.6% 23.4% There was no purchase, sale or redemption of the bank's listed securities by the bank or any of its subsidiaries in 2004. Shareholders' funds (excluding proposed dividends) rose by HK$3,352 million, or 9.3 per cent, to HK$39,552 million at 31 December 2004. Retained profits also increased by HK$1,675 million. Premises and investment properties revaluation reserves rose by HK$1,751 million, reflecting the rise in the property market. The return on average shareholders' funds was 27.6 per cent, compared with 23.4 per cent in 2003, reflecting the growth in attributable profit. Capital resources management Analysis of capital base and risk-weighted assets Figures in HK$m At 31Dec04 At 31Dec03 Capital base Tier 1 capital - share capital 9,559 9,559 - retained profits 20,560 19,084 - capital redemption reserve 99 99 - less: goodwill (302) - - total 29,916 28,742 Tier 2 capital - premises and investment properties revaluation reserves 5,322 4,096 - long-term equity investment revaluation reserve 625 688 - general provisions 289 1,101 - total 6,236 5,885 Unconsolidated investments and other deductions (2,829) (1,283) Total capital base after deductions 33,323 33,344 Risk-weighted assets On-balance sheet 259,429 234,251 Off-balance sheet 16,577 15,047 Total risk-weighted assets 276,006 249,298 Total risk-weighted assets adjusted for market risk 277,029 253,326 Capital adequacy ratios After adjusting for market risk - tier 1^ 10.8% 11.3% - total^ 12.0% 13.2% Before adjusting for market risk - tier 1 10.8% 11.5% - total 12.1% 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 1.2 percentage points to 12.0 per cent at 31 December 2004, compared with 13.2 per cent at 31 December 2003. The capital base at 31 December 2004 was maintained at HK$33.3 billion, the same level as at the previous year-end. The rise in premises and investment properties revaluation reserves and retained profits has been offset by the deduction of the cost of investment in Industrial Bank Co., Ltd (IB) and the release of general provisions. Risk-weighted assets adjusted for market risk grew by 9.4 per cent, mainly attributable to the increase in advances to customers and debt securities holdings. The deduction of goodwill from tier 1 capital base on acquisition of the IB investment, and the growth in risk-weighted assets, caused the tier 1 capital ratio to fall by 50 basis points to 10.8 per cent. Liquidity ratio The average liquidity ratio for the year, calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance, is as follows: 2004 2003 The bank and its major banking subsidiaries 47.2% 46.2% Reconciliation of cash flow statement (a) Reconciliation of operating profit to net cash flow from operating activities Figures in HK$m 2004 2003 Operating profit 12,644 10,683 Net interest income (9,690) (10,179) Dividend income (96) (92) Provisions for bad and doubtful debts (814) 792 Depreciation 317 329 Amortisation of long-term investments 426 203 Advances written off net of recoveries (652) (1,172) Interest received 9,054 10,240 Interest paid (2,646) (2,747) Operating profit before changes in working capital 8,543 8,057 Change in cash and short-term funds (1,757) 99 Change in placings with banks maturing after one month 1,798 12,890 Change in certificates of deposit (2,225) 1,392 Change in securities held for dealing purposes (634) (34) Change in advances to customers (20,941) (4,524) Change in amounts due from immediate holding company and fellow subsidiary companies 1,373 341 Change in other assets (4,358) (3,491) Change in customer deposit accounts 15,335 34,280 Change in debt securities in issue 8,168 (8,060) Change in deposits from banks 7,429 130 Change in amounts due to immediate holding company and fellow subsidiary companies 1,516 797 Change in other liabilities 8,944 4,199 Elimination of exchange differences and other non-cash items (4,634) (11,984) Cash generated from operating activities 18,557 34,092 Taxation paid (925) (526) Net cash inflow from operating activities 17,632 33,566 (b) Analysis of the balances of cash and cash equivalents Figures in HK$m At 31Dec04 At 31Dec03 Cash in hand and balances with banks and other financial institutions 7,248 5,823 Money at call and placings with banks maturing within one month 57,071 71,658 Treasury bills 47 91 Certificates of deposit 2,685 3 67,051 77,575 Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec04 Contingent liabilities: Guarantees 10,722 10,447 3,501 Commitments: Documentary credits and short-term trade-related transactions 9,020 1,844 1,805 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 86,714 - - - one year and over 23,677 11,839 10,460 Other 38 38 38 119,449 13,721 12,303 Exchange rate contracts: Spot and forward foreign exchange 138,269 1,066 298 Other exchange rate contracts 23,158 323 106 161,427 1,389 404 Interest rate contracts: Interest rate swaps 120,603 1,421 347 Other interest rate contracts 5,067 15 6 125,670 1,436 353 Other derivative contracts 1,373 46 23 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 31Dec04 At 31Dec03 Replacement cost Exchange rate contracts 834 876 Interest rate contracts 939 997 Other derivative contracts 5 - 1,778 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: Banks & other Sovereign & financial public sector Figures in HK$m institutions entities Other Total At 31Dec04 Asia-Pacific excluding Hong Kong: - Australia 21,429 62 1,223 22,714 - other 26,222 1,530 5,432 33,184 47,651 1,592 6,655 55,898 The Americas: - Canada 19,748 4,957 1,556 26,261 - other 11,320 2,744 10,252 24,316 31,068 7,701 11,808 50,577 Western Europe: - Germany 17,037 - 816 17,853 - United Kingdom 23,794 16 5,945 29,755 - other 59,889 2,063 4,895 66,847 100,720 2,079 11,656 114,455 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 - other 8,051 7,215 9,441 24,707 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. Statutory accounts and accounting policies The information in this news release does not constitute statutory accounts. Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2004 (2004 accounts), which will be delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The statutory accounts comply with the module on 'Financial Disclosure by Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by Hong Kong Monetary Authority in November 2002. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 28 February 2005. The 2004 accounts and this news release have been prepared on a basis consistent with the accounting policies adopted in the 2003 accounts as no new accounting policies were adopted in 2004. For the accounting periods beginning on or after 1 January 2005, a number of new and revised Hong Kong Financial Reporting Standards (new HKFRSs) are effective. Hang Seng is in the process of assessing the impact of these new HKFRSs and considers that the adoption of the following HKFRSs will have significant financial or presentational effects on Hang Seng's financial statements: HKAS 12: Income taxes - HKAS Interpretation 21 HKAS 17: Leases HKAS 19: Employee benefits (International Accounting Standard 19) HKAS 39: Financial instruments: Recognition and Measurement HKAS 40: Investment property A summary of the requirement of each of the HKFRSs as compared with the current accounting policy and the effect on adoption and transitional and restatement treatment is set out in note 4 to the 2004 accounts, which will be available from Hang Seng's website http://www.hangseng.com on Monday, 28 February 2005. 2. Property revaluation Hang Seng's premises and investment properties were revalued by DTZ Debenham Tie Leung Limited, an independent professional valuer, at 30 September 2004, who confirmed that there had been no material change in valuations at 31 December 2004. The valuations were carried out by qualified persons 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$2,224 million, of which HK$1,821 million (net of deferred tax amounting to HK$255 million) has been credited to the bank's revaluation reserves at 31 December 2004. The remaining amount of HK$148 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. 3. 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 2004 and 2003 are shown in the tables below. VAR Minimum Maximum Average during during for the Figures in HK$m At 31Dec04 the year the year year VAR for all interest rate risk and foreign exchange risk 394 249 605 372 VAR for foreign exchange risk (trading) 3 1 58 33 VAR for interest rate risk: - trading 4 1 16 4 - accrual 394 244 603 371 Minimum Maximum Average during during for the Figures in HK$m At 31Dec03 the year the year the year VAR for all interest rate risk and foreign exchange risk 271 186 473 321 VAR for foreign exchange risk (trading) 57 2 156 32 VAR for interest rate risk: - trading 1 1 11 4 - accrual 264 186 472 315 The average daily revenue earned from market risk-related treasury activities in 2004, including accrual book net interest income and funding related to dealing positions, was HK$10 million (HK$8 million for 2003). The standard deviation of these daily revenues was HK$5 million (HK$7 million for 2003). An analysis of the frequency distribution of daily revenues shows that out of 249 trading days in 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 143 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 2004 was HK$4 million (HK$2 million for 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 4 on page 54, are managed by the Asset and Liability Management Committee. 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 2004 was HK$6 million (HK$6 million for 2003). 4. Foreign currency positions Foreign currency exposures include those arising from dealing, non-dealing and structural positions. At 31 December 2004, the US dollar (US$) and renminbi (RMB) were the currencies 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$m At 31Dec 04 At 31Dec 03 US$ RMB US$ RMB Non-structural position Spot assets 173,071 2,664 162,330 769 Spot liabilities (171,698) (2,400) (151,706) (640) Forward purchases 68,726 207 40,537 643 Forward sales (69,795) (192) (35,587) (643) Net options positions (37) - - - Net long non-structural position 267 279 15,574 129 At 31 December 2004, Hang Seng's major structural foreign currency positions were US dollar and renminbi. At 31Dec 04 At 31Dec 03 % of % of total net total net structural structural HK$m position HK$m position Structural position US dollar 850 28.8 841 68.5 Renminbi 1,998 67.6 282 23.0 5. Material related-party transactions (a) Immediate holding company and fellow subsidiary companies In 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 year, the balances of amounts due to and from the relevant related parties, and the total contract sum of off-balance sheet transactions at the year-end are as follows: Income and expenses for the year Year ended Figures in HK$m 31Dec04 31Dec03 Interest income 84 195 Interest expense 91 17 Other operating income 126 244 Operating expenses 657 618 Balances at year-end Figures in HK$m At 31Dec04 At 31Dec03 Total amount due from 4,598 13,715 Total amount due to 3,928 2,412 Total contract sum of off-balance sheet transactions 34,622 35,121 (b) Associated companies Hang Seng maintained an interest-free shareholders' loan to an associated company. The balance at 31 December 2004 was HK$233 million (HK$229 million at 31 December 2003). (c) Ultimate holding company In 2004, no transaction was conducted with the bank's ultimate holding company (same as 2003). (d) Key management personnel In 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). 6. Ultimate holding company Hang Seng Bank is an indirectly-held, 62.14 per cent-owned subsidiary of HSBC Holdings plc. 7. Register of shareholders The Register of Shareholders of Hang Seng Bank will be closed on Wednesday, 16 March 2005, during which no transfer of shares can be registered. In order to qualify for the fourth 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 Tuesday, 15 March 2005. The fourth interim dividend will be payable on Thursday, 24 March 2005 to shareholders on the Register of Shareholders of the bank on Wednesday, 16 March 2005. 8. Proposed timetable for 2005 quarterly dividends First interim Second interim Third interim Fourth interim dividend dividend dividend dividend Announcement 03May05 01Aug05 07Nov05 06Mar06 Book close date 30May05 24Aug05 21Dec05 21Mar06 Payment date 07June05 01Sept05 04Jan06 31Mar06 9. News release Copies of this news release may be obtained from the Legal and Company Secretarial Services Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from Hang Seng's website http://www.hangseng.com. The 2004 Annual Report and Accounts will be available from the same website on Monday, 28 February 2005 and will also be published on the website of The Stock Exchange of Hong Kong Limited in due course. Printed copies of the 2004 Annual Report will be sent to shareholders in late March 2005. Media enquiries to: Richard Beck Telephone: +44 (0)20 7991 0633 Karen Ng Telephone: +44 (0)20 7991 0655 This information is provided by RNS The company news service from the London Stock Exchange

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