Hang Seng Bank Interim 05 Pt3

HSBC Holdings PLC 01 August 2005 Rescheduled advances to customers The amount of rescheduled advances and its expression as a percentage of gross advances to customers is as follows: At 30Jun05 At 30Jun04 At 31Dec04 restated restated HK$m % HK$m % HK$m % Rescheduled advances to customers 357 0.1 2,621 1.1 1,512 0.6 Rescheduled advances are those which have been rescheduled or renegotiated for reasons related to the borrower's financial difficulties. This will normally involve the granting of concession terms and resetting the overdue account to non-overdue status. A rescheduled advance will continue to be disclosed as such unless the debt has been performing in accordance with the rescheduled terms for a period of six to 12 months. Rescheduled advances which have been overdue for more than three months under the rescheduled terms are reported as overdue advances to customers (page 40). Rescheduled advances reduced by HK$1,155 million, or 76.4 per cent, to HK$357 million at 30 June 2005, representing 0.1 per cent of gross advances to customers. The reduction was mainly the result of the repayment and upgrade of corporate customers and personal loans. Segmental analysis of advances to customers by geographical area Advances to customers by geographical area are classified according to the location of the counterparties after taking into account the transfer of risk. In general, risk transfer applies when an advance is guaranteed by a party located in an area which is different from that of the counterparty. At 30 June 2005, over 90 per cent of the group's advances to customers and the related impaired loans and overdue advances were classified under the area of Hong Kong (unchanged from the positions at 30 June 2004 and 31 December 2004). Gross advances to customers by industry sector The analysis of gross advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority is as follows: At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Gross advances to customers for use in Hong Kong Industrial, commercial and financial sectors Property development 15,048 13,909 12,818 Property investment 41,986 39,960 44,732 Financial concerns 4,399 4,819 3,996 Stockbrokers 298 372 314 Wholesale and retail trade 5,244 5,107 5,460 Manufacturing 7,770 3,733 4,384 Transport and transport equipment 12,080 11,416 11,173 Other 23,535 20,392 22,010 110,360 99,708 104,887 Individuals Advances for the purchase of flats under the Government Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme 24,713 28,177 26,386 Advances for the purchase of other residential properties 81,545 80,740 79,987 Credit card advances 6,583 5,508 6,534 Other 7,385 7,435 7,122 120,226 121,860 120,029 Total gross advances for use in Hong Kong 230,586 221,568 224,916 Trade finance 16,910 15,807 15,539 Gross advances for use outside Hong Kong 14,217 10,240 12,109 Gross advances to customers 261,713 247,615 252,564 Lending to the industrial, commercial and financial sectors rose by 5.2 per cent during the first half of 2005. Financial concerns, including investment holding vehicles, grew by 10.1 per cent. Wholesale, retail and manufacturing together were up by 32.2 per cent, reflecting the continued expansion of the economy. Lending to the transport and transport equipment sector, mainly taxi and other motor vehicle loans, also recorded a growth of 8.1 per cent. Individual lending was up 0.2 per cent compared with the end of 2004, or up 2.0 per cent excluding mortgages under the GHOS Scheme which is still in suspension. Residential mortgages went up by 1.9 per cent in an active and competitive market. Card advances and others, mainly personal advances, together grew 2.3 per cent as the bank continued to promote consumer finance. Trade finance advances recorded an encouraging growth of 8.8 per cent, benefiting from further increase in external trade activities. Gross advances for use outside Hong Kong rose by 17.4 per cent, largely due to growth in lending activity by our mainland branches. Financial investments At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Available-for-sale at fair value - equity investments 1,560 1,484 1,838 - certificates of deposit and other debt securities 183,030 - - Held-to-maturity at amortised cost debt securities 8,361 160,634 181,100 192,951 162,118 182,938 Fair value of held-to-maturity debt securities 8,818 160,796 182,577 Treasury bills 4,604 3,715 3,923 Certificates of deposit 31,738 33,295 35,393 Equity shares 1,560 1,484 1,838 Other debt securities 155,049 123,624 141,784 192,951 162,118 182,938 Available-for-sale investments include treasury bills, certificates of deposit, other debt securities and equity investments intended to be held for an indefinite period of time, but which may be sold in response to needs for liquidity or changes in the market environment. Available-for-sale investments are carried at fair value with the gains and losses from change in fair value recognised through equity reserves. Held-to-maturity debt securities are stated at amortised cost, adjusted for the amortisation of premiums and accretion of discounts over the period from the date of purchase to the date of maturity. On adoption of HKAS 39 on 1 January 2005, the group has reclassified all held-to-maturity debt securities as available-for-sale, with the exception of certain life insurance fund portfolios. This is to maintain the flexibility of the group in managing its liquidity and interest rate risks. Analysis of securities by counterparty and place of listing At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Trading securities 13,812 3,953 6,000 Financial assets designated as at fair value through profit or loss 3,743 - - Financial investments 192,951 162,118 182,938 210,506 166,071 188,938 At carrying value Issued by public bodies: - central governments and central banks 25,157 19,840 24,161 - other public sector entities 12,664 11,535 13,934 37,821 31,375 38,095 Issued by other bodies: - banks and other financial institutions 151,264 112,859 128,129 - corporate entities 21,421 21,837 22,714 172,685 134,696 150,843 210,506 166,071 188,938 - listed in Hong Kong 7,429 6,814 8,069 - listed outside Hong Kong 2,366 26,854 29,000 9,795 33,668 37,069 - unlisted 200,711 132,403 151,869 210,506 166,071 188,938 At fair value Issued by public bodies: - central governments and central banks 25,172 19,791 24,435 - other public sector entities 12,680 11,739 14,371 37,852 31,530 38,806 Issued by other bodies: - banks and other financial institutions 151,689 112,854 128,722 - corporate entities 21,422 21,849 22,887 173,111 134,703 151,609 210,963 166,233 190,415 - listed in Hong Kong 7,433 6,801 8,176 - listed outside Hong Kong 2,404 26,845 29,023 9,837 33,646 37,199 - unlisted 201,126 132,587 153,216 210,963 166,233 190,415 Amounts due from/to immediate holding company and fellow subsidiary companies At balance sheet dates, the amounts due from/to immediate holding company and fellow subsidiary companies included in the assets and liabilities balances of the consolidated balance sheets are analysed as follows: Figures in HK$m At 30Jun05 At 30Jun04 At 31Dec04 Amounts due from: Cash in hand and balances with banks and other financial institutions 1,013 1,588 1,227 Placings with banks 4,619 3,222 2,416 Trading securities 50 - 154 Financial assets designated as at fair value through profit or loss 155 - - Financial investments 1,236 1,557 1,574 Other assets 228 248 224 7,301 6,615 5,595 Amounts due to: Customer accounts 136 147 165 Deposits from banks 9,946 7,002 3,301 Other liabilities 770 384 465 10,852 7,533 3,931 Investments in associated companies At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Share of net assets 2,138 2,103 1,988 Goodwill 311 - 311 2,449 2,103 2,299 Intangible assets At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Value of in-force long-term assurance business 1,409 1,128 1,249 Other intangible assets 17 18 17 1,426 1,146 1,266 Other assets At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Items in the course of collection from other banks 3,858 4,235 4,456 Prepayments and accrued income 3,328 2,873 3,029 Deferred tax assets 7 17 11 Non current assets held for sale 237 385 320 Other accounts 1,574 2,056 2,164 9,004 9,566 9,980 On adoption of HKFRS5, repossessed collateral assets have been reclassified from 'Advances to customers' to 'Non current assets held for sale' under 'Other assets'. Current, savings and other deposit accounts At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Current, savings and other deposit accounts: - as per consolidated balance sheet 430,395 418,638 447,460 - structured deposits reported as trading liabilities 7,475 - - 437,870 418,638 447,460 By type: - demand and current accounts 29,583 33,183 36,148 - savings accounts 212,344 231,135 251,192 - time and other deposits 195,943 154,320 160,120 437,870 418,638 447,460 Certificates of deposit and other debt securities in issue At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Certificates of deposit and other debt securities in issue: - as per consolidated balance sheet 11,158 9,807 16,055 - structured certificates of deposit and other debt securities in issue reported as trading liabilities 9,836 - - 20,994 9,807 16,055 By type: - Certificates of deposit in issue 20,839 9,807 15,409 - Other debt securities in issue 155 - 646 20,994 9,807 16,055 Current, savings and other deposit accounts (including structured deposits reported as trading liabilities) fell by HK$9.6 billion, or 2.1 per cent, to HK$437.9 billion at 30 June 2005, compared with the last year-end. Certificates of deposit and other debt securities in issue (including those reported as trading liabilities) rose by HK$4.9 billion to HK$21.0 billion at 30 June 2005. As interest rates gradually moved up, customer deposits shifted from current and savings accounts to time deposits. Certificates of deposit and other deposit instruments with yield enhancement features also gained in popularity. Trading liabilities At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Certificates of deposit and other debt securities in issue 9,836 - - Structured deposits 7,475 - - Short positions in securities 7,047 2,657 5,840 24,358 2,657 5,840 Trading liabilities includes customer deposits and certificates of deposit with embedded options or other derivatives, the market risk of which was managed in the trading book. Other liabilities At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Items in the course of transmission to other banks 5,629 5,162 6,136 Accruals 1,124 1,703 2,303 Long-term liabilities attributable to policy holders - 6,342 8,291 Other 1,113 1,988 4,252 7,866 15,195 20,982 Subordinated liabilities At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Floating rate subordinated notes due 2015 1,496 - - 4.125 per cent subordinated notes due 2015 reported as financial liabilities designated as at fair value through profit or loss 995 - - 2,491 - - In June 2005, the bank issued subordinated notes of total nominal value of HK$2,500 million, divided into a fixed rate tranche of HK$1,000 million and a floating rate tranche of HK$1,500 million. Both tranches will mature on or about 23 June 2015 with a one-time call option in June 2010 (call option date). The fixed rate notes bear an interest rate of 4.125 per cent per annum payable semi-annually from the issue date to the call option date at which point, if the notes are not redeemed, the interest rate will be reset to three-month HIBOR plus 0.825 per cent, payable quarterly. The floating rate notes bear an interest at three-month HIBOR plus 35 basis points payable quarterly from the issue date to the call option date. Thereafter, if the notes are not redeemed, the interest rate will be reset to three-month HIBOR plus 0.85 per cent. Shareholders' funds At 30Jun05 At 30Jun04 At 31Dec04 Figures in HK$m restated restated Share capital 9,559 9,559 9,559 Retained profits 26,222 24,293 23,854 Premises revaluation resevere 3,387 2,615 2,778 Long-term equity investment revaluation reserve - 635 935 Cash flow hedge reserve (256) - - Available-for-sale investment reserve 294 - - Capital redemption and share option reserves 193 137 165 Other reserves (2) - - Total reserves 29,838 27,680 27,732 39,397 37,239 37,291 Proposed dividends 2,103 2,103 3,633 Shareholders' funds 41,500 39,342 40,924 Return on average shareholders' funds 29.7% 32.0% 25.2% 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 2005. Shareholders' funds (excluding proposed dividends) rose by HK$2,106 million, or 5.6 per cent, to HK$39,397 million at 30 June 2005. Retained profits increased by HK$2,368 million and premises revaluation reserve rose by HK$609 million, reflecting the rise in the property market. The return on average shareholders' funds was 29.7 per cent, compared with 32.0 per cent and 25.2 per cent for the first and second halves of 2004 respectively. Capital resources management Analysis of capital base and risk-weighted assets Figures in HK$m At 30Jun05 At 30Jun04 At 31Dec04 Capital base Tier 1 capital - share capital 9,559 9,559 9,559 - retained profits 21,829 21,193 20,560 - classified as regulatory reserve (468) - - - capital redemption reserve 99 99 99 - less: goodwill (311) (311) (302) - total 30,708 30,540 29,916 Tier 2 capital - property revaluation reserve 4,710 4,965 5,322 - available-for-sale investment and equity revaluation reserve 350 422 625 - collective impairment allowances 468 403 289 - regulatory reserve 468 - - - term subordinated debt 2,491 - - - total 8,487 5,790 6,236 Unconsolidated investments and other deductions (2,871) (2,606) (2,829) Total capital base after deductions 36,324 33,724 33,323 Risk-weighted assets On-balance sheet 276,339 245,792 259,429 Off-balance sheet 17,698 15,591 16,577 Total risk-weighted assets 294,037 261,383 276,006 Total risk-weighted assets adjusted for market risk 292,331 263,236 277,029 Capital adequacy ratios After adjusting for market risk - tier 1^ 10.5% 11.6% 10.8% - total^ 12.4% 12.8% 12.0% Before adjusting for market risk - tier 1 10.4% 11.7% 10.8% - total 12.4% 12.9% 12.1% ^The capital ratios take into account market risks in accordance with the relevant Hong Kong Monetary Authority guideline under the Supervisory Policy Manual. In accordance with the HKMA guideline 'Impact of the New Hong Kong Accounting Standards on Authorised Institutions' Capital Base and Regulatory Reporting', the bank has earmarked a 'Regulatory Reserve' from retained profits and it is included as tier 2 capital together with the bank's collective impairment allowances after the adoption of HKAS 39. The total capital ratio rose by 0.4 percentage points to 12.4 per cent at 30 June 2005, compared with 12.0 per cent at 31 December 2004. The capital base at 30 June 2005 increased by HK$3,001 million to HK$36,324 million. In June 2005, the bank issued subordinated notes, which qualify as tier 2 capital, amounting to HK$2,491 million to achieve a more balanced capital structure and to support business growth. Risk-weighted assets adjusted for market risk grew by 5.5 per cent, mainly attributable to the increase in advances to customers and debt securities holdings. Liquidity ratio The average liquidity ratio for the period, calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance, is as follows: Half-year ended Half-year ended Half-year ended 30Jun05 30Jun04 31Dec04 The bank and its major banking subsidiaries 43.6% 48.1% 46.3% Reconciliation of cash flow statement (a) Reconciliation of operating profit to net cash flow from operating activities Half-year ended Half-year ended 30Jun05 30Jun04 Figures in HK$m restated Operating profit 5,632 6,816 Net interest income (5,264) (4,715) Dividend income (37) (76) Loans impairment charges/(releases) and other credit risk allowances 302 (746) Depreciation 135 126 Amortisation of intangible assets 4 4 Amortisation of long-term investments 8 241 Advances written off net of recoveries (112) (391) Interest received 5,091 4,592 Interest paid (2,537) (1,161) Operating profit before changes in working capital 3,222 4,690 Change in placings with banks maturing after one month (5,350) 14,822 Change in trading securities 3,132 52 Change in financial assets designated as at fair value through profit or loss 299 - Change in derivatives (167) 76 Change in advances to customers (8,856) (16,297) Change in financial investments 1,277 (1,497) Change in other assets (171) (1,520) Change in current, savings and other deposit accounts (9,789) (13,509) Change in deposits from banks 22,804 10,090 Change in trading liabilities 7,817 1,143 Change in certificates of deposit and other debt securities in issue (1,454) 1,920 Change in other liabilities (731) (675) Change in financial liabilities designated as at fair value through profit or loss (1) - Elimination of exchange differences and other non-cash items (1,094) 1,743 Cash generated from operating activities 10,938 1,038 Taxation paid (222) (212) Net cash inflow from operating activities 10,716 826 (b) Analysis of the balances of cash and cash equivalents At 30Jun05 At 30Jun04 Figures in HK$m restated Cash in hand and balances with banks and other financial institutions 7,816 5,945 Money at call and placings with banks maturing within one month 41,614 55,865 Treasury bills 1,033 641 Certificates of deposit 2 1,069 50,465 63,520 Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 30Jun05 Contingent liabilities: Guarantees 13,343 13,112 3,336 Commitments: Documentary credits and short-term trade-related transactions 8,845 1,782 1,764 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 100,918 - - - one year and over 25,593 12,796 11,770 Other 26 26 26 135,382 14,604 13,560 Exchange rate contracts: Spot and forward foreign exchange 131,827 1,346 341 Other exchange rate contracts 31,916 382 118 163,743 1,728 459 Interest rate contracts: Interest rate swaps 169,762 1,476 406 Other interest rate contracts 1,669 8 3 171,431 1,484 409 Other derivative contracts 311 17 9 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 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 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 derivatives 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. Derivatives financial instruments are held for trading, as financial instruments designated as at the fair value through profit or loss or designated as either fair value hedge or cash flow hedges. The accounting policies for each class of derivatives on adoption of HKAS 39 are set out in note 1 of the additional information on page 61. The following table shows the nominal value and marked-to-market assets and liabilities of each class of derivatives. At 30Jun05 At 30Jun04 At 31Dec04 Non- Non- Figures in HK$m Trading Hedging Trading trading Trading trading Contract amounts: Interest rate contracts 103,968 67,463 48,677 77,115 54,755 70,915 Exchange rate contacts 163,743 - 105,965 311 161,117 310 Other derivative contacts 311 - 36 - 1,373 - 268,002 67,463 154,678 77,426 217,245 71,225 Derivative assets: Interest rate contracts 675 223 514 - 519 - Exchange rate contracts 647 - 693 - 1,160 - Other derivative contracts 7 - 2 - 5 - 1,329 223 1,209 - 1,684 - Derivative liabilities: Interest rate contracts 847 591 524 - 477 - Exchange rate contracts 412 - 437 - 796 - Other derivative contracts 7 - - - - - 1,266 591 961 - 1,273 - The above derivative assets, being the total positive marked-to-market value of the derivative contracts and represent their replacement costs as none of these contracts are subject to any bilateral netting arrangement. Cross-border claims Cross-border claims include receivables and loans and advances, balances due from banks and holdings of certificates of deposit, bills, promissory notes, commercial paper and other negotiable debt instruments and also include accrued interest and overdue interest on these assets. Claims are classified according to the location of the counterparties after taking into account the transfer of risk. For a claim guaranteed by a party situated in a country different from the counterparty, the risk will be transferred to the country of the guarantor. For a claim on the branch of a bank or other financial institution, the risk will be transferred to the country where its head office is situated. Claims on individual countries or areas, after risk transfer, amounting to 10 per cent or more of the aggregate cross border claims are shown as follows: Banks Sovereign & other & public financial sector Figures in HK$m institutions entities Other Total At 30Jun05 Asia-Pacific excluding Hong Kong: - Australia 25,194 61 954 26,209 - other 27,760 1,600 6,197 35,557 52,954 1,661 7,151 61,766 The Americas: - Canada 19,011 4,599 1,571 25,181 - other 13,396 2,601 10,882 26,879 32,407 7,200 12,453 52,060 Western Europe: - United Kingdom 25,206 15 6,897 32,118 - other 79,498 2,577 6,757 88,832 104,704 2,592 13,654 120,950 At 30Jun04(restated) Asia-Pacific excluding Hong Kong: - Australia 19,187 214 1,063 20,464 - other 22,489 1,264 6,638 30,391 41,676 1,478 7,701 50,855 The Americas: - Canada 17,502 6,009 803 24,314 - other 10,058 4,658 10,963 25,679 27,560 10,667 11,766 49,993 Western Europe: - United Kingdom 21,508 16 5,911 27,435 - other 59,735 2,271 4,818 66,824 81,243 2,287 10,729 94,259 At 31Dec04(restated) Asia-Pacific excluding Hong Kong: - Australia 22,023 62 1,223 23,308 - other 26,303 1,530 5,448 33,281 48,326 1,592 6,671 56,589 The Americas: - Canada 19,748 4,957 1,566 26,271 - other 11,326 3,236 10,344 24,906 31,074 8,193 11,910 51,177 Western Europe: - United Kingdom 24,412 16 5,969 30,397 - other 79,577 2,096 6,388 88,061 103,989 2,112 12,357 118,458 This information is provided by RNS The company news service from the London Stock Exchange

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