Hang Seng Bank Interim 05 Pt2

HSBC Holdings PLC
01 August 2005



Analysis of income from wealth management businesses

                      Half-year ended           Half-year ended           Half-year ended
                              30Jun05                   30Jun04                   31Dec04
Figures in HK$m                                        restated                  restated

Investment income:
- retail investment
  products and funds
  under management ^              789                       869                       630
- securities/stockbroking         233                       295                       265
- margin trading                   33                        33                        33
                                1,055                     1,197                       928
Insurance income: 
- life insurance
  - underwriting including
    embedded value                334                       387                       236
  - life investment income ^^     209                        79                       339
- general insurance and others    161                       150                       119
                                  704                       616                       694
Total                           1,759                     1,813                     1,622

^ Income from retail investment products and funds under management included
those which were reported under fees and commissions including the sale of unit
trust funds, third party investment products and private banking business. This
also included profit on issue of structured investment products, reported under
trading income.

^^ Investment income from insurance funds included those reported as net
interest income, trading income, net income from financial instruments
designated as at fair value and net investment income on assets backing
policyholder liabilities.

Wealth management business related income fell slightly by HK$54 million, or 3.0
per cent, compared with the first half of 2004. Investment income fell by HK$142
million, or 11.9 per cent. In a rising interest rate environment, the focus of
the bank's investment services shifted from capital guaranteed funds to yield
enhancement structured instruments. The bank continued to widen its investment
products range to facilitate customers in capturing market opportunities.
Private banking business recorded encouraging growth in both customers and
asset management portfolios. 

Total funds under management, including discretionary and advisory, grew by 10.6
per cent to HK$99.4 billion during the first half of 2005.

Insurance agency and underwriting income, including embedded value of long-term
life contracts, increased by HK$88 million, or 14.3 per cent, following the
successful launch of new insurance plans such as 'Three-year Express Wealth' and
'Five-year Excel' with cumulative life protection and wealth benefits.

Compared with the second half of 2004, wealth management business related income
rose by HK$137 million, or 8.4 per cent, attributable to the growth of 13.7 per
cent and 1.4 per cent in investment services related income and insurance income
respectively.

Loan impairment(charges)/releases and other credit risk allowances

                              Half-year ended       Half-year ended       Half-year ended
                                      30Jun05               30Jun04               31Dec04
Figures in HK$m                                            restated              restated

Loan impairment(charges)/
  releases 
  - individually assessed                 (95)                  144                    (3)
  - collectively assessed
    - portfolios basis                    (55)                  (96)                  (80)
    - individually unimpaired loans      (152)                  698                   114
                                         (302)                  746                    31
 Of which:
  - new and additional                   (666)                 (241)                 (222)
  - releases                              314                   932                   199
  - recoveries                             50                    55                    54
                                         (302)                  746                    31

Loan impairment charges amounted to HK$302 million, compared with net releases
in loan impairment of HK$746 million for the first half of 2004 and HK$31
million for the second half of 2004. The overall loan impairment charges on
individually assessed loans amounted to HK$95 million, with new loan impairment
charges on certain commercial banking accounts offset by a net release from
mortgages and personal loans. This compared with a net release of HK$144 million
in the first half of 2004. Impairment loss for small homogeneous loans
collectively assessed on a portfolio basis amounted to HK$55 million, compared
with HK$96 million for the first half of 2004, reflecting further improvement in
credit card charge-offs in the generally stronger economic conditions.
Collective assessment of loans determined not to be individually impaired
resulted in a charge of HK$152 million, following an update of the historical
loss rate to cover the economic cycle. This compared with releases in general
provisions of HK$698 million and HK$114 million for the first and second halves
of 2004 respectively.

Operating expenses

                            Half-year ended         Half-year ended       Half-year ended
                                    30Jun05                 30Jun04               31Dec04
Figures in HK$m                                            restated              restated


Personnel expenses:   
- salaries and other costs            1,059                     972                 1,093
- retirement benefit costs               66                      84                    85
                                      1,125                   1,056                 1,178

General and administrative expenses:
- rental expenses                        98                      95                    98
- other premises and equipment          343                     319                   358
- other operating expenses              451                     381                   483
                                        892                     795                   939
Depreciation of business 
  premises and equipment                135                     126                   130
Amortisation of intangible
  assets                                  4                       4                     4
                                      2,156                   1,981                 2,251

Cost:income ratio                      26.7%                   24.6%                 28.1%

Staff numbers by region^

                                 At 30Jun05              At 30Jun04            At 31Dec04

Hong Kong                             7,148                   7,233                 7,229
Mainland and others                     377                     242                   313
Total                                 7,525                   7,475                 7,542

^ Full-time equivalent

Operating expenses went up by HK$175 million, or 8.8 per cent, compared with the
same period last year. Personnel expenses rose by 6.5 per cent, attributable to
the salary increment at the beginning of the year and the increase in average
headcount of 193, which was mainly related to recruitment for Personal Financial
Services business and the expansion of the Mainland network. Increases in IT
costs on business and credit control systems accounted for a 7.5 per cent
increase in other premises and equipment cost. Other operating expenses rose by
18.4 per cent, due mainly to an increase in marketing expenditure for the
promotion of card and insurance products and processing costs as further
activities were outsourced to group service centres in Guangzhou and Shanghai.

Compared with the second half of 2004, operating expenses fell by HK$95 million,
or 4.2 per cent, due to the provision made for staff performance bonuses for
2004 in the previous half-year period.

Full-time equivalent staff at 30 June 2005 was 7,525, a drop of 17 compared with
the previous year-end, due to further migration of processing to the Mainland
service centres and higher staff turnover. The number of staff on the Mainland
increased by 64 in the first half of 2005, following the opening of a sub-branch
in Shenzhen and the expansion of the Fuzhou branch.

The cost:income ratio for the first half of 2005 was 26.7 per cent, compared
with 24.6 per cent and 28.1 per cent for the first and second halves of 2004.

Profit on disposal of tangible fixed assets and financial investments

                            Half-year ended         Half-year ended       Half-year ended
                                    30Jun05                 30Jun04               31Dec04
Figures in HK$m                                            restated              restated

Profit on disposal of
  financial investments
- realisation of amounts
  previously recognised
  in revaluation reserves
  at beginning of 
  the period                            327                     301                    80
- gains arising in current
  period                                  1                      28                     3
                                        328                     329                    83

Profit less loss on
  disposal of tangible
  fixed assets                           20                      20                    10
                                        348                     349                    93

Tax expenses

Taxation in the consolidated profit and loss account represents:

                            Half-year ended         Half-year ended       Half-year ended
                                    30Jun05                 30Jun04               31Dec04
Figures in HK$m                                            restated              restated

Current tax - provision
  for Hong Kong profits tax
Tax for the period                      783                     864                   670
Benefit of previously 
  unrecognised tax losses                 -                      (1)                    1
(Over)/under-provision
  in respect of prior years               -                     (15)                    3
                                        783                     848                   674
Current tax - taxation
  outside Hong Kong
Tax for the period                        6                       3                     4

Deferred tax
Origination and reversal
  of temporary differences              135                     141                    41
Total tax expenses per
  profit and loss account               924                     992                   719
Share of associated
  companies' taxation                   110                       2                    54
Total tax expenses
  (including share of
  associated companies'
  taxation)                           1,034                     994                   773

Effective tax rate                     14.4%                   13.7%                 12.7%

The current tax provision is based on the estimated assessable profit for the
first half of 2005, and is determined for the bank and its subsidiaries
operating in the Hong Kong SAR using the Hong Kong profits tax rate of 17.5 per
cent (17.5 per cent for 2004). For subsidiaries and branches operating in other
jurisdictions, the appropriate tax rates prevailing in the countries in which
they operate are used.

Deferred tax is calculated at the tax rates that are expected to apply in the
year when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the profit and loss account, except when it relates to
items charged or credited directly to reserves, in which case the deferred tax
is also dealt with in the reserves. The carrying amount of deferred tax assets/
liabilities is reviewed at each balance sheet date and is reduced to the extent
that it is no longer probable that sufficient taxable profit will be available
to allow the related tax benefit to be utilised.

Earnings per share

The calculation of earnings per share for the first half of 2005 is based on
earnings of HK$6,045 million (HK$6,188 million for the first half of 2004) and
on the weighted average number of ordinary shares in issue of 1,911,842,736
shares (unchanged from the first half of 2004).

Dividends per share

                         Half-year ended          Half-year ended      Half-year ended
                                 30Jun05                  30Jun04              31Dec04
                    HK$             HK$m            HK$      HK$m        HK$      HK$m
              per share                       per share            per share

First interim      1.10            2,103           1.10     2,103          -         -
Second interim     1.10            2,103           1.10     2,103          -         -
Third interim         -                -              -         -       1.10     2,103
Fourth interim        -                -              -         -       1.90     3,633
                   2.20            4,206           2.20     4,206       3.00     5,736

Segmental analysis

Segmental information is presented in respect of business and geographical
segments. Business by customer group information, which is more relevant to the
group in making operating and financial decisions, is chosen as the primary
reporting format.

For the purpose of segmental analysis, the allocation of revenue reflects the
benefits of capital and other funding resources allocated to the customer groups
or geographical segments by way of internal capital allocation and funds
transfer pricing mechanisms. Cost allocation is based on the direct cost
incurred by the respective customer groups and apportionment of management
overheads. Rental charges at market rate for usage of premises are reflected as
inter-segment income for the 'Other' customer group and inter-segment expenses
for the respective customer groups.

(a) By customer group

The group's business comprises five customer groups. Personal Financial Services
provides banking (including deposits, credit cards, mortgages and other retail
lending) and wealth management services (including insurance and investment) to
personal customers. Commercial Banking manages middle market and smaller
corporate relationships and specialises in trade-related financial services.
Corporate and Institutional Banking handles relationships with large corporate
and institutional customers. Treasury engages in interbank and capital market
activities and proprietary trading. Treasury also manages the funding and
liquidity positions of the bank and other market risk positions arising from
banking activities. 'Other' mainly represents management of shareholders' funds
and investments in premises, investment properties and available-for-sale
equities.

Personal Financial Services

Personal Financial Services (PFS) reported a growth of 12.8 per cent in pre-tax
profit, underpinned by the growth in net interest income and a net release in
loan impairment loss, mainly from mortgages and personal loans.

Net interest income grew by 20.4 per cent, benefiting from the growth in average
deposits and a widening of deposits spreads as the local market interest rates
moved up after a prolonged period of exceptionally low levels. The expansion of
the consumer lending portfolio also contributed to the growth in net interest
income despite further decline in mortgage portfolio yields.

The wealth management business remained the core of the PFS business. In a
rising interest rate environment, the focus of investment services shifted from
capital guaranteed funds to yield enhancement structured products and the
further widening of the investment product range. Private banking business
recorded encouraging growth in both customers and asset management
portfolios. Insurance continued to record satisfactory growth with a rise of 6.7
per cent in life annualised premiums following the successful launch of new
insurance plans featuring cumulative life protection and wealth benefits. Credit
card services income rose satisfactorily, driven by the growth of 10.6 per cent
and 20.6 per cent in card base and cardholder spending respectively.

Net fees income (mainly including the sales of retail investment products and
stockbroking and related income) fell by HK$186 million or 13.5 per cent. Net
earned insurance premiums rose by 39.1 per cent, mainly contributed from renewed
policies as the life insurance in-force policies continued to expand apart from
the growth in new policies. Other operating income rose by HK$65 million or 14.9
per cent.

During the first half of 2005, PFS customer advances grew by 1.2 per cent,
recorded in mortgages, card and personal loans, despite the fall in mortgages
under the suspended GHOS. Customer deposits were 0.8 per cent lower, compared
with the end of last year.

Commercial Banking

Commercial Banking (CMB) reported pre-tax profit of HK$437 million, a fall of
66.7 per cent compared with the same period last year. This fall was largely due
to the net charge for loan impairment of HK$453 million compared with a net
release of HK$581 million in the first half of 2004. At the operating profit
prior to loans impairment loss, CMB recorded growth of 4.9 per cent.

Net interest income increased by 17.4 per cent, underpinned by the strong growth
in average customer advances of 30.9 per cent and the widening of deposits
spreads. Growth of 6.8 per cent in trade finance income, consistent with the
increase in trade services turnover, was outweighed by a fall in investment
services income, resulting in an overall decline of 9.0 per cent in net fee
income, net earned insurance premiums and other operating income.

Customer advances rose by 11.7 per cent. There was particularly strong growth of
14.1 per cent recorded in trade finance as CMB further leveraged its strong
relationship management team, trade services capabilities and branches on the
Mainland and in Macau to provide customised services to meet customers' needs.

Corporate and Institutional Banking

Corporate and Institutional Banking (CIB) reported a pre-tax profit of HK$171
million, 60.2 per cent lower than the same period last year. This was affected
by the collectively assessed loan impairment charges of HK$109 million compared
with a net release of HK$116 million in the first half of 2004. Operating profit
before loans impairment loss was down by 10.8 per cent with the fall in fees and
other operating income outweighing the growth in net interest income, driven by
the growth of average customer advances and improved deposits spreads.

During the first half of 2005, corporate advances grew by 3.5 per cent.

Treasury

Treasury's pre-tax profit fell by 40.9 per cent. Net interest income fell by
31.5 per cent, affected by the rise in funding costs and fewer gapping
opportunities due to the flattening of the yield curves. Trading income fell by
66.3 per cent, mainly affected by the fall of HK$91 million in foreign exchange
income as a result of the drop in customer trade turnover, and the losses from
the economic hedges under the new accounting standards. Income from derivatives
trading rose by HK$47 million, attributable mainly to increased sales of
structured investment products to commercial and personal customers.

Other

Other showed a significant increase of 153.4 per cent in pre-tax profit. This
was mainly attributable to the surplus on revaluation of properties and the
improved return on shareholders' funds following the rise in market interest
rates.


                     Personal                    Corporate &                                      Inter-
                    Financial   Commercial     Institutional                                     segment
Figures in HK$m      Services      Banking           Banking      Treasury        Other      elimination         Total

Half-year ended
30Jun05
Income and expenses
Net interest income     3,363          734               302           686          257              (78)        5,264
Net fee income          1,196          277                36           (11)          28                -         1,526
Net earned insurance
  premiums              2,619          109                 -             -            -                -         2,728
Other operating
  income                  500          122                 8           136          137               78           981
Inter-segment
  income                    -            -                 -             -          154             (154)            -
Total operating 
  income                7,678        1,242               346           811          576             (154)       10,499
Net insurance 
  claims incurred
  and movement in
  policyholder
  liabilities          (2,387)         (22)                -             -            -                -        (2,409)
Net operating
  income before
  loan impairment
  (charges)/releases
  and other
  credit risk
  allowances            5,291        1,220               346           811          576             (154)        8,090
Loan impairment
  (charges)/ releases 
  and other
  credit risk
  allowances              260         (453)             (109)            -            -                -          (302)
Net operating
  income                5,551          767               237           811          576             (154)        7,788
Total operating
  expenses^            (1,468)        (429)              (63)          (80)        (116)               -        (2,156)
Inter-segment
  expenses               (123)         (25)               (3)           (3)           -              154             -
Operating profit            -            -                 -             -          348                -           348
Net surplus on 
  property 
  revaluation               -            -                 -             -          877                -           877
Share of profits 
  of associated
  companies                10          124                 -            56           15                -           205
Profit before
  tax                   3,970          437               171           784        1,700                -         7,062
Share of pre-tax
  profit                 56.2%         6.2%              2.4%         11.1%        24.1%               -         100.0%

Operating profit
  excluding 
  inter-segment  
  transactions          4,083          338               174           731          306                -        5,632

^ Included in
  operating 
  expenses is
  depreciation/
  amortisation
  of                      (50)          (9)               (1)           (1)         (78)               -         (139)

At 30Jun05
Total assets          146,398       52,351            80,182       267,687       23,101                -       569,719
Total 
  liabilities         353,402       73,003            29,628        61,214       10,041                -       527,288
Investments in
  associated
  companies                96        1,210                 -           546          597                -         2,449
Capital expenditure
  incurred during 
  the period               63           13                 5             1           15                -            97

                     Personal                    Corporate &                                      Inter-
                    Financial   Commercial     Institutional                                     segment         Total
Figures in HK$m      Services      Banking           Banking      Treasury        Other      elimination      restated

Half-year ended
30Jun04
Income and
  expenses
Net interest
  income                2,794          625               259         1,002           35                -         4,715
Net fee income          1,382          320               106            (9)          22                -         1,821
Net earned
  insurance 
  premiums              1,883          115                 -             -            -                -         1,998
Other operating
  income                  435          123                 8           404          141               -          1,111
Inter-segment
  income                    -            -                 -             -          159             (159)            -
Total operating 
  income                6,494        1,183               373         1,397          357             (159)        9,645
Net insurance
  claims incurred 
  and movement in
  policyholder
  liabilities          (1,560)         (34)                -             -            -                -        (1,594)
Net operating
  income before
  loan impairment
  releases and
  other credit risk
  allowances            4,934        1,149               373         1,397          357             (159)        8,051
Loan impairment
  releases and other
  credit risk 
  allowances               49          581               116             -            -                -           746
Net operating 
  income                4,983        1,730               489         1,397          357             (159)        8,797
Total operating
  expenses^            (1,334)        (393)              (56)          (68)        (130)               -       (1,981)
Inter-segment
  expenses               (128)         (26)               (3)           (2)           -              159             -
Operating profit        3,521        1,311               430         1,327          227                -         6,816
Profit on disposal
  of tangible fixed
  assets and financial
  investments               -            -                 -             -          349                -           349
Net surplus
  on property 
  revaluation               -            -                 -             -           91                -            91
Share of profits 
  of associated 
  companies                 -            -                 -             -            4                -             4
Profit before  
  tax                   3,521        1,311               430         1,327          671                _         7,260
Share of pre-tax 
  profit                 48.5%        18.1%              5.9%         18.3%         9.2%               -         100.0%

Operating profit
  excluding 
  inter-segment
  transactions          3,649        1,337               433         1,329           68                -         6,816

^ Included in
  operating expenses 
  is depreciation/
  amortisation 
  of                      (53)          (9)               (1)           (1)         (66)               -          (130)

At 30Jun04
Total assets          140,417       42,376            75,152       222,498       22,115                -       502,558
Total liabilities     327,788       72,671            24,605        18,538       18,890                -       462,492
Investments in
  associated 
  companies                90        1,075                 -           470          468                -         2,103
Capital
  expenditure incurred
  during the period        35            6                 1             1           15                -            58

                     Personal                    Corporate &                                      Inter-
                    Financial   Commercial     Institutional                                     segment         Total
Figures in HK$m      Services      Banking           Banking      Treasury        Other      elimination      restated

Half-year ended
31Dec04
Income and expenses
Net interest income     2,912          706               337           848          177                -         4,980
Net fee income          1,083          306                95           (10)          18                -         1,492
Net earned insurance
  premiums              2,346          128                 -             -           -                 -         2,474
Other operating
  income                  726          140                 8           303          125                _         1,302
Inter-segment
  income                    -            -                 -             -          161             (161)            -
Total operating
  income                7,067        1,280               440         1,141          481             (161)       10,248
Net insurance claims 
  incurred and movement
  in policyholder
  liabilities          (2,199)         (47)                -             -            -                -        (2,246)
Net operating
  income before
  loan impairment
  releases and
  other credit
  risk allowances       4,868        1,233               440         1,141          481             (161)        8,002
Loan impairment
  releases and other
  credit risk 
  allowances                2           15                14             -            -                -            31
Net operating
  income                4,870        1,248               454         1,141          481             (161)        8,033
Total operating
  expenses ^           (1,498)        (481)              (42)          (91)        (139)               -        (2,251)
Inter-segment
  expenses               (128)          (3)              (27)           (3)           -              161             -
Operating profit        3,244          764               385         1,047          342                _         5,782
Profit on disposal of  
  tangible fixed
  assets and
  financial 
  investments               -            -                 -            (4)          97                -            93
Net surplus
  on property
  revaluation               -            -                 -             -           55                -            55
Share of
  profits of 
  associated
  companies                 4           45                 -            20           24                -            93
Profit before
  tax                   3,248          809               385         1,063          518                -         6,023
Share of
  pre-tax profit         53.9%        13.4%              6.4%         17.7%         8.6%               -         100.0%

Operating profit
  excluding 
  inter-segment
  transactions          3,372          767               412         1,050          181                -         5,782

^Included in
  operating expenses 
  is depreciation/
  amortisation of         (51)          (9)               (1)           (1)         (72)               -          (134)

At 31Dec04
Total assets          142,592       46,712            77,353       256,368       23,963                -       546,988
Total liabilities     353,076       77,712            25,150        21,553       27,721                -       505,212
Investments in
  associated 
  companies                94        1,123                 -           491          591                -         2,299
Capital expenditure
  incurred during the
  period                   69           11                 1             1            8                -            90


(b) By geographical region

The geographical regions in this analysis are classified by the location of the
principal operations of the subsidiary companies or, in the case of the bank
itself, by the location of the branches responsible for reporting the results or
advancing the funds.

                                                                                  Total
Figures in HK$m                  Hong Kong          Americas         Other     restated

Half-year ended 30Jun05

Income and expenses

Total operating income               9,441               962            96       10,499
Profit before tax                    5,877               947           238        7,062
 
At 30Jun05

Total assets                       485,067            64,811        19,841      569,719
Total liabilities                  510,484            10,095         6,709      527,288
Capital expenditure incurred 
  during period                         81                 -            16           97
Contingent liabilities and 
  commitments                      145,296                 -         3,429      148,725

Half-year ended 30Jun04

Income and expenses

Total operating income               8,863               731            51        9,645
Profit before tax                    6,524               718            18        7,260

At 30Jun04

Total assets                       421,676            65,212        15,670      502,558
Total liabilities                  448,473             7,967         6,052      462,492
Capital expenditure
  incurred during period                55                 -             3           58
Contingent liabilities and     
  commitments                      111,159               113         1,938      113,210

                                                                                  Total
Figures in HK$m                  Hong Kong          Americas         Other     restated

Half-year ended 
31Dec04

Income and expenses

Total operating income               9,310               863            75       10,248
Profit before tax                    5,075               848           100        6,023

At 31Dec04

Total assets                       460,653            69,675        16,660      546,988
Total liabilities                  490,711             9,315         5,186      505,212
Capital expenditure incurred  
  during period                         88               -               2           90
Contingent liabilities and
  commitments                      127,246               -           2,925      130,171

Analysis of financial assets and liabilities by accounting treatment

The following matrix sets out the financial assets and liabilities by type and
by accounting treatment on adoption of HKAS 39. The related changes in
accounting policies are set out on page 65.

                              Fair value
                                 through           Available
                               profit or                 for       Amortised
Figures in HK$m       Trading       loss                sale            cost      Total

At 30Jun05

Financial assets
Cash and short-term 
  funds                     -          -                   -          50,966     50,966
Placings with
  banks maturing
  after one month           -          -                   -          22,832     22,832
Treasury bills          1,843          -               4,604               -      6,447
Certificates of
  deposit               1,017        190              30,614           1,124     32,945
Investment
  securities           10,952      3,553             149,373           7,236    171,114
Derivatives
  financial
  instruments           1,326          3                 223               -      1,552
Advances to
  cutomers                  -          -                   -         260,512    260,512

Financial
  liabilities
Deposits by 
  banks                     -          -                   -          34,753     34,753
Customer
  accounts              7,475          -                   -         430,395    437,870
Certificates of
  deposit and other
  debt securities in
  issue                 9,836          -                   -          11,158     20,994
Securities net
  short position        7,047          -                   -               -      7,047
Derivatives
  financial 
  instruments           1,243         23                 591               -      1,857
Liabilities to
  customers
  under
  investment contracts      -          -                   -              542       542
Liabilities to
  customers under
  insurance contracts       -          -                   -           11,558    11,558
Subordinated debts          -        995                   -            1,496     2,491

Analysis of assets and liabilities by remaining maturity

The maturity analysis is based on the classification set out in the table for
'Analysis of financial assets and liabilities by accounting treatment' on page
34.
                                    Less      Three          One
                    Repayable       than     months         year      Over
                           on      three          to           to     five
Figures in HK$m        demand     months    one year  five years     years     Total

At 30Jun05

Assets 
Cash and
  short-term funds      7,735     43,231           -            -        -    50,966
Placings with
  banks maturing
  after one month           -     14,436       8,192          204        -    22,832
Treasury bills              -      3,869       2,578            -        -     6,447
Certificates
  of deposit               59      5,285      10,798       15,514    1,289    32,945
Investment securities              9,498      26,189      119,437   15,990   171,114
Derivatives financial
  instruments               -      1,552          -            -         -     1,552
Advances to customers  13,625     32,801      30,977       92,770   90,339   260,512
                       21,419    110,672      78,734      227,925  107,618   546,368

Liabilities
Deposits by banks       4,800     29,953           -            -        -    34,753
Customer accounts     245,003    179,555       9,010        3,552      750   437,870
Certificates of 
  deposit and other
  debt securities
  in issue                  -        278       3,392       16,638      686    20,994
Derivatives financial
  instruments               -      1,857           -            -        -     1,857
Securities net short       
  position                  -      7,047           -            -        -     7,047
Liabilities to customers
  under investment 
  contracts               542          -           -            -        -       542
Liabilities to customers
  under insurance 
  contracts                 -          -           -            -   11,558    11,558
Subordinated debts          -          -           -          995    1,496     2,491
                      250,345    218,690      12,402       21,185    14,490  517,112

Cash and short-term funds

                   At 30Jun05           At 30Jun04             At 31Dec04
Figures in HK$m                           restated               restated

Cash in hand and
  balances with banks
  and other financial
  institutions          7,816                5,946                  7,248
Money at call and 
  placings with banks
  maturing within one
  month                43,150               56,267                 57,597
                       50,966               62,213                 64,845

Trading securities

                   At 30Jun05           At 30Jun04             At 31Dec04
Figures in HK$m                           restated               restated

Treasury bills          1,843                1,657                  2,704
Certificates 
  of deposit            1,017                   63                     70
Equity investments         32                  919                  1,136
Other debt      
  securities           10,920                1,314                  2,090
                       13,812                3,953                  6,000

Financial assets designated as at fair value through profit or loss

                   At 30Jun05           At 30Jun04            At 31Dec04
Figures in HK$m                           restated              restated

Certificates
  of deposit              190                    -                     -
Equity investments      1,161                    -                     -
Other debt securities   2,392                    -                     -
                        3,743                    -                     -

Financial assets are designated as at fair value through profit or loss at
inception, usually together with the related liabilities or derivatives for
economic hedge. The policy and criteria for financial instruments designated as
at fair value through profit or loss are set out in note 1 of the additional
information on page 61. The figures also include those financial assets of life
insurance funds designated as at fair value for backing policyholder
liabilities.


Advances to customers

                   At 30Jun05           At 30Jun04            At 31Dec04
Figures in HK$m                           restated              restated

Gross advances to
  customers           261,713              247,615               252,564
Loans impairment
  allowances:
- individually
  assessed               (733)                (787)                 (692)
- collectively 
  assessed               (468)                (434)                 (319)
                      260,512              246,394               251,553
Included in advances
  to customers are:
- trade bills           3,015                2,861                 3,053
- loans                
  impairment
  allowances              (12)                 (12)                   (8)
                        3,003                2,849                 3,045

Loans impairment allowances against advances to customers

                                  Collectively assessed

                                                              Individual
                 Individually            Portfolio            unimpaired
Figures in HK$m      assessed                basis                 loans         Total

At1Jan05                  692                   30                   289         1,011
Amounts written off       (69)                 (84)                    -          (153)
Recoveries of advances
  written off in previous
  years                    24                   26                     -            50
New impairment allowances
  charged to profit and 
  loss account            430                   84                   152           666
Impairment allowances
  released to
  profit and loss
  account                (335)                 (29)                    -          (364)
Unwind of discount
  of loans impairment
  loss                     (9)                   -                     -            (9)

At 30Jun05                733                   27                   441         1,201

Total loans impairment allowances as a percentage of gross advances to customers
are as follows:

                  At 30Jun05            At 30Jun04            At 31Dec04
                                          restated              restated
                           %                     %                     %

Loans impairment
  allowances
- Individually 
  assessed              0.28                  0.32                  0.27
- Collectively
  assessed
  - portfolio basis     0.01                  0.01                  0.01
  - individually 
     unimpaired loans   0.17                  0.16                  0.11
Total loans
  impairment 
  allowances            0.46                  0.49                  0.39

Total loans impairment allowances as a percentage of gross advances to customers
rose to 0.46 per cent as at 30 June 2005, compared with 0.39 per cent at the end
of 2004. Individually assessed allowances as a percentage of gross advances
stood at the same level as last year-end at 0.28 per cent. Collectively assessed
allowances rose by six basis points to 0.18 per cent of gross advances to
customers, compared with 0.12 per cent at the end of 2004, following an update
of the historical loss rate for calculation of allowances for collective
assessment of loans which were individually determined to be unimpaired.

Impaired loans to customers and allowances

The amounts of impaired loans to customers are as follows:

                  At 30Jun05            At 30Jun04           At 31Dec04
Figures in HK$m                           restated             restated

Gross impaired
  loans                1,946                 3,434                1,793
Loans impairment 
  allowances            (760)                 (818)                (722)
Net impaired loans     1,186                 2,616                1,071

Loans impairment
  allowances as a
  percentage of
  gross impaired  
  loans                 39.1%                 23.8%                40.3%

Gross impaired
  loans as a
  percentage of 
  gross advances 
  to customers           0.7%                  1.4%                 0.7%


Impaired loans to customers are those advances where full repayment of principal
and/or interest is considered unlikely and are so classified as soon as such a
situation becomes apparent. Impairment allowances are made to write down the
carrying value of the advances to the discounted value of future recoverable
amounts, including the realisation of collateral.

Gross impaired loans rose by HK$153 million, or 8.5 per cent, to HK$1,946
million, compared with the end of 2004, the net effect of the increase in
commercial banking impaired loans and the recovery from residential mortgages.
Compared with 30 June 2004, gross impaired loans decreased by HK$1,488 million,
or 43.3 per cent, mainly due to the repayment of certain corporate customers.
Loans impairment allowances as a percentage of gross impaired loans improved to
39.1 per cent from 40.3 per cent at the end of 2004.

Overdue advances to customers

The amounts of advances to customers which are overdue for more than three
months and their expression as a percentage of gross advances to customers are
as follows:

                  At 30Jun05            At 30Jun04           At 31Dec04
                                          restated             restated
                HK$m       %    HK$m             %        HK$m        %

Gross advances 
  to customers
  which have 
  been overdue
  with respect 
  to either
  principal or 
  interest for 
  periods of:
- six months or
  less but
  over three
  months         500     0.2     715           0.3          587     0.2
- one year
  or less but
  over six 
  months         224     0.1     378           0.1          304     0.1
- over one
  year           423     0.1     507           0.2          430     0.2
               1,147     0.4   1,600           0.6        1,321     0.5
  
Advances with a specific repayment date are classified as overdue when the
principal or interest is overdue and remains unpaid at the period-end. Advances
repayable by regular instalments are treated as overdue when an instalment
payment is overdue and remains unpaid at the period-end. Advances repayable on
demand are classified as overdue either when a demand for repayment has been
served on the borrower but repayment has not been made in accordance with the
demand notice, or when the advances have remained continuously outside the
approved limit advised to the borrower for more than the overdue period in
question.












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