Hang Seng Bank Interims Pt.1

HSBC Holdings PLC
6 August 2001



PART 1

                            HANG SENG BANK LIMITED

                      2001 INTERIM RESULTS - HIGHLIGHTS

* Operating profit before provisions up 0.1 per cent to HK$5,967 million
(HK$5,964 million for the first half of 2000).

* Pre-tax profit up 1.3 per cent to HK$6,183 million (HK$6,104 million for the
first half of 2000).

* Attributable profit up 3.5 per cent to HK$5,375 million (HK$5,195 million
for the first half of 2000).

* Return on average shareholders' funds of 24.4 per cent (24.2 per cent for
the first half of 2000).

* Total assets fell by 3.6 per cent to HK$482.6 billion (HK$500.8 billion at
31 December 2000).

* Earnings per share up 3.3 per cent to HK$2.81 (HK$2.72 per share for the
first half of 2000).

* First interim dividend per share up 5.0 per cent to HK$2.10 (HK$2.00 per
share for the first half of 2000).

* Total capital ratio of 15.8 per cent (15.3 per cent at 31 December 2000);
tier 1 capital ratio of 12.6 per cent (11.9 per cent at 31 December 2000).

* Cost:income ratio of 23.8 per cent (22.6 per cent for the first half of
2000).

Hang Seng Bank attributable profit up 3.5 per cent to HK$5,375 million

Hang Seng Bank Limited (the bank) and its subsidiary companies (Hang Seng)
reported an unaudited profit attributable to shareholders of HK$5,375 million
for the first half of 2001, an increase of 3.5 per cent over the same period
last year and a rise of 11.5 per cent compared with the second half of 2000.

Operating profit before provisions was in line with the same period last year,
with an increase in operating income offsetting higher operating expenses.
Operating profit increased by 1.1 per cent to HK$5,946 million as a result of
a substantial reduction in the net charge for provisions for bad and doubtful
debts. Profit before tax amounted to HK$6,183 million, which was HK$79
million, or 1.3 per cent, higher than the first half of 2000, after taking
account of increased profits on disposal of debt securities and locally-listed
equities. Compared with the second half of 2000, operating profit before
provisions and profit before tax rose by 7.0 per cent and 11.0 per cent
respectively.

Total assets decreased by HK$18.2 billion, or 3.6 per cent, to HK$482.6
billion, compared with HK$500.8 billion at 31 December 2000. Advances to
customers recorded a modest growth of 1.0 per cent during the first half of
2001 but interbank placings decreased. The reduction in the balance sheet size
reflected a lower level of customer deposits, which fell by 3.3 per cent
during the period.

Shareholders' funds (excluding proposed dividends) grew by HK$584 million to
HK$41,168 million at 30 June 2001. This was due to an increase of HK$1,430
million in retained profits and a reduction of HK$776 million in the long-term
equity investment revaluation reserve due to the realisation on disposals and
the fall in fair value of long-term equities. Following the adoption of the
revised Hong Kong Statement of Standard Accounting Practice 9 (HKSSAP 9),
dividends proposed after the balance sheet date are reported as a separate
component of shareholders' funds instead of being recognised as a liability.
Shareholders' funds and return on average shareholders' funds at 30 June 2000
and 31 December 2000 have been restated to reflect the change in accounting
policy.


The return on average total assets was 2.2 per cent (2.3 per cent for the
first half of 2000). The return on average shareholders' funds was 24.4 per
cent, compared with 24.2 per cent for the first half of 2000.

The advances to deposits ratio rose to 52.9 per cent at 30 June 2001 from 50.6
per cent at 31 December 2000, the combined effect of a small growth in
customer advances and a reduction in customer deposits during the first half
of 2001. Hang Seng continued to maintain a strong liquidity position, with the
average liquidity ratio for the first half of 2001 (calculated in accordance
with the Fourth Schedule of the Banking Ordinance) rising to 46.0 per cent
(41.4 per cent for the first half of 2000).

The total capital ratio at 30 June 2001 was 15.8 per cent (15.3 per cent at 31
December 2000) and the tier 1 capital ratio was 12.6 per cent (11.9 per cent
at 31 December 2000).

Earnings per share of HK$2.81 were 3.3 per cent higher than in the first half
of 2000. The Directors have declared a first interim dividend of HK$2.10 per
share (HK$2.00 per share for the first half of 2000), which will be payable on
Tuesday, 4 September 2001 to shareholders on the Register of Shareholders on
Tuesday, 28 August 2001. The dividend as declared should not be taken as an
indication of the level of profit or dividend for the full year.

Comment by David Eldon, Chairman

'The slowing of the world's major economies in the first half of the year
affected Hong Kong's economic growth. Loan demand remained weak and the money
markets highly liquid. In this lacklustre operating environment, Hang Seng's
performance was respectable with a 3.5 per cent increase in attributable
profit to HK$5,375 million, compared with the same period last year.

'The uncertain outlook for the US economy affects prospects for the second
half of the year. The business environment for banks remains difficult, marked
by intense competition, high liquidity, subdued loan demand and narrowing
margins.

'However, Hang Seng's continued focus on value-creating businesses and total
customer relationship positions it well to meet the challenges following the
full deregulation of interest rates.'

Contents

The financial information in this news release is based on the unaudited
consolidated accounts of Hang Seng Bank Limited and its subsidiary companies
for the six months ended 30 June 2001.

Highlights of Results and Chairman's Comment

Contents

Consolidated Profit and Loss Account (Unaudited)

Consolidated Balance Sheet (Unaudited)

Consolidated Statement of Recognised Gains and Losses (Unaudited)

Reconciliation of Movements in Consolidated Shareholders' Funds (Unaudited)

Economic Profit (Unaudited)

Consolidated Cash Flow Statement (Unaudited)

Financial Review

Net interest income

Other operating income

Operating expenses

Provisions for bad and doubtful debts

Profit on tangible fixed assets and long-term investments

Taxation

Earnings per share

Dividends per share

Cash and short-term funds

Placings with banks maturing after one month

Advances to customers

Provisions against advances to customers

Non-performing advances to customers and provisions

Overdue advances to customers

Rescheduled advances to customers

Segmental analysis of advances to customers by geographical area

Gross advances to customers by industry sector

Long-term investments

Other assets

Current, savings and other deposit accounts

Shareholders' funds

Capital resources management

Liquidity ratio

Reconciliation of cash flow statement

Contingent liabilities, commitments and derivatives

Segmental analysis

Additional Information

Accounting policies

Comparative figures

Market risk

Foreign currency position

Material related-party transactions

Statutory accounts

Ultimate holding company

Statement of compliance

Register of shareholders

News release

Consolidated Profit and Loss Account (Unaudited)
                     Half-year            Half-year            Half-year
                         ended                ended                ended
Figures in HK$m        30Jun01              30Jun00              31Dec00

Interest income         14,430               15,047               16,866
Interest                (8,528)              (9,164)             (11,058)
expense
Net interest             5,902                5,883                5,808
income
Other operating          1,931                1,820                1,754
income
Operating                7,833                7,703                7,562
income
Operating               (1,866)              (1,739)              (1,986)
expenses
Operating                5,967                5,964                5,576
profit before
provisions
Provisions for
bad
 and doubtful              (21)                 (83)                (113)
debts
Operating                5,946                5,881                5,463
profit
Profit on
tangible fixed
assets and
 long-term                 212                  196                   52
investments
Net surplus on
property
 revaluation                __                   __                   28
Share of
profits of
associated
 companies                  25                   27                   28
Profit on
ordinary
activities
 before tax              6,183                6,104                5,571
Tax on profit
on ordinary
 activities               (808)                (909)                (752)
Profit                   5,375                5,195                4,819
attributable to
shareholders
Retained
profits at
beginning
 of period              18,732               17,729               19,154
Transfer of
depreciation
 to premises
revaluation
 reserve                    50                   52                   47
Realisation on
disposal of
 premises and
investment
 properties                 20                    3                   66
Exchange                    __                   (1)                  (1)
adjustments
Proposed                (4,015)              (3,824)              (5,353)
dividends
Retained                20,162               19,154               18,732
profits at end
of period

Figures in HK$

Earnings per              2.81                 2.72                 2.52
share
Dividends per             2.10                 2.00                 2.80
share

Consolidated Balance Sheet (Unaudited)
Figures in HK$m              At 30Jun01          At 30Jun00           At 31Dec00

Assets
Cash and short-term funds       118,172             120,682             129,312
Placings with banks
maturing after
 one month                       49,665              70,360              58,405
Certificates of deposit          19,407              15,017              17,232
Securities held for               2,837                 680               4,499
dealing purposes
Advances to customers           219,750             211,412             217,518
Amounts due from
immediate holding
 company and fellow               7,641              10,129              10,383
subsidiary companies
Long-term investments            40,963              28,355             39,270
Investments in associated           808                 683                789
companies
Tangible fixed assets            11,916              11,676             12,049
Other assets                     11,458               7,998             11,327
                                482,617             476,992            500,784


Liabilities
Current, savings and            415,484             411,541            429,605
other deposit accounts
Deposits from banks               4,050               6,563              3,802
Amounts due to immediate
holding
 company and fellow               1,098               1,822              1,999
subsidiary companies
Other liabilities                16,802              13,364             19,441
                                437,434             433,290            454,847

Capital resources
Share capital                     9,559               9,559              9,559
Reserves                         31,609              30,319             31,025
Proposed dividends                4,015               3,824              5,353
Shareholders' funds              45,183              43,702             45,937
                                482,617             476,992            500,784


Consolidated statement of recognised gains and losses (unaudited)
                      Half-year            Half-year            Half-year
                          ended                ended                ended
Figures in HK$m         30Jun01              30Jun00              31Dec00

Profit
attributable to
 shareholders             5,375                5,195                4,819
Unrealised
surplus on
 revaluation of              __                   __                  511
premises
Unrealised
surplus on
 revaluation of
investment
 properties
- Bank and
subsidiary
 companies                   __                   __                   73
- Associated                 __                   __                   98
company
Long-term equity
investment
 revaluation
reserve
- Unrealised
(deficit)/
surplus
 on revaluation            (612)                (870)                 611
- Realisation on           (164)                (196)                 (52)
disposal
Exchange                     __                   (1)                  (1)
adjustments
Recognised gains
for
the period                4,599                4,128                6,059

Reconciliation of movements in consolidated shareholders' funds (unaudited)
Figures in HK$m            At 30Jun01        At 30Jun00        At 31Dec00

Shareholders' funds at
beginning
 of period
- As previously reported        40,584             39,574             39,878
- Change in accounting
 policy in respect
 of dividends                    5,353              4,780              3,824
- As restated                   45,937             44,354             43,702
Recognised gains for the         4,599              4,128              6,059
period
Dividends paid                  (5,353)            (4,780)            (3,824)
Shareholders' funds at          45,183             43,702             45,937
end of period

Economic profit (unaudited)

Economic profit is calculated from profit after tax, adjusted for non-cash
items, and takes into account the cost of capital invested by Hang Seng's
shareholders. For this purpose, the cost of capital is currently estimated to
be 15.0 per cent.
                    Half-year            Half-year       Half-year ended
                        ended                ended
Figures in            30Jun01              30Jun00               31Dec00
HK$m

Average                30,448               29,723                30,788
invested
capital

Return on               5,423                5,236                 4,832
invested
capital^
Cost of                (2,270)              (2,211)               (2,325)
capital
Economic                3,153                3,025                 2,507
profit

^Return on invested capital represents profit after tax adjusted for
non-cash items.

Consolidated cash flow statement (unaudited)
                               Half-year                 Half-year
                                   ended                     ended
Figures in HK$m                  30Jun01                   30Jun00

Net cash (outflow)/inflow
from
 operating activities             (1,070)                   29,921

Returns on investments and
servicing of finance
Dividends received from an            27                        23
associated company
Dividends paid                    (5,353)                   (4,780)
Income received on                 1,250                       779
long-term investments
Net cash outflow from
returns on
 investments and servicing        (4,076)                   (3,978)
of finance

Taxation paid                       (168)                      (65)

Investing activities
Net cash outflow from
investment in
 an associated company               (25)                       __
Purchase of long-term            (18,991)                  (12,837)
investments
Proceeds from sale or
redemption of
 long-term investments            17,101                    10,426
Purchase of tangible fixed          (105)                      (69)
assets
Proceeds from sale of                 49                         8
tangible fixed assets
Net cash outflow from             (1,971)                   (2,472)
investing activities

(Decrease)/increase in            (7,285 )                  23,406
cash and cash equivalents


Financial Review


Net interest income
                      Half-year            Half-year            Half-year
                          ended                ended                ended
Figures in HK$m         30Jun01              30Jun00              31Dec00

Net interest              5,902                5,883                5,808
income
Average                 461,267              418,774              452,559
interest-earning
assets
Net interest               2.21 %               2.35 %               2.04 %
spread
Net interest               2.58 %               2.83 %               2.55 %
margin

Compared with the first half of 2000, net interest income increased slightly
by HK$19 million, or 0.3 per cent. Average interest-earning assets increased
by HK$42,493 million, or 10.1 per cent, driven by growth in customer deposits.
There was a significant increase in investment securities, and average
advances to customers grew by 7.5 per cent. Net interest margin fell by 25
basis points to 2.58 per cent. Net interest spread narrowed by 14 basis points
to 2.21 per cent compared with the same period last year. The adverse effect
of a further decline in the average yield on the mortgage portfolio and a
narrower spread earned on time deposits outweighed the benefits of growth in
lower cost savings deposits, a higher yield on investment securities and a
wider gap between BLR and HIBOR. The contribution from net free funds
decreased by 11 basis points to 0.37 per cent in a low interest rate
environment.

Compared with the second half of 2000, net interest income improved by HK$94
million, or 1.6 per cent, with a three basis point rise in net interest margin
to 2.58 per cent. Net interest spread widened by 17 basis points to 2.21 per
cent, benefiting from improved spreads on investment securities, growth in
lower cost savings deposits, and higher recoveries of previously suspended
interest, despite a further reduction in the average yield on the mortgage
portfolio. The contribution from net free funds fell by 14 basis points to
0.37 per cent due to lower average interest rates.

Due to the further fall in the pricing of new mortgages and the re-pricing of
existing loans, the average yield of the residential mortgage portfolio,
excluding Government Home Ownership Scheme mortgages and staff loans, fell to
65 basis points below BLR for the first half of 2001, before accounting for
the effect of cash incentive payments. This compared with five basis points
above BLR and 57 basis points below BLR in the first and second halves of last
year respectively.

Other operating income
                Half-year           Half-year ended           Half-year ended
                    ended
Figures in        30Jun01                   30Jun00                   31Dec00
HK$m

Dividend
income
- Listed               51                        50                        44
investments
- Unlisted              6                         2                         2
investments
                       57                        52                        46
Fees and            1,278                     1,200                     1,167
commissions
receivable
Fees and             (154)                     (154)                     (141)
commissions
payable
                    1,124                     1,046                     1,026
Dealing
profits
- Foreign             259                       273                       261
exchange
-
Securities
and other
trading
 activities            __                         3                        (8)
                      259                       276                       253
Rental
income from
investment
 properties           123                       122                       125
Other                 368                       324                       304
                    1,931                     1,820                     1,754


Other operating income rose by HK$111 million, or 6.1 per cent, and
contributed 24.7 per cent of total operating income, 1.1 percentage points
higher than the first half of 2000, reflecting the bank's focus on expanding
fee-based services and wealth management initiatives.

Net fees and commissions rose by HK$78 million, or 7.5 per cent. Insurance,
card services and trade finance income showed improvements and the mandatory
provident fund business began to generate income. Affected by the depressed
stock market, securities broking and related income fell, but fee income from
the sale and management of retail investment funds rose, benefiting from the
successful launch of the Hang Seng Capital Guaranteed Fund Series. Dealing
profits fell by HK$17 million, or 6.2 per cent, mainly attributable to lower
foreign exchange income. Other operating income increased by HK$44 million, or
13.6 per cent.


Operating expenses
                     Half-year            Half-year            Half-year
                         ended                ended                ended
Figures in HK$m        30Jun01              30Jun00              31Dec00

Staff costs
- Salaries and             909                  891                  935
other costs
- Retirement               112                  111                  111
benefit costs
                         1,021                1,002                1,046
Depreciation               189                  191                  197
Premises and
equipment
- Rental                    80                   78                   80
expenses
- Other                    339                  254                  354
                           419                  332                  434
Other operating            237                  214                  309
expenses
                         1,866                1,739                1,986

Cost:income               23.8 %               22.6 %               26.3 %
ratio

Staff numbers            7,425                7,347                7,449
(full-time
equivalent)

Operating expenses increased by HK$127 million, or 7.3 per cent, compared with
the same period last year. Staff costs rose by HK$19 million, or 1.9 per cent,
mainly due to the salary award in the first half of this year. Premises and
equipment expenses increased by HK$87 million, or 26.2 per cent, mainly
reflecting the growth in IT expenditure to support new e-initiatives. Other
operating expenses rose by HK$23 million, or 10.7 per cent, mainly
attributable to an increase in marketing expenditure.

The cost:income ratio increased to 23.8 per cent, compared with 22.6 per cent
for the same period last year.

The number of full-time equivalent (FTE) staff at 30 June 2001 was 7,425, an
increase of 78 compared with a year earlier, but a decrease of 24 compared
with the end of last year. Part of the sales force recruited in 2000 to
promote Mandatory Provident Fund sales was redeployed in the first half of
2001 to support new business initiatives. The reduction in staff number due to
natural attrition in the first half of 2001 was accompanied by enhancement in
productivity through continued streamlining of procedures.

Provisions for bad and doubtful debts

              Half-year ended       Half-year ended       Half-year ended
Figures in            30Jun01               30Jun00               31Dec00
HK$m

Net charge/
(release) for
 bad and
doubtful
 debts
Advances to
customers
Specific
provisions
- New                     576                   461                   527
provisions
- Releases               (461)                 (369)                 (378)
- Recoveries              (94)                  (32)                  (10)
                           21                    60                   139
General                    __                    23                   (26)
provisions
Net charge to
profit and
 loss account              21                    83                   113


The net charge for bad and doubtful debts decreased by HK$62 million, or 74.7
per cent, to HK$21 million compared with the first half of 2000. The net
charge for specific provisions fell by HK$39 million, or 65.0 per cent,
benefiting from a substantial increase in recoveries and releases of specific
provisions from corporate accounts. The increase in new and additional
provisions was mainly for residential mortgages and commercial banking
customers. As the additional general provision of HK$125 million was
transferred to augment general provisions at 31 December 2000, no charge for
general provisions was made against loan growth during the first half of 2001.
In comparison, a charge of HK$23 million for general provisions was made in
the same period last year.

Profit on tangible fixed assets and long-term investments
                Half-year ended       Half-year ended     Half-year ended
Figures in HK$m         30Jun01               30Jun00             31Dec00

Profit on
disposal of
long-term
 equity
investments
- Realisation
of amounts
 previously
recognised in
 revaluation
reserves
 at beginning               181                   298                  53
of period
- Loss arising              (17)                 (102)                 (1)
in current
period
                            164                   196                  52
Profit on
disposal of
long-term
 debt                        49                     2                  __
securities
Net loss on
disposal of
tangible
 fixed assets                (1)                   (2)                 __
                            212                   196                  52


Profit on disposal of tangible fixed assets and long-term investments rose by
HK$16 million, or 8.2 per cent, to HK$212 million compared with the same
period last year, with an increase in profit on disposal of debt securities
from the accrual portfolio and a reduction in profit on the disposal of
locally-listed equities.

Taxation

Taxation in the consolidated profit and loss account represents:
               Half-year ended       Half-year ended      Half-year ended
Figures in             30Jun01               30Jun00              31Dec00
HK$m

Provision for
Hong Kong
 profits tax               802                   904                  793
Taxation                                           1                    1
outside Hong                 2
Kong
Deferred                    __                    __                  (46)
taxation
                           804                   905                  748
Share of
associated
companies'
 taxation                    4                     4                    4
                             

Total charge               808                   909                  752
for taxation

Effective tax             13.1 %                14.9 %               13.5 %
rate


The provision for Hong Kong profits tax was made at 16.0 per cent (the same
rate as for 2000) based on an estimate of the assessable profits for the
half-year ended 30 June 2001. Similarly, taxation provisions for subsidiary
companies and branches outside Hong Kong were made at the appropriate rates of
taxation prevailing in the countries in which they operate.

The effective tax rate fell from 14.9 per cent for the first half of 2000 to
13.1 per cent for the first half of 2001. This was mainly due to the release
of specific provisions made by the Mainland branches, which is not subject to
tax since no relief had been assumed in the previous year, and an increase in
non-taxable capital gains on the disposal of investments.

Earnings per share

The calculation of earnings per share was based on earnings of HK$5,375
million (HK$5,195 million in the first half of 2000) and on the weighted
average number of ordinary shares in issue of 1,911,842,736 shares (unchanged
from the first half of 2000).

Dividends per share
                    Half-year ended       Half-year ended       Half-year ended
                            30Jun01               30Jun00               31Dec00
                          HK$  HK$m             HK$  HK$m             HK$  HK$m
                    per share             per share             per share

First interim            2.10 4,015            2.00 3,824              __    __
Second interim             __    __              __    __            2.80 5,353
                         2.10 4,015            2.00 3,824            2.80 5,353


The calculation of dividends per share for the first half of 2001 is based on
proposed dividends of HK$4,015 million (HK$3,824 million for the first half of
2000) and on 1,911,842,736 shares in issue (unchanged from the first half of
2000).


Cash and short-term funds

Figures in HK$m             At 30Jun01        At 30Jun00        At 31Dec00

Cash in hand and balances
 with banks and other
 financial institutions          3,916             3,221             4,257
Money at call and placings
 with banks maturing
 within one month              104,457           106,067           110,372
Treasury bills                   9,799            11,394            14,683
                               118,172           120,682           129,312





Placings with banks maturing after one month

Figures in HK$m             At 30Jun01         At 30Jun00         At 31Dec00

Remaining maturity:
- Three months or less
 but over one month             34,223             42,674             35,756
- One year or less but          15,442             27,671             22,649
over three months
- Five years or less but
 over one year                     __                  15                __
                                49,665             70,360             58,405


Advances to customers

Figures in HK$m              At 30Jun01        At 30Jun00        At 31Dec00

Gross advances to               223,741           216,190           221,973
customers
Specific provisions              (2,554)           (3,315)           (3,017)
General provisions               (1,437)           (1,463)           (1,438)
                                219,750           211,412           217,518

Included in advances to
customers are:
- Trade bills                     2,085             1,984             1,929
- Provisions for bad and            (44)             (36)               (37)
doubtful debts
                                  2,041            1,948              1,892

Advances to customers (after deduction of interest in suspense and provisions)
recorded a modest growth of HK$2,232 million, or 1.0 per cent, to HK$219.8
billion at 30 June 2001. Given the uncertain economic outlook and subdued
capital investment, loan demand remained weak during the period.

Provisions against advances to customers

                                                                Suspended
Figures in HK$m        Specific       General       Total        interest

At 1 January              3,017         1,438       4,455             801
2001
Amounts written            (578)           __        (578)           (157)
off
Recoveries of
advances
 written off in              94            __          94              __
previous years
Net charge to                21            __          21              __
profit and loss
account
Interest                     __            __          __             175
suspended during
the period
Suspended                    __            __          __             (35)
interest
recovered
Exchange                     __            (1)         (1)             __
adjustments
At 30 June 2001           2,554         1,437       3,991             784

Suspended interest comprises both suspended interest netted against advances
to customers and suspended interest netted against accrued interest receivable
in prepayments and accrued income.

Total provisions as a percentage of gross advances to customers are as
follows:
                               At 30Jun01        At 30Jun00        At 31Dec00
                                        %                 %                 %

Specific provisions                  1.14              1.53              1.36
General provisions                   0.64              0.68              0.65
Total provisions                     1.78              2.21              2.01


Total provisions as a percentage of gross advances fell to 1.78 per cent at 30
June 2001, compared with 2.01 per cent at the end of 2000. Specific provisions
as a percentage of gross advances decreased by 0.22 percentage points to 1.14
per cent, mainly reflecting the write-off of non-performing advances on final
settlement and the upgrading of certain rescheduled advances and doubtful
accounts to performing status. General provisions fell from 0.65 per cent to
0.64 per cent, reflecting the partial utilisation of the additional provision
of HK$125 million which was transferred to the pool of general provisions at
the end of 2000.

Non-performing advances to customers and provisions

Non-performing advances to customers on which interest has been placed in
suspense or on which interest has ceased to accrue are as follows:

                               At 30Jun01        At 30Jun00        At 31Dec00

Gross non-performing advances
on
 which interest
- Has been placed in suspense       6,578             7,343             6,894
- Accrual has ceased                  342               585               867
                                    6,920             7,928             7,761
Suspended interest                   (316)             (321)            (327)
Gross non-performing advances^
 (page 20)                          6,604             7,607             7,434
Specific provisions                (2,554)           (3,315)           (3,017)
Net non-performing advances         4,050             4,292             4,417

Specific provisions as a
 percentage of gross
 non-performing advances^            38.7 %            43.6 %            40.6 %

Gross non-performing advances^
 as a percentage of gross
 advances to customers                3.0 %             3.5 %             3.3 %


^Stated after deduction of interest in suspense.

Non-performing advances to customers are those advances where full repayment
of principal or interest is considered unlikely and are so classified as soon
as such a situation becomes apparent. Thus, non-performing advances may
include advances that are not yet more than three months overdue but are
considered doubtful. Except in certain limited circumstances, all advances on
which principal or interest is more than three months overdue are classified
as non-performing. Specific provisions made in respect of non-performing
advances take into account the value of collateral held.

Gross non-performing advances (after deduction of interest in suspense) fell
by HK$830 million, or 11.2 per cent, compared with the end of 2000. This was
mainly due to amounts written-off against specific provisions on final
settlement and the upgrading of certain rescheduled advances and doubtful
accounts to performing status. The percentage of gross non-performing advances
to total gross advances to customers was 3.0 per cent, a reduction of 0.3
percentage points compared with the end of 2000.

Overdue advances to customers

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

                   At 30Jun01              At 30Jun00              At 31Dec00
             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        861         0.4         865         0.4         854         0.4
months
- One year
or less but
over
 six months 1,455         0.6         862         0.4         762         0.3
- Over one  3,109         1.4       4,253         2.0       3,687         1.7
year
            5,425         2.4       5,980         2.8       5,303         2.4

Overdue
advances to
customers
 (as above) 5,425         2.4       5,980         2.8       5,303         2.4
Less:
overdue
advances
 on which
interest is
still
 being       (655)       (0.3)       (435)       (0.2)       (418)       (0.2)
accrued
Add:
advances
overdue for
 periods of
three
months or
 less, or
which are
not yet
 overdue,
and on
which
 interest
has been
placed:
 in
suspense
- included  1,137         0.5       1,225         0.5       1,576         0.7
in
rescheduled
advances
- other       697         0.4         837         0.4         973         0.4
Gross
non-performing
advances
 (page 19)  6,604         3.0       7,607         3.5       7,434         3.3


^Stated after deduction of interest in suspense.

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 instruction, or when the advances have remained
continuously outside the approved limit advised to the borrower for more than
the overdue period in question.

Rescheduled advances to customers

The amount of rescheduled advances and its expression as a percentage of gross
advances to customers are as follows:

                               At 30Jun01      At 30Jun00           At 31Dec00
                                HK$m    %       HK$m    %       HK$m         %
Rescheduled advances to        2,336  1.0      1,745  0.8      2,756       1.2
customers^

^ Stated after deduction of interest in suspense.

Rescheduled advances are those advances which have been restructured or
renegotiated because of a deterioration in the financial position of the
borrower, or because of the inability of the borrower to meet the original
repayment schedule.

Rescheduled advances to customers are stated net of any advances that have
subsequently become overdue for over three months and are included in overdue
advances to customers (page 19).

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 in
an area which is different from that of the counterparty. At 30 June 2001,
over 90 per cent of Hang Seng's advances to customers and the related
non-performing advances and overdue advances were classified under the area of
Hong Kong (unchanged from positions at 30 June 2000 and 31 December 2000).

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