Hang Seng Bank Interim 05 Pt4

HSBC Holdings PLC
01 August 2005


Additional information

1. Accounting policies

This news release has been prepared on a basis consistent with the accounting
policies adopted in the 2004 financial statements except for the changes in
accounting policies following the adoption on 1 January 2005 of the new and
revised Hong Kong Financial Reporting Standards and Hong Kong Accounting
Standards ('HKFRSs') as set out below.

HKFRS 2: Share-Based Payment ('HKFRS 2')

In prior years, no compensation cost was recognised for share options granted at
fair value or not more than 20 per cent discount to fair value. Where the
options were granted by the bank's ultimate holding company without charging the
bank for the value of the option, the value was credited to equity reserves. For
restricted share awards, the cost for acquisition of shares for the conditional
award was charged to 'staff costs' over the period in respect of which the
performance condition applied.

On adoption of HKFRS 2, all share compensations are recognised at fair value
which takes into account the vesting conditions related to market performance.
Compensation cost is measured at the date of grant based on the assessed value
of the option or award and is recognised over the service period, which is
usually the vesting period, as part of 'personnel cost'.

The change in accounting policy has been applied retrospectively by way of prior
year adjustment and restatement of comparative figures for 2004. The unamortised
cost of share compensation of HK$66 million at 31 December 2004 (30 June 2004:
HK$38 million) was adjusted to retained profits. The personnel costs for the
first and second halves of 2004 have been restated to recognise the share
compensation cost of HK$19 million and HK$28 million attributable to the periods
respectively. Share compensation cost for the first half of 2005 amounting to
HK$28 million was recognised through the profit and loss account.

HKFRS 3: Business Combinations ('HKFRS 3')

In prior years, positive goodwill arising from the acquisition of subsidiary and
associated companies was amortised over its estimated life, usually taken as 20
years, on a straight-line basis in the profit and loss account.

On adoption of HKFRS 3, positive goodwill is not amortised but is tested for
impairment at each balance sheet date at the cash-generating unit level by
applying a fair-value-based test in accordance with HKAS 36 'Impairment of
Assets'.

The accounting policy on goodwill is applied retrospectively by way of prior
year adjustment and restatement of comparative figures for 2004. The positive
goodwill at 31 December 2004 is restated to reverse all amortisation made prior
to that date (HK$9 million) with a corresponding adjustment through retained
profit at 31 December 2004. The operating profit for the second half of 2004 is
adjusted upwards by HK$9 million to reverse the goodwill amortisation for the
period (first half of 2004: nil). No impairment loss has been recognised for the
first half of 2005.

HKFRS 4: Insurance Contracts ('HKFRS 4')

In prior years, all contracts of insurance business, including investment-linked
contracts were accounted as insurance contracts.

On adoption of HKFRS 4, certain long-term insurance contracts which do not
transfer significant insurance risks are treated as investment contracts. The
financial assets held under these investment contracts are accounted based on
their classification in accordance with HKAS 39 as described below. Liabilities
under insurance contract are recognised as financial and carried at valuation.
No restatement of 2004 comparative figures is required.

HKFRS 5: Non-Current Assets Held for Sale and Discontinued Operations ('HKFRS 5')

In prior years, collateral assets repossessed for recovery of non-performing
advances were reported as advances. The carrying value was adjusted to the net
realisable value of the repossessed assets and classified as non-performing
advances.

On adoption of HKFRS 5, repossessed collateral assets are reported as
'Non-current asset held for sale' under 'Other assets'.

The change in accounting policy has been applied retrospectively and reflected
by way of prior year adjustment and the restatement of comparative figures for
2004. At 31 December 2004, repossessed assets of HK$320 million were
reclassified from 'Customer advances' to 'Non-current assets held for sale' (30
June 2004: HK$385 million). Gains on disposal of HK$18 million and HK$19 million
for the first and second halves of 2004 respectively were re-classified from
'Net charge for bad and doubtful debts' to 'Other operating income'. Gains on
disposal of HK$9 million for the first half of 2005 were recorded under 'Other
operating income'.

HKAS 17: Leasing ('HKAS 17')

In prior years, leasehold premises were stated at valuation, as valued by
professionally qualified valuers. The apportionment of the value between the
land and building elements was made by estimating the 'net replacement cost' of
the building as the value of the building element, and taking the residual
figure as the value of the land element.

On adoption of HKAS 17, where leasehold properties are held for own use and
where the land and buildings elements can be allocated reliably as at inception
of the lease, the land element is treated as an operating lease. As such, land
premiums or other costs for acquiring the leasehold land are amortised over the
term of the lease. Where the land and building cannot be allocated reliably as
at the inception of the lease, the land and building elements will continue to
be treated as finance leases and carried at fair value.

The land element of a leasehold premise with the cost of land premium paid
separately is accounted for as an operating lease. The revaluation reserve on
the leasehold land is de-recognised and the related deferred taxation reversed, 
while the cost of land premium paid is reflected as a prepayment under 'Other 
assets' and amortised over the remaining lease term. Amortisation of land 
premium is recognised as 'Rental charges' instead of depreciation.

The change in accounting policy is adopted retrospectively and reflected by way
of prior year adjustment and restatement of comparative figures.

Net increases/(decreases) in the outstanding balances on restatement of the
balance sheets

Figures in HK$m                           At 30Jun04         At 31Dec04
Assets:
Premises                                      (2,501)            (2,511)
Prepayment                                       616                609

Liabilities and reserves:
Premises revaluation reserve                  (1,435)            (1,502)
Retained profits                                (120)               (66)
Deferred tax liabilities                        (330)              (334)

Increases/(decreases) in the following items on restatement of the profit and
loss accounts
                                     Half-year ended    Half-year ended
Figures in HK$m                              30Jun04            31Dec04
Depreciation                                     (23)               (29)
Rental expense                                     7                  7
Net surplus of revaluation of
  properties (net of deferred tax)               (25)                17

Rental expense on leasehold land for the first half of 2005 amounted to HK$7
million.

HKAS 19: Employee Benefit ('HKAS 19')

In prior years, only the actuarial gains or losses exceeding the threshold
prescribed by HKSSAP 34 were taken into account in calculating the retirement
benefit costs of defined benefit schemes.

The revised HKAS 19 effective from 1 January 2005 provides an option for
actuarial gains or losses to be recognised in full through 'Retained profits' in
the year of occurrence. The group has elected to take the option to recognise
all actuarial gains or losses through retained profits in the current year. To
reflect the change in accounting policy, the balance of actuarial loss amounting
to HK$82 million has been adjusted through 'Retained profits' as at 31 December
2004. (30 June 2004: actuarial gain of HK$128 million). An actuarial loss for
the first half of 2005, amounting to HK$9 million, has been recognised through
retained profits.

HKAS 27: Consolidated and Separate Financial Statements ('HKAS 27') 
HKAS Interpretation 12 'Consolidation - Special Purpose Entities' ('Int 12')

Life insurance subsidiary

In prior years, on consolidation of the life insurance subsidiary, long-term
assurance assets and liabilities attributable to policyholders were recognised
in aggregate under 'Other assets' and 'Other liabilities' respectively. Income
from long-term assurance assets was reported together with net earned insurance
premiums, less net insurance claims and movement in policyholder liabilities, as
'Insurance underwriting profit' in the profit and loss account.

On adoption of HKAS 27, life insurance subsidiary accounts are consolidated
line-by-line. Assets of the life insurance subsidiary, including long-term
assurance assets, are reported according to asset type as presented in the
group's consolidated balance sheet. Net earned insurance premiums and net
insurance claims are separately shown in the profit and loss account, with
income on assets reported under the same income categories as in the group's
consolidated profit and loss account.

The change in accounting policy has been adopted retrospectively and the
comparative figures of 2004 have been restated to reflect the aforesaid
reclassifications, except for the treatment of financial assets and the related
income, in accordance with the requirement of HKAS 39 as described below.

HKAS 38: Intangible Assets ('HKAS 38')

In prior years, costs incurred for development of IT software for internal use
were expensed through the profit and loss account as incurred.

On adoption of HKAS 38, costs incurred in the development phase of a project to
produce application software for internal use are capitalised and amortised over
the software's estimated useful life, usually three years. The change in
accounting policy came into effect on 1 January 2005 and the amount of costs
capitalised for the first half of 2005 amounted to HK$5 million.

Value of in-force long-term assurance business (embedded value) previously
grouped under 'Other assets' are reported under 'Intangible assets' with effect
from 1 January 2005.

HKAS 39: Financial Instruments - Recognition and Measurement

Interest income and expense

In prior years, interest income on loans and advances and debt securities and
interest expense on deposits and debt instruments in issue were recognised on an
accrual basis using the relative contract or coupon interest rates. When a loan
was considered doubtful, interest was suspended and ceased to accrue.

Fees on loan origination are recognised when receivable except when such fees
are charged to cover the costs of continuing service to, or risk borne for, the
customers, or are interest in nature. In these cases, the fees are recognised on
an appropriate basis over the relevant period. Costs associated with loan
origination or acquisition are usually charged as interest expenses or operating
expenses when incurred. Premiums or discounts of debt securities held, or debt
instruments in issue, are amortised over the period from the date of purchase or
issue to the date of maturity, as part of interest income or interest expense.

On adoption of HKAS 39, interest income and expenses are recognised using the
effective interest method. The calculation of effective interest includes all
fees, commissions and costs on loans and advances and premiums and discounts on
debt securities.

Interest will continue to be recognised on impaired financial assets using the
rate of interest used to discount future cash flows for the purpose of measuring
the related impairment loss. Subsequent unwinding of discount allowance is
recognised as interest income.

Interest income and interest expense of trading assets and liabilities and
financial assets and liabilities designated as at fair value are recognised as
part of 'Net trading income' and 'Net income on financial instruments designated
as at fair value' respectively in the profit and loss account, instead of
'Interest income' and 'Interest expense' as for those arising from other
financial assets and liabilities.

Interest receipt and payment of interest rate derivatives of qualifying hedges
will be accounted as interest income or interest expenses following the
underlying recognised assets or liabilities. Interest receipts and payments of
other interest rate derivatives are recognised as trading income or net income
from financial instruments designated as at fair value through profit or loss.

Derivatives financial instruments

In prior years, derivatives financial instruments held for trading purposes were
accounted at fair value and carried as assets when the fair value was positive
and as liabilities when the fair value was negative. Gains or losses from
changes in fair value were recognised through the profit and loss account.
Derivatives held for non-trading purposes, including qualifying hedges and
synthetic alteration positions in accordance with defined risk management
strategies, were accounted for on a basis equivalent to the underlying assets,
liabilities and positions.

On adoption of HKAS 39, all derivatives are initially recognised at fair value
and carried as assets when the fair value is positive and as liabilities when
the fair value is negative. Subsequent changes in fair value are recognised
depending on the purpose of the derivatives as follows.

Derivatives financial instruments designated as hedges will apply hedge
accounting provided certain qualifying criteria are met. There are two types of
hedges:

- fair value hedge, a hedge against the fair value of recognised assets or
liabilities or firm commitments. This will be accounted for with the changes in
fair value of the derivatives, together with the changes in fair value of the
hedged assets or liabilities that are attributable to the hedged risk, recorded
through the profit and loss account.

- cash flow hedge, a hedge against the cash flows attributable to recognised
assets or liabilities or forecast transactions. This is accounted for with
changes in the fair value of the derivatives initially through equity, and
subsequently released into the profit and loss account in line with the
recognition of income or expense of the assets or liabilities being hedged.

Derivatives financial instruments held for trading and those that do not qualify
for hedge accounting, will be accounted for with changes in fair value reported
through the profit and loss account.

Financial assets

In prior years, all financial assets were carried at cost or amortised cost, net
of impairment provisions, except for securities held for trading purposes and
long-term equity investments which were held at fair value. Gains and losses
from change in fair value were recognised in the profit and loss account in
respect of securities held for trading, and in equity in respect of long-term
equity investments.

On adoption of HKAS 39, financial assets are recognised based on the following
classifications:

Loans and advances

Loans and advances not intended for trading are carried at amortised cost taking
into account the unamortised portion of fees and costs less impairment allowances.

Held to maturity

Debt securities with fixed maturities that management has the positive intention
and ability to hold to maturity are carried at amortised cost.

Available for sale

Available-for-sale investments including treasury bills, certificates of
deposits, other debt securities and equities intended to be held for an
indefinite period of time but which may be sold in response to needs for
liquidity or changes in market environment are carried at fair value. Gains and
losses from changes in fair value are recognised in equity until the financial
asset is derecognised or impaired, at which time the cumulative gain or loss
previously recognised in equity will be transferred to the profit and loss
account.

Trading securities

Treasury bills, debt securities, equity shares which have been acquired or
incurred principally for the purpose of selling or repurchasing in the near term
are classified as trading securities. Trading securities are recognised at fair
value and transaction costs are taken to the profit and loss account. The
changes in fair value are recognised as 'trading income' in the profit and loss
account.

Financial assets designated as at fair value through profit or loss

A financial instrument is classified in this category if it meets the criteria
set out below, and is so designated by management. The group designates
financial instruments at fair value because the designation:

- eliminates or significantly reduces a measurement or recognition inconsistency
that would otherwise arise from measuring assets or liabilities or recognising
the gains and losses on them on different bases; or

- applies to a group of financial assets, financial liabilities or both that is
managed and its performance evaluated on a fair value basis, in accordance with
the group's documented risk management or investment strategy, and where 
information about the group is provided internally on that basis to the group's 
key management personnel; or

- relates to financial instruments containing one or more embedded derivatives
which significantly modify the cash flows resulting from the financial instruments,
and which would otherwise require separate accounting.

Financial assets so designated are recognised initially at fair value and
transaction costs taken directly to the profit and loss account. Regular way
purchases of financial assets are accounted for at trade date.

The changes in fair value are recognised as 'Net income on fair value through
profit or loss' in the profit and loss account.

Impairment of financial assets

Loans and advances

In prior years, provisions for bad and doubtful debts were classified into
specific and general provisions. Specific provisions on loans were assessed
individually or, for small homogeneous loans, on a portfolio basis. General
provisions were assessed on loans which were not identified as impaired
individually. The assessment methodologies were in line with the requirements of
HKAS 39 as set out below.

On adoption of HKAS 39, impairment allowances are made on a loan when there is
objective evidence of impairment as a result of the occurrence of certain loss
events (as listed below) that will impact on the estimated future cash flows of
the loan. Impairment loss is assessed either individually for individually
significant loans, or collectively for loan portfolios with similar credit risk
characteristics.

Loss events include:

(i) significant financial difficulty of the issuer or obligor;

(ii) a breach of contract, such as a default or delinquency in interest or
principal payments;

(iii) the group granting to the borrower, for economic or legal reasons relating
to the borrower's financial difficulty, a concession that the lender would not
otherwise consider;

(iv) it becoming probable that the borrower will enter bankruptcy or other
financial reorganisation;

(v) the disappearance of an active market for that financial asset because of
financial difficulties; or

(vi) observable data indicating that there is a measurable decrease in the
estimated future cash flows from a group of financial assets since the initial
recognition of those assets, although the decrease cannot yet be identified with
the individual financial assets in the group, including:
- adverse changes in the payment status of borrowers in the group; or
- national or local economic conditions that correlate with defaults on the
assets in the group.

Impairment loss of an individually assessed loan is measured as the difference
between the carrying value and the present value of estimated future cash flows
discounted at the original effective interest rate of the individual loan.

For the purpose of collective assessment of impairment, loans are grouped on the
basis of similar credit risk characteristics relevant to the estimation of
future cash flows. Portfolios of small homogeneous loans are collectively
assessed using roll rate or historical loss rate methodologies. Loans which have
been assessed individually and determined to have no objective evidence of
impairment are grouped by similar credit characteristics and collectively
assessed based on historical loss experience of each type of loan and
management judgement of the current economic and credit environment.

Other financial assets

In prior years, financial assets, other than loans and advances, were reviewed
on each balance sheet date to determine whether there was any indication of
impairment. If the recoverable amount of the asset was estimated to be less than
its carrying amount, the carrying amount of the asset was reduced to its
recoverable amount and the impairment loss was recognised in the profit and loss
account. For investment securities carried at fair value through equity, any
loss previously recognised in equity was transferred to the profit and loss
account.

On adoption of HKAS 39, held-to-maturity investments and available-for-sale
financial assets are assessed for objective evidence of impairment at each
balance sheet date. Impairment loss for held-to-maturity investments is
recognised through the profit and loss account. When an available-for-sale
financial asset is determined to be impaired, the cumulative loss previously
recognised in equity will be transferred to the profit and loss account.

Financial liabilities

In prior years, all financial liabilities except trading securities short
positions were carried at cost or amortised cost. Trading securities short
positions were carried at fair value and any gains and losses from changes in
fair value were recognised through the profit and loss account.

On adoption of HKAS 39, the group's financial liabilities are recognised based
on the following classifications:

Trading liabilities

Trading liabilities, include trading securities short positions, customer
deposits and debt securities-in-issue for market risks trading and the embedded
derivatives, are carried at fair value. Gains and losses from change in fair
value are recognised through the profit and loss account.

Financial liabilities designated as at fair value through profit or loss

Financial liabilities designated as at fair value through profit or loss,
including own debt securities in issue, are designated as such at inception
usually together with the related assets or derivatives for economic hedge. The
classification criteria of financial liabilities designated as at fair value
through profit or loss are set out above under the caption of 'Financial assets
designated as at fair value through profit or loss'.

Gains and losses from the changes in fair value are recognised as 'Net income
from financial instruments designated as at fair value' through the profit and 
loss account.

Deposits, securities in issue and other liabilities

Deposits and debt securities in issue, other than those designated as trading
liabilities or at fair value, and other financial liabilities, are carried at
amortised cost.

Valuation of securities and derivatives

The fair value of financial instruments is based on their quoted market prices
at the balance sheet date without any deduction for estimated future selling
costs. Financial assets are priced at current bid prices, while financial
liabilities are priced at current asking prices.

If a quoted market price is not available on a recognised stock exchange or from
a broker / dealer for non-exchange-traded financial instruments, the fair value
of the instrument is estimated using valuation techniques, including use of
recent arm's length market transactions, reference to the current fair value of
another instrument that is substantially the same, discounted cash flow
techniques, option pricing models or any other valuation technique that provides
a reliable estimate of prices obtained in actual market transactions.

Where discounted cash flow techniques are used, estimated future cash flows are
based on management's best estimates, and the discount rate used is a market
rate at the balance sheet date applicable for an instrument with similar terms
and conditions. Where other pricing models are used, inputs are based on market
data at the balance sheet date. Fair values for unquoted equity investments are
estimated, if possible, using applicable price/earnings ratios for similar
listed companies adjusted to reflect the specific circumstances of the issuer.

When valuing instruments on a model basis using the fair value of underlying
components, management additionally considers the need for adjustments to take
account of counterparty creditworthiness, model uncertainty and the future costs
of servicing the portfolio based on defined policies.

For derivatives where market observable data is not available, the initial
increase in fair value indicated by the valuation model, but based on
unobservable inputs, is not realised immediately in the profit and loss
accounts. This amount is held back and recognised over the life of the
transaction where appropriate, or released to the profit and loss account when
the inputs become observable, or, when the transaction matures or is closed out.

Investments in other unlisted open-ended investment funds are recorded at the
net asset value per share as reported by the managers of such funds.

The change in accounting policies on adoption of HKAS 39 is applied with effect
from 1 January 2005. The opening balance sheet has been restated with net
increases in total assets of HK$1,168 million, retained profits of HK$534
million, equity reserves of HK$532 million, and other liabilities of HK$116
million and reduction in minority interests of HK$14 million. The relevant
financial assets and liabilities are re-classified to suit the new definition
and requirements of the accounting standard and disclosure requirements.

HKAS 40: Investment Property ('HKAS 40')
HKAS 12: Income Taxes - HKAS Interpretation 21

In prior years, investment properties were carried at valuation assessed by
professional valuers on the basis of open market value. Surpluses arising on
revaluation on a portfolio basis were credited to the investment properties
revaluation reserve. Deficits arising on revaluation on a portfolio basis were
firstly set off against any previous revaluation surpluses and thereafter taken
to the profit and loss account. No deferred tax was provided on revaluation
surplus.

On adoption of HKAS 40, investment properties are carried at fair value with the
changes in fair value reported directly in the profit and loss account. Deferred
tax is provided on revaluation surplus of investment properties in accordance
with HKAS Int 21 on HKAS 12.

The change in accounting policy was reflected by way of prior year adjustment,
and as permitted by HKAS 40, no restatement of comparative figures of 2004 was
made. At 31 December 2004, the balance of investment revaluation surplus
reserves of HK$3,283 million, after deducting deferred tax of HK$574 million,
was transferred to retained profit. Revaluation gain for the first half of 2005
was HK$729 million and the related deferred tax amounted to HK$127 million.

2. Restatement of profit and loss accounts and balance sheets

The following are shown as exhibits to the Financial Review section of this news
release:

- the profit and loss accounts for the first and second halves of 2004 and the
balance sheets at 30 June 2004 and 31 December 2004 as previously reported and
as restated showing the effects of the adoption of the aforesaid new and revised
HKFRSs and Interpretations (except HKAS 39 and HKFRS 4) on the individual
account items - Appendices 1 to 4.

- restatement of the opening balance sheet at 1 January 2005 showing the effects
of the adoption of HKAS 39 and HKFRS 4 - Appendix 5.

3. Comparative figures

Certain comparative figures have been reclassified to conform with current
period's presentation.

4. Property revaluation

A revaluation of the group's premises and investment properties was performed in
June 2005 to reflect property market movements in the first half of 2005. The
valuation was conducted by DTZ Debenham Tie Leung Limited, an independent
professional valuer, and carried out by qualified persons who are members of the
Hong Kong Institute of Surveyors. The basis of the valuation of premises and
investment properties was open market value. The revaluation surplus for bank
premises amounted to HK$918 million of which HK$148 million was a reversal of
revaluation deficits previously charged to the profit and loss account. The balance
of HK$770 million was credited to the premises revaluation reserve. Revaluation
gains on investment properties of HK$729 million were recognised through the
profit and loss account on adoption of HKAS 40. The related deferred tax
provision of bank premises and investment properties were HK$160 million and
HK$127 million respectively.

5. 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 the group. The
group'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.

The group 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 actions to ensure
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. In line with the HSBC Group,
the bank refined its basis of calculating VAR from one predominantly based on
variance/co-variance ('VCV') to one predominantly based on historical simulation
('HS') effective 3 May 2005. This latter calculation was introduced because it
better captures the non-linear characteristics of certain market risk positions.
HS uses scenarios derived from historical market rates, and takes account of the
relationships between different markets and rates, for example, interest rates
and foreign exchange rates. Movements in market prices are calculated by
reference to market data from 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.

The group has obtained approval from the Hong Kong Monetary Authority (HKMA) to
change the VAR model from VCV to HS for calculating market risk in capital
adequacy reporting and the HKMA has expressed itself satisfied with the group's
market risk management process.

The group's VAR for all interest rate risk and foreign exchange risk positions
and on individual risk portfolios during the first halves of 2005 and 2004 are
shown in the tables below. The VAR figures for the first half of 2005 are based
on four months' VCV and two months' HS.

VAR
                                                    Minimum   Maximum   Average
                                                     during    during       for
                                                        the       the       the
Figures in HK$m                        At 30Jun05    period    period    period

VAR for all interest rate risk 
  and foreign exchange risk                   614       389       836       647
VAR for foreign exchange
  risk (trading)                                7         1        10         4
VAR for interest rate risk
- trading                                       4         4        67        19
- banking                                     613       387       825       635

                                                    Minimum   Maximum   Average
                                                     during    during       for
                                                        the       the       the
Figures in HK$m                        At 30Jun04    period    period    period

VAR for all interest rate risk
  and foreign exchange risk                   349       250       607       387
VAR for foreign exchange 
  risk (trading)                               37        35        58        43
VAR for interest rate risk
- trading                                       4         1         8         4
- banking                                     348       245       605       386

The average daily revenue earned from market risk-related treasury activities
for the first half of 2005 was HK$7 million (HK$10 million for the first half of
2004). The standard deviation of these daily revenues was HK$5 million (HK$5
million for the first half of 2004). An analysis of the frequency distribution
of daily revenues shows that out of 121 trading days in the first half of 2005,
losses were recorded on six days and the maximum daily loss was HK$4 million.
The most frequent result was a daily revenue of between HK$4 million and HK$8
million, with 46 occurrences. The highest daily revenue was HK$23 million.

The group's foreign exchange exposures mainly comprise foreign exchange dealing
by Treasury and currency exposures originated by its banking business. The
latter are transferred to Treasury where they are centrally managed within
foreign exchange position limits approved by the Board of Directors. The average
one-day foreign exchange profit for the first half of 2005 was HK$2 million
(HK$4 million for the first half of 2004).

Interest rate risk, which arises in both Treasury trading and non-trading
portfolios and the banking books, is centrally managed by Treasury under limits
approved by the Board of Directors. The average daily revenue earned from
Treasury-related interest rate activities for the first half of 2005 was HK$5
million (HK$6 million for the first half of 2004).

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 6, are managed by the Asset and Liability Management Committee.

6. Foreign currency positions

Foreign currency exposures include those arising from dealing, non-dealing and
structural positions. At 30 June 2005, the US dollar (US$) was the only currency
in which the group had a non-structural foreign currency position which exceeded
10 per cent of the total net position in all foreign currencies.

Figures in HK$m                  At 30Jun05               At 30Jun04              At 31Dec04
                             US$        RMB           US$        RMB          US$        RMB
Non-structural position
Spot assets              188,701      4,665       166,456      1,534      173,071      2,664
Spot liabilities        (177,851)    (4,526)     (161,751)    (1,415)    (171,698)    (2,400)
Forward purchases         61,568        384        41,452        836       68,726        207
Forward sales            (71,173)      (380)      (34,390)      (835)     (69,795)      (192)
Net options positions         (4)         -            (2)         -          (37)         -
Net long non-structural
  position                 1,241        143        11,765        120          267        279

At 30 June 2005, the group's major structural foreign currency positions were US
dollar and renminbi.

                               At 30Jun05              At 30Jun04              At 31Dec04
                                     % of                    % of                    % of
                                total net               total net               total net
                               structural              structural              structural
                        HK$m     position      HK$m      position      HK$m      position

Structural position
US dollar              1,037         33.0       852          29.7       850          28.8
Renminbi               1,997         63.6     1,910          66.6     1,998          67.6

7. Material related-party transactions

(a) Immediate holding company and fellow subsidiary companies

During the first half of 2005, the group 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. The group participated, in its ordinary course of business, in
certain structured finance deals arranged by its immediate holding company.

The group used the information technology 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. The group also
maintained a staff retirement benefit scheme for which a fellow subsidiary
company acted 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.
In the normal course of business, the immediate holding company acted as lead
manager and bookrunner for the bank in an offering of subordinated notes. The
fees paid on this transaction were in line with remuneration for similar
transactions in the market.

The aggregate amount of income and expenses arising from these transactions
during the period, the balances of amounts due to and from the relevant related
parties, and the total contract sum of off-balance-sheet transactions at
period-end are as follows:

Income and expenses for the period
                        Half-year ended     Half-year ended     Half-year ended
Figures in HK$m                 30Jun05             30Jun04             31Dec04

Interest income                      76                  72                  56
Interest expenses                   130                  22                  69
Other operating income               58                  92                  34
Operating expenses                  314                 300                 357

Balances at period-end

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


Total amount due from             7,301               6,615               5,595
Total amount due to              10,852               7,533               3,931

Interest rate and exchange rate contracts
                                                   Credit      Risk-
                                    Contract   equivalent   weighted
Figures in HK$m                       amount       amount     amount

30 June 2005                          47,428          448         90
31 December 2004                      34,622          485         97
30 June 2004                          44,887          544        109

(b) Associated companies

The group maintained an interest-free shareholders' loan to an associated
company. The balance at 30 June 2005 was HK$233 million (HK$233 million at 30
June 2004 and HK$233 million at 31 December 2004).

(c) Ultimate holding company

For the first half of 2005, no transactions were conducted with the bank's
ultimate holding company (same as 2004).

(d) Key management personnel

For the first half of 2005, no material transaction was conducted with key
management personnel of the group and its holding companies and parties related
to them (same as 2004).

8. Statutory accounts

The information in this news release does not constitute statutory accounts.

The statutory accounts for the year ended 31 December 2004 have been delivered
to the Registrar of Companies and the Hong Kong Monetary Authority. The auditors
expressed an unqualified opinion on those statutory accounts in their report
dated 28 February 2005. The Annual Report and Accounts for the year ended 31
December 2004, which includes the statutory accounts, can be obtained on request
from Legal and Company Secretarial Services Department, Level 10, 83 Des Voeux 
Road Central, Hong Kong; or from Hang Seng Bank's website http://www.hangseng.com.

9. Ultimate holding company

Hang Seng Bank is an indirectly-held, 62.14 per cent-owned subsidiary of HSBC
Holdings plc.

10. Statement of compliance

This news release has been prepared in accordance with Hong Kong Accounting
Standard 34 'Interim Financial Reporting'. It also complies with the module on
'Interim Financial Disclosure by Locally Incorporated Authorised Institutions'
under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority.

11. Register of Shareholders

The Register of Shareholders of Hang Seng Bank will be closed on Wednesday, 24
August 2005, during which no transfer of shares can be registered. In order to
qualify for the second interim dividend, all transfers, accompanied by the
relevant share certificates, must be lodged with the bank's Registrars,
Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor,
Hopewell Centre, 83 Queen's Road East, Wanchai, Hong Kong, for registration not
later than 4:00 pm on Tuesday, 23 August 2005. The second interim dividend will
be payable on Thursday, 1 September 2005 to shareholders on the Register of
Shareholders of the bank on Wednesday, 24 August 2005.

12. Proposed timetable for the remaining quarterly dividends for 2005

                                       Third                    Fourth
                            interim dividend          interim dividend

Announcement                 7 November 2005              6 March 2006
Book close date             21 December 2005             21 March 2006
Payment date                  4 January 2006             31 March 2006

13. News release

Copies of this news release may be obtained from 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 2005 Interim Report and Accounts will be available from the same website on
Monday, 1 August 2005 and will also be published on the website of The Stock
Exchange of Hong Kong Limited in due course. Printed copies of the 2005 Interim
Report will be sent to shareholders in late August 2005.








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