Hang Seng Bank Ltd 2010 Inter

RNS Number : 3185Q
HSBC Holdings PLC
02 August 2010
 



 

 

 

 

2 August 2010

 

HANG SENG BANK LIMITED

2010 INTERIM RESULTS - HIGHLIGHTS

 

 

·    Attributable profit up 8.4 per cent to HK$6,964 million (HK$6,426 million for the first half of 2009; up 3.8 per cent compared with HK$6,712 million for the second half of 2009).

 

·    Profit before tax up 6.6 per cent to HK$8,103 million (HK$7,599 million for the first half of 2009; up 3.9 per cent compared with HK$7,801 million for the second half of 2009).

 

·    Operating profit up 0.1 per cent to HK$6,697 million (HK$6,687 million for the first half of 2009; up 2.6 per cent compared with HK$6,527 million for the second half of 2009).

 

·    Operating profit excluding loan impairment charges and other credit risk provisions down 6.3 per cent to HK$6,850 million (HK$7,308 million for the first half of 2009; up 2.0 per cent compared with HK$6,718 million for the second half of 2009).

 

·    Return on average shareholders' funds of 22.8 per cent (23.5 per cent for the first half of 2009; 22.4 per cent for the second half of 2009).

 

·    Earnings per share up 8.3 per cent to HK$3.64 per share (HK$3.36 per share for the first half of 2009).

 

·    Second interim dividend of HK$1.10 per share; total dividends of HK$2.20 per share for the first half of 2010 (HK$2.20 per share for the first half of 2009).

 

·    Capital adequacy ratio of 12.9 per cent (16.3 per cent at 31 December 2009); core capital ratio of 11.1 per cent (12.6 per cent at 31 December 2009).

 

·    Cost efficiency ratio of 33.8 per cent (30.9 per cent for the first half of 2009 and 34.4 per cent for the second half of 2009).

 

   Within this document, the Hong Kong Special Administrative Region of the People's Republic of China has been referred to as 'Hong Kong'.

 

 

 

Hang Seng Bank Limited

Contents

 

__________________________________________________________________________________________

 

The financial information in this news release is based on the unaudited consolidated financial statements of Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the group') for the six months ended 30 June 2010.

 

1

Highlights of Results

2

Contents

4

Chairman's Comment

6

Chief Executive's Review

10

Results Summary

14

Customer Group Performance

21

Mainland Business

22

Consolidated Income Statement

23

Consolidated Statement of Comprehensive Income

24

Consolidated Statement of Financial Position

25

Consolidated Statement of Changes in Equity

27

Consolidated Cash Flow Statement

28

Financial Review


28

Net interest income


30

Net fee income


31

Trading income


32

Net income/(loss) from financial instruments designated at fair value


32

Other operating income


33

Analysis of income from wealth management business


35

Loan impairment charges and other credit risk provisions


36

Operating expenses


37

Gains less losses from financial investments and fixed assets


38

Tax expense


39

Earnings per share


39

Dividends per share


39

Segmental analysis


42

Cash and balances with banks and other financial institutions


42

Placings with and advances to banks and other financial institutions


43

Trading assets


44

Financial assets designated at fair value


45

Advances to customers


46

Loan impairment allowances against advances to customers


47

Impaired advances and allowances


48

Overdue advances


49

Rescheduled advances


49

Segmental analysis of advances to customers by geographical area


50

Gross advances to customers by industry sector


52

Financial investments


54

Investments in associates


54

Intangible assets


54

Other assets


55

Current, savings and other deposit accounts


55

Certificates of deposit and other debt securities in issue


56

Trading liabilities


56

Other liabilities


57

Subordinated liabilities


58

Shareholders' funds


59

Capital resources management


60

Liquidity ratio


61

Reconciliation of cash flow statement


62

Contingent liabilities, commitments and derivatives


66

Statutory accounts and accounting policies


66

Comparative figures


67

Property revaluation


67

Foreign currency positions


69

Ultimate holding company


69

Register of shareholders


69

Proposed timetable for the remaining 2010 quarterly dividends


69

Code on corporate governance practices


70

Board of Directors


70

News release

 

 

 

 

Comment by Raymond Ch'ien, Chairman

 

Our efforts to position Hang Seng for long-term growth yielded encouraging results in the first half of 2010. Our trusted brand and comprehensive portfolio of products and services helped us expand our customer base in both Hong Kong and mainland China and increase our income from core customer groups despite competitive operating conditions.

 

We recorded strong growth in fee income, although the persistence of low interest rates continued to constrain interest-based revenues, particularly under Treasury.

 

We enhanced our position as a leader in wealth management by using our excellent time-to-market capabilities to capture the shift in investor preference and by extending our range of corporate wealth management products.

 

As economic conditions improved, we leveraged our strong balance sheet to grow lending to both personal and business customers.

 

Our initiatives to improve service delivery and access for SMEs, together with our active participation in Hong Kong government-organised lending schemes, helped reinforce our reputation as a trusted banking partner for local industry. Close collaboration between our Commercial Banking teams in Hong Kong and on the Mainland and the expansion of our renminbi services are helping us win a greater share of cross-border business.

 

We strengthened our platform for future growth on the Mainland. We expanded our network of outlets and the deposit base and deepened local strategic alliances. We took up our full entitlement under a rights share issue by our Mainland partner, Industrial Bank Co., Ltd. ('Industrial Bank').

 

Financial Performance

 

Profit attributable to shareholders rose to HK$6,964 million - up 8.4 per cent and 3.8 per cent compared with the first and second halves of last year respectively. Earnings per share rose by 8.3 per cent compared with a year earlier to reach HK$3.64.

 

Profit before tax increased to HK$8,103 million - up 6.6 per cent and 3.9 per cent compared with the first and second halves of 2009 respectively.

 

Operating profit excluding loan impairment charges and other credit risk provisions fell by HK$458 million, or 6.3 per cent, to HK$6,850 million compared with the first half of 2009, due mainly to the 7.7 per cent drop in net interest income. Compared with the second half of 2009, operating profit excluding loan impairment charges and other credit risk provisions was up 2.0 per cent.

 

Operating profit increased by 0.1 per cent compared with the first half of last year and 2.6 per cent compared with the second half to reach HK$6,697 million, reflecting improved economic conditions and effective credit risk management.

 

Increases in performance-related pay, marketing to support growth and investment in our Mainland operations resulted in a HK$236 million, or 7.2 per cent, rise in operating expenses to HK$3,504 million. Excluding our Mainland business, operating costs were up 6.1 per cent.

 

Our cost efficiency ratio was 33.8 per cent - compared with 30.9 per cent in the first half of 2009 and 34.4 per cent in the second half.

 

Return on average shareholders' funds was 22.8 per cent, compared with 23.5 per cent and 22.4 per cent for the first and second halves of 2009. Return on average total assets was 1.7 per cent - the same as the first half of last year and up 0.1 percentage point on the second half.

 

At 30 June 2010, our capital adequacy ratio was 12.9 per cent, compared with 16.3 per cent at the end of 2009. This decline was due mainly to our participation in Industrial Bank's rights issue, the repayment of HK$2.5 billion in subordinated debt and the rise in risk-weighted assets. Our core capital ratio was 11.1 per cent, down 1.5 percentage points compared with last year-end.

 

The Directors have declared a second interim dividend of HK$1.10 per share, payable on 1 September 2010. This brings the total distribution for the first half of 2010 to HK$2.20 per share, the same as in the first half of 2009.

 

Outlook

 

The global economy has rebounded from the international financial crisis on the back of large-scale fiscal and monetary stimulus. However, this recovery has been uneven, with solid improvements in key emerging economies but slower progress in many advanced economies.

 

The rebound supported an upswing in exports and GDP growth in both Hong Kong and the Mainland during the first half of 2010. Looking ahead, overseas trade activity will likely grow at a more modest pacein the second half of the year as governments around the world begin to rein in their stimulus programmes. Officials in several major export markets have announced plans to cut spending and implement tax hikes in a bid to restore fiscal discipline and tackle serious challenges such as high levels of sovereign debt.

 

On the Mainland, the domestic sector will remain strong. The authorities are taking steps to curb escalating property prices, but steady income growth and government measures to support private consumption will continue to drive demand. In Hong Kong, improving labour market conditions and rising consumer confidence should help underpin domestic-led growth.

 

Against this backdrop, we will continue to leverage our competitive strengths - including our widely respected brand, strong customer relationships and excellent market knowledge - to enhance our leading position in target areas and capitalise on emerging opportunities to achieve long-term growth for shareholders.

 

 

 

Review by Margaret Leung, Vice-Chairman and Chief Executive

 

Competition intensified in the first half of 2010 as banks sought to capitalise on increased trade flows and an upswing in investment sentiment. Hang Seng's leading market position and fast response to the changing needs of customers proved to be powerful tools in capturing business. We achieved growth in our customer base and income in key segments and we further aligned our operations to support the continued expansion of core revenue drivers.

 

In the low interest rate environment, we took successful steps to further diversify our revenue base - leveraging our strong wealth management capabilities and comprehensive range of cross-border services for commercial customers to increase fee-based income. With excellent growth in investment fund sales revenue, we consolidated our position as a leading fund distributor in Hong Kong.

 

We used our balance sheet strength and good credit risk management to expand lending, gaining market share in the competitive credit card sector. Increases in net interest income from advances and returns on the life insurance investment funds portfolio partly offset the declines in contributions from Treasury's balance sheet management portfolio and deposits.

 

We expanded renminbi services for commercial customers and became the first bank in Hong Kong to establish a renminbi prime rate, underscoring our position as a market leader for cross-border commercial banking and our active support for Hong Kong's development as the centre for offshore renminbi financial services.

 

In Personal e-Banking, we passed the milestone of one million registered customers and we became one of the first banks in Hong Kong to launch an iPhone application for on-the-go investment services.

 

Customer Groups

 

Personal Financial Services achieved a 13.6 per cent increase in profit before tax to HK$3,937 million. Operating profit excluding loan impairment charges grew by 10.2 per cent to HK$3,945 million. Operating profit was up 16.3 per cent at HK$3,843 million.

 

With narrow spreads on mortgage loans and deposits, we redeployed the commercial surplus to expand secured and unsecured lending. Along with improved returns on the life insurance investment funds portfolio, this supported the 4.5 per cent increase in net interest income to HK$4,194 million.

 

Wealth management business was a core driver of growth, with income up 14.6 per cent at HK$2,495 million. Investment income increased by 20.7 per cent. We took steps to capitalise on improved investor confidence - including launching the Hang Seng China A-Share Focus Fund. We achieved a 28-month high in investment fund sales in March and investment fund subscriptions increased five-fold during the first half of 2010 compared with the same period last year. Enhancements to investment service delivery channels contributed to the increases in turnover and the number of accounts for foreign exchange and gold margin trading.

 

Life insurance income grew by 9.5 per cent, with an 8.7 per cent rise in total policies in force and a 13.7 per cent increase in total annualised life insurance premiums.

 

Our strong portfolio of mortgage services supported year-on-year growth of 92.3 per cent in residential mortgage drawdowns. We ranked first for equitable mortgages and second for new mortgage registrations in the second quarter of this year. 

 

A series of effective card utilisation campaigns drove increases in credit card spending, receivables and the card base of 17.8 per cent, 11.8 per cent and 6.1 per cent respectively. We maintained our position as Hong Kong's second-largest issuer of credit cards, with over 1.9 million cards in circulation.

 

Year-on-year, total operating income from secured and unsecured lending was up 28.1 per cent and 16.5 per cent respectively.

 

In February, we were named 'Best Local Private Bank in Hong Kong' in Euromoney's peer-nominated Private Banking Survey 2010.

 

Commercial Banking recorded a 65.1 per cent increase in profit before tax to HK$1,783 million. Operating profit excluding loan impairment charges rose by 31.1 per cent to HK$1,247 million, reflecting broad-based income growth. Operating profit was up 74 per cent at HK$1,197 million, with improvements in the economic environment and good credit risk management resulting in an 81.0 per cent decline in loan impairment charges.

 

Net interest income rose by 20 per cent to HK$1,184 million. We capitalised on the upswing in economic activity during the first half of 2010 to grow lending by 60.9 per cent, supporting an increase in net interest income from advances. Customer deposits rose by 23.9 per cent, but narrowing deposit spreads resulted in a drop in net interest income from deposits.

 

Non-interest income was up 22.0 per cent at HK$850 million. Net fee income grew by 23.9 per cent to HK$649 million, driven mainly by sales of investment and treasury products and a 19.2 per cent increase in trade finance and factoring fee revenue.

 

The strength of our cross-border proposition was an important competitive advantage in growing our Commercial Banking business. A comprehensive range of new renminbi services, closer cooperation between Commercial Banking teams in Hong Kong and on the Mainland, and an expanding network of strategic mainland partners enhanced our service capabilities and coverage.

 

At 30 June 2010, we had over 4,000 cross-border renminbi trade settlement accounts and had facilitated more than RMB4.2 billion in renminbi cross-border trade business.

 

We further developed our corporate wealth management business, offering investment products in line with risk appetite and liquidity needs as well as a broad range of business insurance coverage. Corporate wealth management revenue grew by 37.1 per cent, increasing its contribution to Commercial Banking's total operating income to 15.1 per cent - up from 13.2 per cent in 2009.

 

We improved service access and banking convenience for SME customers by remodelling our Business Banking Centres, extending transaction cut-off times and expanding our Business e-Banking platform. As at 30 June 2010, we had approved about 6,000 loan applications totalling more than HK$16.3 billion under Hong Kong government-initiated SME lending schemes.

 

Corporate Banking's profit before tax rose by 24.7 per cent to HK$560 million. Operating profit excluding loan impairment charges was up 7.5 per cent at HK$556 million, due largely to the 9.9 per cent increase in net interest income. Operating profit grew by 27.6 per cent to HK$555 million, reflecting a 98.8 per cent reduction in loan impairment charges.

 

Assisted by our cross-border services, good industry knowledge and long-term customer relationships, we provided facilities to high-quality borrowers in a competitive environment for lenders, with notable progress in loans to large Mainland enterprises with operations in Hong Kong.

 

Lending to corporate customers grew by 14.2 per cent compared with a year earlier. Customer deposits rose by 61.1 per cent.

 

Treasury recorded profit before tax of HK$1,430 million - down 29.1 per cent due mainly to the 55.0 per cent fall in net interest income. Operating profit excluding credit risk provisions declined by 48.6 per cent to HK$927 million.

 

Low interest rates and ample market liquidity limited good investment opportunities under the balance sheet management portfolio. We maintained our prudent risk management approach while taking steps to defend the interest margin. We capitalised on market opportunities to dispose of selected instruments and invest in high-quality assets. 

 

Initiatives with other customer groups to cross-sell Treasury products saw a more than tripling of income from foreign exchange options and other structured products.

 

Mainland Business

 

Hang Seng Bank (China) Limited ('Hang Seng China') opened two cross-location sub-branches under CEPA VI in the first half of 2010, bringing its total number of outlets to 38 across 13 cities.

 

We enhanced our Commercial Banking capabilities and wealth management offerings and leveraged new and existing strategic alliances. This supported good growth in both the personal and commercial customer bases - which increased by 9 per cent and 11 per cent respectively compared with a year earlier.

 

Customer deposits were up 24.6 per cent on last year-end and 67.4 per cent year on year - improving balance sheet strength. We expanded lending while continuing to emphasise credit quality over loan portfolio size. Advances to customers increased by 13.2 per cent compared with 31 December 2009 and 36.8 per cent compared with 30 June 2009.

 

Hang Seng China's profit before tax recorded encouraging year-on-year growth, with the 16.4 per cent rise in total operating income and a decline in loan impairment charges slightly offset by increased investment in future business expansion.

 

Collaboration with strategic partners, Industrial Bank and Yantai Bank Co., Ltd ('Yantai Bank'), continued to provide business synergy and extend our reach in regions with good economic growth potential.

 

Looking Ahead

 

Improvements in business and investment sentiment on the back of the economic upturn generated new opportunities for business during the first half of 2010.

 

However, the recovery remains fragile - particularly in major advanced economies that provide key export markets for Asia - making the outlook uncertain for Hong Kong's externally orientated economy for the rest of the year. A slowdown in external demand will also affect the Mainland, although robust domestic consumption should help underpin growth, albeit at a more moderate pace than in the first half of the year.

 

In an uncertain economic environment, we will continue to focus on providing excellent service to meet the changing needs of our diverse range of customers.

 

Our time-to-market strengths, comprehensive range of products and extensive distribution network - including mobile and online channels - will support the growth of our wealth management business and drive new customer acquisitions. We will continue to enhance our services in support of key personal customer segments, focusing particularly on Prestige Banking and young people.

 

We will further leverage our strong financial fundamentals to expand secured and unsecured lending while staying vigilant in managing credit risk.

 

Cross-border collaboration will remain central to our strategy to establishing Hang Seng as a leading provider of Greater China Commercial Banking services. We will continue to strengthen our product and service suite to provide comprehensive financial solutions for companies with operations in Hong Kong and on the Mainland. We have enhanced our corporate e-banking platforms to support renminbi account enquiries and transaction instructions and we will capitalise on the recent expansion of the renminbi cross-border trade settlement scheme.

 

Treasury will continue to work closely with other customer groups to support the growth of non-interest based business and explore new opportunities created by the enlarged scope of offshore renminbi financial services.

 

On the Mainland, we will deepen cooperation with existing strategic partners and build new alliances to enhance service delivery, expand product offerings and generate more cross-referral business. Along with brand-building initiatives, this will underpin growth in the customer and deposit bases. In May, we underlined our long-term commitment to this important market with a RMB510 million agreement to purchase a Mainland headquarters premises in Shanghai.

 

We will continue to make good use of our competitive strengths to further develop our core business drivers, reinforce our leadership in key lines, and tap new markets and customer segments in support of long-term growth and increasing value for shareholders.

 

 

Results summary

 

Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the group') reported an unaudited profit attributable to shareholders of HK$6,964 million for the first half of 2010, up 8.4 per cent compared with the first half of 2009. Earnings per share were up 8.3 per cent at HK$3.64. Compared with the second half of 2009, attributable profit rose by 3.8 per cent.

 

- Operating profit excluding loan impairment charges and other credit risk provisions fell by HK$458 million, or 6.3 per cent, to HK$6,850 million. In the low interest rate environment, net interest income was adversely affected by the continuing compression of deposit spreads and the re-pricing of assets at lower rates. Non-interest income registered encouraging growth as Asian economies strengthened and demand for wealth management products in Hong Kong and mainland China increased. While continuing to carefully manage costs, the group made further investments in its business to drive income growth momentum - resulting in a 7.2 per cent increase in operating expenses compared with the same period last year.

 

- Net interest income dropped by HK$562 million, or 7.7 per cent, despite the 7.8 per cent increase in average interest-earning assets. The group achieved good growth in its loan portfolios and lending spreads improved. However, with the persistence of low interest rates, deposit spreads remained constrained and contribution from net free funds fell. Re-pricing of assets at lower rates also had an adverse effect. Net interest margin for the first half of 2010 was 1.77 per cent - down 29 basis points compared with the same period last year. Net interest spread dropped by 27 basis points to 1.72 per cent and the contribution from net free funds declined by 2 basis points to 0.05 per cent. Compared with the second half of 2009, net interest income remained broadly at the same level, reflecting the bank's efforts to support its net interest income base through the expansion of lending.

 

- Net fees and commissions grew across most core business lines and increased by HK$443 million, or 23.0 per cent, to HK$2,369 million. Despite tightened regulatory requirements in Hong Kong, the group's quick response to improved investment sentiment saw income from sales of retail investment funds increase by 117.3 per cent. This achievement was facilitated by the launch of the Hang Seng China A-Share Focus Fund in March 2010 as part of efforts to offer a wide spectrum of funds from both Hang Seng Investment Management and third-party providers. Private banking continued to expand its product range and grew its service fee income by 37.0 per cent, reflecting increased client appetite for trading and investment in structured products. The group enhanced its comprehensive range of health and wealth insurance solutions for all life stages, underpinning a 35.0 per cent increase in insurance agency fee income. The credit card business continued to gain market share in terms of cards in issue, spending and receivables, and achieved strong fee income growth of 12.6 per cent. Benefiting from the rebound of the export market and recovering global demand, income from trade financing and remittance services recorded double-digit growth of 18.5 and 20.8 per cent respectively. There were also increases in fee income from account services and credit facilities as the bank continued to grow affluent personal banking, which increased the customer base and lending opportunities. With the bank registering lower stock market trading turnover and keen price competition, income generated from stockbroking and related services fell by 2.3 per cent.

 

- Trading income was down HK$145 million, or 14.0 per cent, at HK$890 million. Foreign exchange income declined by HK$50 million, or 5.4 per cent, due primarily to the decrease in trading net interest income from funding swaps, although this was partly offset by modest growth in foreign exchange-linked structured products income. Securities, derivatives and other trading income fell by HK$95 million, or 90.5 per cent.

 

- Income from insurance business (included under 'net interest income', 'net fee income', 'net income from financial instruments designated at fair value', 'net earned insurance premiums', and 'movement in present value of in-force insurance business' within 'other operating income', and after deducting 'net insurance claims incurred and movement in policyholders' liabilities) grew by HK$119 million, or 9.5 per cent, to HK$1,370 million. The bank continued to enhance its strong position in providing retirement savings products to customers. Net interest income and fee income from life insurance business grew by 20.1 per cent, attributable mainly to the increase in the size of the life insurance funds investment portfolio, with bond investments the major underlying assets. Investment returns on life insurance funds improved from a loss of HK$133 million in the first half of 2009 to a gain of HK$97 million in the first half of 2010. New annualised life insurance premiums grew modestly compared with same period last year. Movement in present value of in-force insurance business ('PVIF') increased, due mainly to the growth in volume and profitability of new business written in the first half of 2010 as well as increases in natural premiums paid up and maturing policies, which had little impact on PVIF movement in the first half of 2010 but contributed to higher profit release in 2009.

 

- Net operating income before loan impairment charges and other credit risk provisions decreased by HK$222 million, or 2.1 per cent, to HK$10,354 million.

 

- Operating expenses rose by HK$236 million, or 7.2 per cent, compared with the first half of 2009. The group invested in its business to better capture new opportunities arising from the economic recovery and improve its income streams, while continuing to carefully manage costs. Excluding mainland business, operating expenses rose by 6.1 per cent, attributable largely to higher performance-related pay expenses, marketing expenditure and processing recharges. Mainland-related operating expenses increased by 15.3 per cent, reflecting the expansion of the bank's wholly owned mainland banking subsidiary, Hang Seng Bank (China) Limited ('Hang Seng China') , from 36 to 38 outlets as well as an increase in headcount.

 

- Operating profit grew by HK$10 million, or 0.1 per cent, to HK$6,697 million, after accounting for the HK$468 million improvement in loan impairment charges and other credit risk provisions. Compared with the second half of 2009, operating profit was up HK$170 million, or 2.6 per cent.

 

- Profit before tax increased by 6.6 per cent to HK$8,103 million after taking the following items into account:

 

·    a 25.5 per cent (or HK$14 million) rise in gains less losses from financial investments and fixed assets;

·    a 62.8 per cent (or HK$59 million) increase in net surplus on property revaluation; and

·    a 55.2 per cent (or HK$421 million) increase in share of profits from associates, mainly Industrial Bank Co., Ltd. and a property investment company. 

 

Consolidated financial positions and key ratios

 

Total assetsincreased by HK$40.4 billion, or 4.9 per cent, to HK$871.1 billion. Customer advances rose by 14.4 per cent with encouraging growth in corporate and retail lending, mainland loans and trade finance. Benefiting from the robust property market, the bank achieved strong growth in residential mortgages in intensely competitive operating conditions - sustaining a leading position and gaining market share. Customer deposits rose by HK$8.6 billion, or 1.3 per cent, to HK$672.2 billion, with improved investor sentiment tempered by continuing caution in identifying investment opportunities. At 30 June 2010, the advances-to-deposits ratio was 58.6 per cent, compared with 51.9 per cent at the end of December 2009. Treasury continued to take a prudent approach in managing its balance sheet management investments. Surplus funds were redeployed to interbank placements and available-for-sale debt securities to attain yield enhancement in the more stable financial markets. As a result, financial investments rose by 2.4 per cent - primarily in high-quality debt securities, including government-guaranteed debt securities.

 

At 30 June 2010, shareholders' funds (excluding proposed dividends) were HK$62,117 million, an increase of HK$3,602 million, or 6.2 per cent. Retained profits rose by HK$2,722 million, due mainly to the growth in attributable profit (excluding first and second interim dividends) for the first half of 2010. The available-for-sale investments reserve recorded a surplus of HK$48 million, compared with a deficit of HK$257 million at last year-end, reflecting the narrowing of credit spreads as a result of the stabilisation in credit markets.

 

The return on average total assets was 1.7 per cent, compared with 1.7 per cent and 1.6 per cent for the first and second halves of 2009 respectively. The return on average shareholders' funds was 22.8 per cent (23.5 per cent in the first half of 2009 and 22.4 per cent in the second half of 2009).

 

At 30 June 2010, the capital adequacy ratio was 12.9 per cent, down from 16.3 per cent at the end of last year. The core capital ratio was 11.1 per cent, down from 12.6 per cent. The ratios were calculated in accordance with the advanced internal ratings-based approach under the Banking (Capital) Rules issued by the Hong Kong Monetary Authority for the implementation of Basel II. The declines in both the capital adequacy and core capital ratios largely reflect the net effect of the increase in deduction on the capital base as a result of the group's participation in Industrial Bank's rights issue in the first half of 2010, the repayment of HK$2.5 billion in subordinated debt in June 2010, the increase in risk-weighted assets and profit growth after accounting for dividends in the first half of the year. 

 

The bank maintained a strong liquidity position. The average liquidity ratio for the first half of 2010 was 42.0 per cent (calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance), compared with 47.5 per cent for the first half of 2009.

 

The cost efficiency ratio for the first half of 2010 was 33.8 per cent, compared with 30.9 per cent and 34.4 per cent for the first and second halves of 2009 respectively.

 

Dividends

 

The Directors have declared a second interim dividend of HK$1.10 per share, which will be payable on 1 September 2010 to shareholders on the register of shareholders as of 17 August 2010. Together with the first interim dividend, the total distribution for the first half of 2010 will amount to HK$2.20 per share, the same as in the first half of 2009.

 

 

Customer group performance

 

 

Personal









Total


Inter-




 

Financial

Commercial

Corporate






reportable

segment




 

Figures in HK$m

Services


Banking


Banking


Treasury


Other


segments

elimination


Total



















Half-year ended

















30 June 2010


































Net interest income

4,194


1,184


641


609


85


6,713


__


6,713


Net fee income/(expense)

1,585


649


90


(12

)

57


2,369


__


2,369


Trading income/(loss)

249


145


4


506


(14

)

890


__


890


Net income/(loss) from financial





 


 


 




 




 instruments designated at fair





 


 


 




 




 value

148


__


__


(2

)

(14

)

132


__


132


Dividend income

__


__


__


__


4


4


__


4


Net earned insurance premiums

6,232


126


1


__


__


6,359


__


6,359


Other operating income/(loss)

541


9


__


(1

)

313


862


(226

)

636


Total operating income

12,949


2,113


736


1,100


431


17,329


(226

)

17,103


Net insurance claims

















  incurred and movement

















  in policyholders' liabilities

(6,670

)

(79

)

__


__


__


(6,749

)

__


(6,749

)

Net operating income before













 




  loan impairment charges













 




  and other credit risk

















  provisions

6,279


2,034


736


1,100


431


10,580


(226

)

10,354


Loan impairment charges













 




  and other credit risk provisions

(102

)

(50

)

(1

)

__


__


(153

)

__


(153

)

Net operating income

6,177


1,984


735


1,100


431


10,427


(226

)

10,201


Total operating expensesW

(2,334

)

(787

)

(180

)

(173

)

(256

)

(3,730

)

226


(3,504

)

Operating profit

3,843


1,197


555


927


175


6,697


__


6,697


Gains less losses from financial

















  investments and fixed assets

__


__


5


62


2


69


__


69


Net surplus on property

















  revaluation

__


__


__


__


153


153


__


153


Share of profits from associates

94


586


__


441


63


1,184


__


1,184


Profit before tax

3,937


1,783


560


1,430


393


8,103


__


8,103


Share of profit before tax

48.6

%

22.0

%

6.9

%

17.6

%

4.9

%

100.0

%

__


100.0

%



































Operating profit excluding loan

















  impairment charges

















  and other credit risk provisions

3,945


1,247


556


927


175


6,850


__


6,850



















W Depreciation/amortisation

















    included in total operating













 




    expenses

(88

)

(16

)

(3

)

(2

)

(246

)

(355

)

__


(355

)



































At 30 June 2010






























 




Total assets

244,132


128,459


115,306


348,071


35,119


871,087


__


871,087


Total liabilities

546,668


132,261


54,456


37,866


35,616


806,867


__


806,867


Investments in associates

1,049


5,913


__


4,466


2,413


13,841


__


13,841


 

 

 

 

Personal









Total


Inter-




 

Financial

Commercial

Corporate






reportable

segment




 

Figures in HK$m

Services


Banking


Banking


Treasury


Other


segments

elimination


Total



















Half-year ended

















30 June 2009 (restated)


































Net interest income

4,015


987


583


1,353


337


7,275


__


7,275


Net fee income/(expense)

1,294


524


79


(19

)

48


1,926


__


1,926


Trading income/(loss)

317


115


10


616


(23

)

1,035


__


1,035


Net loss from financial





 


 


 




 




 instruments designated at fair





 


 


 




 




 value

(170

)

__


__


(9

)

(16

)

(195

)

__


(195

)

Dividend income

1


__


__


__


4


5


__


5


Net earned insurance premiums

6,549


108


1


__


__


6,658


__


6,658


Other operating income

264


15


1


__


307


587


(237

)

350


Total operating income

12,270


1,749


674


1,941


657


17,291


(237

)

17,054


Net insurance claims

















  incurred and movement

















  in policyholders' liabilities

(6,413

)

(65

)

__


__


__


(6,478

)

__


(6,478

)

Net operating income before













 




  loan impairment charges













 




  and other credit risk

















  provisions

5,857


1,684


674


1,941


657


10,813


(237

)

10,576


Loan impairment charges













 




  and other credit risk provisions

(274

)

(263

)

(82

)

(2

)

__


(621

)

__


(621

)

Net operating income

5,583


1,421


592


1,939


657


10,192


(237

)

9,955


Total operating expenses W

(2,278

)

(733

)

(157

)

(137

)

(200

)

(3,505

)

237


(3,268

)

Operating profit

3,305


688


435


1,802


457


6,687


__


6,687


Gains less losses from financial

















  investments and fixed assets

96


53


14


(95

)

(13

)

55


__


55


Net surplus on property

















  revaluation

__


__


__


__


94


94


__


94


Share of profits from associates

66


339


__


310


48


763


__


763


Profit before tax

3,467


1,080


449


2,017


586


7,599


__


7,599


Share of profit before tax

45.6

%

14.2

%

5.9

%

26.6

%

7.7

%

100.0

%

__


100.0

%



































Operating profit excluding loan

















  impairment charges

















  and other credit risk provisions

3,579


951


517


1,804


457


7,308


__


7,308



















W Depreciation/amortisation

















    included in total operating













 




    expenses

(82

)

(15

)

(4

)

(2

)

(223

)

(326

)

__


(326

)



































At 30 June 2009






























 




Total assets

218,251


84,180


90,115


366,245


35,604


794,395


__


794,395


Total liabilities

542,284


106,419


32,593


27,141


29,128


737,565


__


737,565


Investments in associates

683


3,608


__


2,666


2,372


9,329


__


9,329


 

 

 

 

 

Personal









Total


Inter-




 

Financial

Commercial

Corporate






reportable

segment




 

Figures in HK$m

Services


Banking


Banking


Treasury


Other


segments

elimination


Total



















Half-year ended

















31 December 2009 (restated)


































Net interest income

4,180


1,024


575


809


160


6,748


__


6,748


Net fee income/(expense)

1,706


590


66


(16

)

49


2,395


__


2,395


Trading income/(loss)

345


130


(2

)

438


(23

)

888


__


888


Net income/(loss) from financial





 


 


 




 




 instruments designated at fair





 


 


 




 




 value

116


__


__


14


(10

)

120


__


120


Dividend income

1


6


__


__


4


11


__


11


Net earned insurance premiums

4,744


117


__


__


__


4,861


__


4,861


Other operating income

   634


14


__


__


325


973


(234

)

739


Total operating income

11,726


1,881


639


1,245


505


15,996


(234

)

15,762


Net insurance claims

















  incurred and movement

















  in policyholders' liabilities

(5,455

)

(69

)

(2

)

__


__


(5,526

)

__


(5,526

)

Net operating income before













 




  loan impairment (charges)/













 




  releases and

















  other credit risk provisions

6,271


1,812


637


1,245


505


10,470


(234

)

10,236


Loan impairment (charges)/













 




  releases and







 


 




 




  other credit risk provisions

(180

)

(15

)

4


__


__


(191

)

__


(191

)

Net operating income

6,091


1,797


641


1,245


505


10,279


(234

)

10,045


Total operating expenses W

(2,393

)

(774

)

(175

)

(131

)

(279

)

(3,752

)

234


(3,518

)

Operating profit

3,698


1,023


466


1,114


226


6,527


__


6,527


Gains less losses from financial

















  investments and fixed assets

__


__


__


(57

)

188


131


__


131


Net surplus on property

















  revaluation

__


__


__


__


158


158


__


158


Share of profits from associates

93


534


__


319


39


985


__


985


Profit before tax

3,791


1,557


466


1,376


611


7,801


__


7,801


Share of profit before tax

48.6

%

20.0

%

6.0

%

17.6

%

7.8

%

100.0

%

__


100.0

%



































Operating profit excluding loan

















  impairment charges

















  and other credit risk provisions

3,878


1,038


462


1,114


226


6,718


__


6,718



















W Depreciation/amortisation

















    included in total operating













 




    expenses

(91

)

(16

)

(3

)

(2

)

(237

)

(349

)

__


(349

)



































At 31 December 2009






























 




Total assets

234,723


96,490


88,135


377,561


33,759


830,668


__


830,668


Total liabilities

554,357


123,996


37,477


21,503


31,187


768,520


__


768,520


Investments in associates

847


4,284


__


2,707


2,388


10,226


__


10,226


 

 

 

Personal Financial Services ('PFS') reported a profit before tax of HK$3,937 million, representing growth of 13.6 per cent compared with the same period last year. Operating profit excluding loan impairment charges was up 10.2 per cent at HK$3,945 million. Investment and insurance were the key growth drivers as market sentiment improved during the first half of the year.

 

Despite narrowing spreads on deposits and mortgage loans in the low interest rate environment, net interest income grew to HK$4,194 million - up 4.5 per cent compared with the first half of last year - attributable to the successful deployment of the commercial surplus to achieve growth in secured and unsecured lending portfolios.

 

Riding on the buoyant property market, the bank's residential mortgage business achieved good growth and maintained a leading market position. Despite strong competition among lenders, income from secured lending and residential mortgage drawdowns grew by 28.1 per cent and 92.3 per cent respectively compared with the first half of last year. Hang Seng ranked first for equitable mortgages and second for new mortgage registrations in the second quarter of this year, with a market share of 21.6 per cent and 15.8 per cent respectively in June 2010.

 

Total operating income from unsecured lending was up 16.5 per cent year-on-year. Supported by effective marketing campaigns, the credit card business registered impressive growth and gained market share. The card base grew by 6.1 per cent to exceed 1.9 million, helping the bank maintain its number two position for the credit card business in Hong Kong in terms of cards in issue. Card receivables rose by 11.8 per cent to HK$14.3 billion. The bank outperformed its peers for card spending, which rose by 17.8 per cent compared with the first half of last year to HK$32.4 billion. Hang Seng made an important milestone in launching a Hong Kong dollar China UnionPay (CUP) Credit Card in June 2010, offering cardholders' convenience via the extensive CUP merchant network in Hong Kong, Mainland China and overseas countries. Personal loans were up 31.0 per cent year-on-year, with a total loan balance of HK$4.3 billion.

 

Wealth management income increased by 14.6 per cent to HK$2,495 million. Income from investment rose by 20.7 per cent to HK$1,295 million as the bank capitalised on increased investor appetite with the launch of timely investment products - including the Hang Seng China A-Share Focus Fund and tailor-made structured products - that helped boost sales and turnover. Investment fund subscription in the first half of 2010 increased five-fold year-on-year.

 

Income from insurance grew by 8.6 per cent, as we managed to diversify our product mix to offer a wide range of endowment, protection or investment-linked solutions to cater for customer needs. Total policies in force and total annualised life insurance premiums rose by 8.7 per cent and 13.7 per cent respectively.

 

Personal e-Banking achieved landmark growth with over 1.03 million registered customers - a year-on-year increase of 12.3 per cent. Hang Seng was among the first banks in Hong Kong to launch a customised iPhone application that provides a comprehensive platform for obtaining up-to-date investment information.

 

Commercial Banking ('CMB') reported a strong 65.1 per cent increase in profit before tax to reach HK$1,783 million. CMB's contribution to the bank's total profit before tax increased to 22.0 per cent, up 7.8 percentage points compared with the first half of 2009. Operating profit excluding loan impairment charges rose by 31.1 per cent to HK$1,247 million, driven mainly by growth in net interest income from advances and net fee income. On the back of improving market conditions and a continuing emphasis on good risk management, loan impairment charges fell by 81.0 per cent.

 

CMB capitalised on recovering global demand and the rebound of export markets to grow customer advances by 60.9 per cent, which supported the 37.3 per cent increase in net interest income from lending year-on-year. With an influx of liquidity into the region and continuing investor caution, customer deposits rose by 23.9 per cent year-on-year. Net interest income from deposits decreased by 17.6 per cent, reflecting the adverse effects of the low interest rate environment on deposit spreads.

 

In response to the Elucidation of Supervisory Principles and Operational Arrangements regarding RMB Business in Hong Kong released by Hong Kong Monetary Authority in February, CMB expanded the scope of renminbi banking services offered to commercial customers. In addition to renminbi trade settlement services, the bank established the first renminbi Prime Rate in Hong Kong in March 2010, substantiating Hang Seng's position as a commercial banking leader in the Greater China region and contributing to the development of Hong Kong as the key centre for offshore renminbi banking and financial services. A full suite of renminbi commercial banking products was launched in March, including renminbi commercial finance, renminbi current account, renminbi overdraft and renminbi factoring. By 30 June 2010, more than 4,000 cross-border renminbi trade settlement accounts had been opened, with total turnover from cross-border renminbi trade business routed through the bank amounting to over RMB4.2 billion.

 

To assist commercial customers with cross-border operations, CMB continued to collaborate with China Export and Credit Insurance Corporation (Sinosure), as well as Hang Seng China and our strategic mainland partner Industrial Bank. Strengthening these partnerships has augmented CMB's capacity to offer one-stop commercial banking solutions and capture an increasing share of cross-border business flows.

 

CMB worked to provide competitive corporate wealth management products for its customers, especially those in the top-end segment. Enhanced corporate insurance products were marketed to customers using different selling angles, including as wealth management, investment and funding tools. With the sovereign debt crisis in Europe serving to prolong uncertainty in financial markets, momentum was maintained in investment services business with the up-skilling of the sales force, and a greater emphasis on more defensive investment instruments and treasury hedging solutions. Income derived from corporate wealth management business recorded an encouraging growth of 37.1 per cent, increasing its contribution to CMB's total operating income by 1.9 percentage points compared with 2009 to reach 15.1 per cent.

 

In support of the SME community, Business Banking Centres in prime commercial locations were refurbished to enhance service delivery.

 

The bank continued to be an active player in government-backed SME loan schemes. Since the launch of the SME Loan Guarantee Scheme and Special Loan Guarantee Scheme in late 2008, the bank has approved about 6,000 applications with a total loan amount of more than HK$16.3 billion at 30 June 2010.

 

CMB customers continued to migrate to online and automated banking channels, supported by the expansion of service offerings. At 30 June 2010, over 82,900 customers had registered for the bank's Business e-Banking service - up 16.8 per cent compared with a year earlier. The number of online business banking transactions grew by 18.8 per cent.

 

Corporate Banking ('CIB') capitalised on economic recovery in Hong Kong and on the Mainland to record a 7.5 per cent rise in operating profit excluding loan impairment charges to HK$556 million. Profit before tax was up 24.7 per cent at HK$560 million, due mainly to a 98.8 per cent improvement in loan impairment charges. Improvements in the economic environment combined with low interest rates and the increasing availability of investment opportunities to support increased customer demand for funding. This created new opportunities to expand lending, but intensifying competition among banks to book loan assets drove down margins compared with 2009. With changes in the market environment on the Mainland, CIB put more emphasis on lending in Hong Kong and made good progress in expanding its business among key customer segments, including large mainland-owned companies with operations in Hong Kong. Working closely with colleagues in Hang Seng China, CIB provided customers with effective cross-border banking support. This helped strengthen relationships, enabling CIB to capture an increasing share of business from these customers in areas such as deposits.

 

CIB's loan and deposit balances grew by 16.6 per cent and 45.0 per cent respectively compared with the end of December 2009. Net interest income increased by 9.9 per cent compared with a year earlier. Loan impairment charges decreased, resulting in a 27.6 per cent rise in operating profit after impairment compared with the same period last year.

 

Treasury ('TRY') reported a 29.1 per cent drop in profit before tax to HK$1,430 million, mainly reflecting the weak performance of net interest income.

 

With the fragility of the economic recovery and sovereign risks in Europe, global interest rates continued to hover at low levels in the first half of 2010. Coupled with ample liquidity in the local market, this served to limit good investment opportunities in the balance sheet management portfolio. Re-pricing of matured investments resulted in a significant drop in the interest margin. Overall, net interest income fell by 55.0 per cent to HK$609 million.

 

In the difficult interest rate environment, Treasury closely monitored market opportunities to dispose of assets and prudently invested in selective quality securities. The mix of investments in the balance sheet management portfolio was improved. For the first six months of 2010, disposal gains of over HK$60 million were generated, contributing to the bank's bottom line.   

 

With high market volatility and tightening regulatory requirements for sales of investment products to the retail segment posing challenges for proprietary trading and product sales, Treasury worked to sustain trading business momentum by promoting sales of renminbi-linked products and hedging instruments, including foreign exchange options. Income contribution from sales of vanilla and exotic foreign exchange options grew six-fold compared with the same period last year. However, with a HK$82 million drop in funding swap income for the first half of 2010, net trading income fell by 17.9 per cent to HK$506 million. If the volatile funding swap income (described below) is excluded, net trading income decreased by HK$28 million, or 6.8 per cent.

 

 

 

 

 

(Treasury from time to time employs foreign exchange swaps for its funding activities, which in essence involves swapping a currency ('original currency') into another currency ('swap currency') at the spot exchange rate for short-term placement and simultaneously entering into a forward exchange contract to convert the funds back to the original currency on maturity of the placement. In accordance with HKAS 39, the exchange difference of the spot and forward contracts is required to be recognised as a foreign exchange gain/loss, while the corresponding interest differential between the original and swap funding is reflected in net interest income.)

 

 

 

Mainland business

 

Including two cross-city sub-branches that opened in Guangdong Province under CEPA VI during the first half of 2010, Hang Seng Bank (China) Limited now operates a network of 38 outlets in Beijing, Shanghai, Guangzhou, Dongguan, Shenzhen, Fuzhou, Nanjing, Hangzhou, Ningbo, Tianjin, Kunming, Foshan and Zhongshan. The bank has a branch in Shenzhen for foreign currency wholesale business and a representative office in Xiamen.

 

Strong growth was recorded in gross customer advances, which rose by 13.2 per cent to HK$32.1 billion when compared with last year-end. With the further development of wealth management business and Commercial Banking's growing service capabilities, there was  good growth in both personal and commercial customer bases, with total customers increasing by 9.1 per cent year on year. This increase in the mainland customer base helped underpin a 24.6 per cent rise in customer deposits when compared with last year-end.

 

Total operating income grew by 16.4 per cent, supported by the 10.1 per cent increase in net interest income and the 84.4 per cent rise in other operating income. The improvement in other operating income was partly offset by increased exchange losses from the revaluation of US dollar capital funds against the renminbi during the first half of 2010. Profit before tax also recorded encouraging growth of 144.0 per cent when compared with the same period last year.

 

To reinforce the group's long-term commitment to the mainland market and support the continued development of Hang Seng China's business, in May this year Hang Seng China signed a RMB510 million agreement to acquire headquarter premises in Shanghai.

 

The bank's strategic alliance with Industrial Bank continues to yield encouraging results. The Bank took up its full share entitlement under a rights issue by Industrial Bank and increased its equity interest in the mainland bank from 12.78 per cent to 12.80 per cent at 30 June 2010.

 

 

Consolidated Income Statement (unaudited)

 

Half-year ended


Half-year ended


Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009







(restated)



(restated)












Interest income


7,665



8,775



           7,615


Interest expense


(952

)


(1,500

)


          (867

)

Net interest income


6,713



7,275



             6,748


Fee income


2,835



2,327



             2,863


Fee expense


(466

)


(401

)


              (468

)

Net fee income


2,369



1,926



             2,395


Trading income


890



1,035



             888


Net income/(loss) from financial










  instruments designated at fair value 


132


 

(195

)


             120


Dividend income


4



5



                 11


Net earned insurance premiums


6,359



6,658



             4,861


Other operating income


636



350



               739


Total operating income


17,103



17,054



           15,762


Net insurance claims incurred and










  movement in policyholders' liabilities


(6,749

)


(6,478

)


            (5,526

)

Net operating income before loan










  impairment charges and








          


  other credit risk provisions


10,354



10,576



           10,236


Loan impairment charges and










  other credit risk provisions


(153

)


(621

)


              (191

)

Net operating income


10,201



9,955



10,045


Employee compensation and benefits


(1,773

)


(1,669

)


            (1,709

)

General and administrative expenses


(1,376

)


(1,273

)


            (1,460

)

Depreciation of premises, plant








             


  and equipment


(306

)


(286

)


(305

)

Amortisation of intangible assets


(49

)


(40

)


                (44

)

Total operating expenses


(3,504

)


(3,268

)


          (3,518

)

Operating profit


6,697



6,687



           6,527


Gains less losses from financial investments










  and fixed assets


69



55



131             


Net surplus on property revaluation


153



94



               158


Share of profits from associates 


1,184



763



               985


Profit before tax


8,103



7,599



          7,801


Tax expense


(1,139

)


(1,173

)


            (1,089

)

Profit for the period


6,964



6,426



             6,712






















Profit attributable to shareholders


6,964



6,426



             6,712












Earnings per share (in HK$)


3.64



3.36



3.51


 

The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as 'Net trading income' and arising from financial instruments designated at fair value through profit and loss as 'Net income from financial instruments designated at fair value' (other than for debt securities in issue and subordinated liabilities, together with derivatives managed in conjunction with them).

 

The table below presents the interest income and interest expense of Hang Seng, as included within the HSBC Group accounts:


Half-year ended ended



Half-year ended



Half-year ended


Figures in HK$m


30 June 2010



     30 June 2009



         31 December2009












Interest income


7,526



8,545



7,405


Interest expense


(757

)


(1,124

)


(689

)

Net interest income


6,769



7,421



6,716


Net interest income and expense reported as 'Net trading income'


(83

)


(196

)


(38

)

Net interest income and expense reported as 'Net income from










  financial instruments designated at fair value'


27



50



70


 

 


Details of dividends payable to shareholders of the bank attributable to the profit for the half year are set out on page 39.

 

 

Consolidated Statement of Comprehensive Income (unaudited)

 

Half-year ended



Half-year ended



Half-year ended


 


30 June



30 June



31 December


 

Figures in HK$m

2010



2009



2009


 





(restated)



(restated)


 










 

Profit for the period

6,964



6,426



6,712


 










 

Other comprehensive income









 

Premises:









 

- unrealised surplus on









 

  revaluation of premises

690



535



940


 

- deferred taxes

(114

)


(79

)


(103

)

 

Available-for-sale investments reserve:









 

- fair value changes taken to/(from) equity:







             


 

  -- on debt securities

774



1,934



1,974


 

  -- on equity shares

(30)



28



52


 

- fair value changes transferred









 

  (to)/from income statement:









 

  -- on impairment

__



4



__


 

  -- on hedged items

(441

)


114



 (33

)

 

  -- on disposal

(72

)


(64

)


55


 

- share of changes in equity of associates









 

  -- fair value changes

108



73



(99

)

 

- deferred taxes

(34

)


(270

)


(202

)

 

Cash flow hedge reserve:









 

- fair value changes taken to equity

127



194



213


 

- fair value changes transferred to









 

  income statement

(261

)


(511

)


(353

)

 

- deferred taxes

23



48



21


 

Defined benefit plans:









 

- actuarial (losses)/gains on defined







           


 

  benefit plans

(183

)


1,520



357


 

- deferred taxes

30



(251

)


(58

)

 

Exchange differences on translation of:









 

- financial statements of overseas







              


 

  branches, subsidiaries and associates

176



(12

)


15


 

- others

13



5



5



Other comprehensive income for the







 


 

  period, net of tax

806



3,268



2,784



Total comprehensive income









 

  for the period

7,770



9,694



9,496


 










 

Total comprehensive income









 

  for the period attributable to









 

  shareholders

7,770



9,694



9,496


 










 

 

Consolidated Statement of Financial Position (unaudited)

 

 

 

 

At 30 June


 

At 30 June


 

At 31 December


 

 

Figures in HK$m


2010



2009



2009


 

 






(restated)



(restated)


 

 











 

 

ASSETS










 

 

Cash and balances with banks and










 

 

  other financial institutions


30,065



51,065



22,086


 

 

Placings with and advances to banks and










 

 

  other financial institutions


104,711



55,223



 104,551


 

 

Trading assets


35,559



84,517



66,597


 

 

Financial assets designated at fair value


6,160



6,025


 

5,450


 

 

Derivative financial instruments


4,645



4,927



5,050


 

 

Advances to customers


394,110



325,371



344,621


 

 

Financial investments


247,280



225,338



241,502


 

 

Investments in associates


13,841



9,329



10,226


 

 

Investment properties


3,013



2,716



2,872


 

 

Premises, plant and equipment


12,853



11,704



12,414


 

 

Intangible assets


4,706



3,621



4,214


 

 

Other assets


14,134



14,534



11,069


 

 

Deferred tax assets


10



25



16


 

 

Total assets


871,087



794,395



830,668


 

 











 

 

LIABILITIES AND EQUITY










 

 











 

 

Liabilities










 

 

Current, savings and other deposit accounts


650,859



591,267



636,369

 

 

 

Deposits from banks


12,962



4,603



4,870


 

 

Trading liabilities


40,789



53,387



38,391


 

 

Financial liabilities designated at fair value


446



1,452


 

1,456


 

 

Derivative financial instruments


5,516



8,778



4,251


 

 

Certificates of deposit and other










 

 

  debt securities in issue


1,360



2,294



1,826


 

 

Other liabilities


23,863



14,328



15,285


 

 

Liabilities to customers under










 

 

  insurance contracts


59,547



49,479



54,240


 

 

Current tax liabilities


963



739



52


 

 

Deferred tax liabilities


2,709



1,926



2,460


 

 

Subordinated liabilities


7,853



9,312


 

9,320


 

 

Total liabilities


806,867



737,565



768,520


 

 











 

 

Equity










 

 

Share capital


9,559



9,559



9,559


 

 

Retained profits


40,474



36,116



37,752


 

 

Other reserves


12,084



9,052



11,204


 

 

Proposed dividends


2,103



2,103



3,633


 

 

Shareholders' funds


64,220



56,830



62,148


 

 

Total equity and liabilities


871,087



794,395



830,668


 

 











 

 

Consolidated Statement of Changes in Equity (unaudited)

 


Half-year ended


Half-year ended


Half-year ended


 

Figures in HK$m


30 June

2010


30 June

 2009


31 December 2009






(restated)


(restated)










Share capital








  At beginning and end of period


9,559


9,559


9,559










Retained profits (including

  proposed dividends)








  At beginning of period


41,385


38,260


38,219


  Dividends to shareholders








  - Dividends approved in respect of the 

    previous year


(3,633

)

(5,736

)

__


  - Dividends declared in respect of the 

    current period


(2,103

)

(2,103

)

(4,206

)

  Transfer


105


98


357


  Total comprehensive income

    for the period


6,823


7,700


7,015




42,577


38,219


41,385










Other reserves








Premises revaluation reserve








  At beginning of period


7,885


7,047


7,405


  Transfer


(105

)

(98

)

(357

)

  Total comprehensive income

    for the period


576


456


  837




8,356


7,405


7,885










Available-for-sale investment reserve








  At beginning of period


(257

)

(3,823

)

(2,004

)

  Total comprehensive income

    for the period


305


1,819


1,747




48


(2,004

)

(257

)









Cash flow hedge reserve








  At beginning of period


174


562


293


  Total comprehensive income

    for the period


(111

)

(269

)

(119

)



63


293


174










Foreign exchange reserve








  At beginning of period


1,382


1,379


1,367


  Total comprehensive income

  for the period


176


(12

)

15




1,558


1,367


1,382


















 

 

 



Half-year ended


Half-year ended


Half-year ended


 

 

Figures in HK$m


30 June

2010


30 June

 2009


31 December 2009


 

 





(restated)


(restated)


 

 









 

 

Other reserve








 

 

  At beginning of period


2,020


1,984


1,991


 

 

Cost of share-based payment

    arrangements


38


7


28


 

 

  Total comprehensive income

    for the period


1


__


1


 

 



2,059


1,991


2,020


 

 









 

 

Total equity








 

 

  At beginning of period


62,148


54,968


56,830


 

 

  Dividends to shareholders


(5,736

)

(7,839

)

(4,206

)

 

 

  Cost of share-based payment 

    arrangements


38


7


28


 

 

  Total comprehensive income

    for the period


7,770


9,694


9,496


 

 



64,220


56,830


62,148


 

 

Consolidated Cash Flow Statement (unaudited)

 

 

Half-year ended


Half-year ended



 


30 June



30 June



Figures in HK$m


2010



2009











Net cash (outflow)/inflow from operating activities


(33,732

)


102,831











Cash flows from investing activities
















Dividends received from associates


397



358



Purchase of an interest in an associate


(2,626

)


__



Purchase of available-for-sale investments


(16,913

)


(35,448

)


Purchase of held-to-maturity debt securities


(479

)


(130

)


Proceeds from sale or redemption of








  available-for-sale investments


23,331



26,397



Proceeds from redemption of held-to-maturity








  debt securities


238



132



Purchase of fixed assets and intangible assets


(132

)


(157

)


Interest received from available-for-sale investments


783



2,142



Dividends received from available-for-sale investments


3



4



Net cash inflow/(outflow) from investing activities


4,602



(6,702

)

 








 

Cash flows from financing activities







 








 

Dividends paid


(5,736

)


(7,839

)

 

Interest paid for subordinated liabilities


(29

)


(86

)

 

Repayment of subordinated liabilities


(2,500

)


__


 

Net cash outflow from financing activities


(8,265

)


(7,925

)

 








 

(Decrease)/Increase in cash and cash equivalents


(37,395

)


88,204


 








 

Cash and cash equivalents at 1 January


136,759



76,116


 

Effect of foreign exchange rate changes


1,068



1,895


 

Cash and cash equivalents at 30 June


100,432



166,215


 








 

 

 

 

Financial Review

 

Net interest income

 

Half-year ended


Half-year ended


Half-year ended



30 June



30 June



31 December


Figures in HK$m

2010



2009



2009











Net interest income/(expense) arising from:








- financial assets and liabilities that are









  not at fair value through profit and loss

6,772



7,430



6,721


- trading assets and liabilities  

(83

)


(196

)


(38

)

- financial instruments designated









  at fair value

24



41



65



6,713



7,275



6,748











Average interest-earning assets

766,382



711,253



762,234











Net interest spread

1.72

%


1.99

%


1.71

%

Net interest margin

1.77

%


2.06

%


1.76

%

 

 

Net interest income declined by HK$562 million, or 7.7 per cent, to HK$6,713 million, primarily as a result of the low interest rate environment that has persisted since the second half of 2008. Although interest-earning assets increased by 7.8 per cent, net interest income was impacted by the continuous compression of deposit spreads and the re-pricing of assets at lower rates.

 

Net interest margin narrowed by 29 basis points to 1.77 per cent while net interest spread declined by 27 basis points to 1.72 per cent when compared with the same period last year. The low interest rates impacted liability spreads, resulting in little room for the reduction of interest rates paid to customers. Treasury balance sheet management income was adversely affected by the re-pricing of assets at lower rates. Personal and commercial lending, credit cards and trade finance registered impressive growth during the first half of 2010 and helped to moderate the unfavourable impact of deposit spreads. Strong volume growth was recorded in the average balance of mortgage lending which offset the tighter spreads on mortgages in an intensely competitive home loans market. Interest income from the life insurance funds investment portfolio, which has bond investments as its major underlying assets, grew by 19.1 per cent.

 

The contribution from net free funds also dropped by 2 basis points to 0.05 per cent as a result of the decline in average market interest rates.

 

Compared with the second half of 2009, net interest income dropped marginally by HK$35 million, or 0.5 per cent, due mainly to fewer days in the period, notwithstanding that average interest-earning assets remained broadly stable with growth of 0.5 per cent and the net interest margin was up by 1 basis point.

 

The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as 'Net trading income', while that arising from financial instruments designated at fair value through profit and loss is reported as 'Net income from financial instruments designated at fair value' (other than for debt securities in issue and subordinated liabilities, together with derivatives managed in conjunction with them).

 

The table below presents the net interest income of Hang Seng, as included in the HSBC Group accounts:

 

 

Half-year ended


Half-year ended


Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009












Net interest income


6,769



7,421



6,716


Average interest-earning assets


708,453



653,655



686,715












Net interest spread


1.89

%


2.23

%


1.91

%

Net interest margin


1.93

%


2.29

%


1.94

%

 

 

Net fee income

 

Half-year ended



Half-year ended



Half-year ended



30 June



30 June



31 December


Figures in HK$m


2010




2009




2009














- Stockbroking and related services


673




689




877


- Retail investment funds


491




226




378


- Structured investment products


11




5




23


- Insurance agency


139




103




87


- Account services


180




143




148


- Private banking service fee


63




46




83


- Remittances


122




101




116


- Cards


742




659




754


- Credit facilities


91




67




68


- Trade services


205




173




206


- Other


118




115




123


Fee income


2,835




2,327




2,863


Fee expense


(466

)



(401

)



(468

 )



2,369




1,926




2,395














 

Net fee income increased by HK$443 million, or 23.0 per cent, compared with the first half of 2009 to reach HK$2,369 million.

 

With the improvements in the economic environment and investment sentiment, customer interest in wealth management products strengthened. The group responded in a timely manner to this increased demand and launched new products, including the Hang Seng China A Share Focus Fund. Fee income from retail investment fund sales grew by 117.3 per cent. The group offers a wide spectrum of funds from both Hang Seng Investment Management and third-party providers and has established itself as one of the major fund distributors in Hong Kong. Private banking investment service fee income rose by 37.0 per cent, reflecting the improved client appetite for trading and structured investment products. With the bank recording lower stock market trading turnover and keen price competition, income from stockbroking and related services decreased by 2.3 per cent.

 

Driven by a series of marketing campaigns, credit card business recorded impressive growth and gained market share. The bank's customer loyalty scheme and card utilisation programmes helped boost card spending. In tandem with the growth in average card balances, card services income rose by 12.6 per cent compared with the same period last year. The increase in merchant income was supported by year-on-year increases of 6.1 per cent in the number of cards in circulation and 17.8 per cent in cardholder spending.

 

Insurance agency fee income rose by 35.0 per cent as the bank enhanced its comprehensive range of health and wealth insurance solutions to cater for customer needs. Benefiting from the rebound in export markets, income from trade services and remittances registered good growth of 18.5 per cent and 20.8 per cent respectively. Fee income from account services and credit facilities also increased.

 

Compared with the second half of 2009, net fee income remained broadly at the same level. The increase in fee income from insurance agency service and retail investment funds was offset by the fall in fee revenue from stockbroking and related services which recorded solid growth in the second half of 2009 on the back of the rebound in equity markets.

 

Trading income

 

Half-year ended


Half-year ended


Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009












Trading income:










- foreign exchange


880



930



862


- securities, derivatives and










  other trading activities


10



105



26




890



1,035



888


 

Trading income fell by HK$145 million, or 14.0 per cent, to HK$890 million when compared with the first half of 2009. Foreign exchange income decreased by 5.4 per cent, due mainly to the decrease in net interest income from funding swapsW. Income from securities, derivatives and other trading fell by 90.5 per cent.   

 

 

 

WTreasury from time to time employs foreign exchange swaps for its funding activities, which in essence involve swapping a currency ('original currency') into another currency ('swap currency') at the spot exchange rate for short-term placement and simultaneously entering into a forward exchange contract to convert the funds back to the original currency on maturity of the placement. In accordance with HKAS 39, the exchange difference of the spot and forward contracts is required to be recognised as foreign exchange gain/loss, while the corresponding interest differential between the original and swap funding is reflected in net interest income.

 

 

Net income/(loss) from financial instruments designated at fair value

 

Half-year ended


Half-year ended


Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009












Net income/(loss) on assets

  designated at fair value which

  back insurance and

  investment contracts


147



(170

)


116


Net change in fair value of

  other financial instruments 

  designated at fair value


(15

)


(25

)


4




132



(195

)


120


 

Net income from financial instruments designated at fair value reported a revaluation gain of HK$132 million, compared with a revaluation loss of HK$195 million for the first half of 2009, reflecting the more stable financial markets in the first half of 2010. The gain mainly reflects the fair value changes of assets supporting the linked insurance contracts and reported in 'net income/(loss) from financial instruments designated at fair value' with offsetting movements in the value of these contracts reported in the 'net insurance claims incurred and movement in policyholders' liabilities'.

 

 

Other operating income

 

Half-year ended


Half-year ended


Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009












Rental income from










   investment properties


78



73



76


Movement in present value










  of in-force long-term 










  insurance business


467



202



558


Other


91



75



105




636



350



739


 

 

Other operating income rose by HK$286 million, or 81.7 per cent, to HK$636 million when compared with the first half of 2009. Movement in present value of in-force insurance business ('PVIF') increased, due mainly to the growth in volume and profitability of new business written in the first half of 2010 as well as increases in natural premiums paid up and maturing policies, which had little impact on PVIF movement in the first half of 2010 but contributed to higher profit release in 2009.

 

Analysis of income from wealth management business

 

Half-year ended

Half-year ended


Half-year ended



30 June



30 June



31 December


Figures in HK$m


2010




2009




2009














Investment income:












- retail investment funds


491




226




378


- structured investment productsW


239




204




269


- private banking service feeWW


80




58




100


- stockbroking and related services


673




689




877


- margin trading and others


72




76




65




1,555




1,253




1,689


Insurance income:












- life insurance


1,197




1,089




981


- general insurance and others


173




162




175




1,370




1,251




1,156


Total


2,925




2,504




2,845


 

W           Income from structured investment products includes income reported under net fee income on the sales of third-party structured investment products. It also includes profit generated from the selling of structured investment products in issue, reported under trading income.

 

WW Income from private banking includes income reported under net fee income on investment services and profit generated from selling of structured investment products in issue, reported under trading income.

 

Wealth management income rose by 16.8 per cent to HK$2,925 million during the first half of 2010. Investment services income increased by 24.1 per cent, mainly reflecting strong growth in revenue from retail investment fund sales. Income from insurance business grew by 9.5 per cent. Compared with the second half of 2009, wealth management income rose by 2.8 per cent.

 

With the strengthening of major economies in Asia, demand for investment products increased. The bank used its time-to-market strength to launch and promote products and services designed to capture new business flows. Investment funds turnover and sales income rose by 503.2 per cent and 117.3 per cent respectively year on year. Income from structured investment products increased by 17.2 per cent. Securities broking and related services income declined by 2.3 per cent as a result of lower stock market turnover activity recorded by the bank and intense pricing competition in the market.

 

Private banking benefited from the improved investment sentiment, recording a 37.9 per cent rise in service fee income.

 

Leveraging its strong customer relationships, the group continued to enhance a leading position in the retirement savings insurance sector through the promotion of products such as the Smart Income Plan and Target Income Life Insurance Plan. Total policies in force grew by 8.7 per cent year on year. Net interest income and fee income rose by 20.1 per cent as a result of the growth in the size of the life insurance funds investment portfolio which held bond investments as its underlying major assets. Investment returns on life insurance funds improved from a loss of HK$133 million in the first half of 2009 to a gain of HK$97 million in the first half of 2010. The gains are mainly the fair value changes of assets supporting linked insurance contracts and reported under 'net income/(loss) from financial instruments designated at fair value', with offsetting movements in the value of these contracts reported under 'net insurance claims incurred and movement in policyholders' liabilities'. Movement in present value of in-force insurance business ('PVIF') increased, due mainly to the growth in volume and profitability of new business written in the first half of 2010 as well as increases in natural premiums paid up and maturing policies, which had little impact on PVIF movement in the first half of 2010 but contributed to higher profit release in 2009.

 

General insurance income increased by 6.8 per cent to HK$173 million.

 

 

Half-year ended

Half-year ended


Half-year ended



30 June



30 June



31 December


 

Figures in HK$m


2010




2009




2009


 













 

Life insurance:












 

- net interest income and fee income


1,142




951




1,061


 

- investment returns on life insurance












 

  funds


97




(133

)



150


 

- net earned insurance premiums


6,189




6,502




4,691


 

- net insurance claims incurred and












 

  movement in policyholders' liabilitiesW


(6,698

)



(6,433

)



(5,479

)

 

- movement in present value of in-force












 

  long-term insurance business


467




202




558


 



1,197




1,089




981


 

General insurance and others


173




162




175


 

Total


1,370




1,251




1,156


 

 

W Including premium and investment reserves

 

 

 

Loan impairment charges and other credit risk provisions

 

Half-year ended


Half-year ended


Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009












Loan impairment charges:










- individually assessed


(77

)


(288

)


(22

)

- collectively assessed


(76

  )


(333

)


(169

)



(153

  )


(621

)


(191

)

Of which:










- new and additional


(281

  )


(709

)


(395

)

- releases


98



61



169


- recoveries


30



27



35




(153

)


(621

)


(191

)











Other credit risk provisions


__



__



__












Loan impairment charges and other










  credit risk provisions


(153

)


(621

)


(191

)

 

Loan impairment charges and other credit risk provisions dropped by HK$468 million year-on-year to HK$153 million.

 

Individually assessed provisions fell by HK$211 million, due mainly to lower impairment charges on commercial banking customers in the first half of 2010, supported by the improvement in the credit environment compared to the credit conditions in the same period last year and the bank's good risk management control measures.

 

Collectively assessed provisions dropped by HK$257 million, due largely to the fall in credit card delinquencies. In line with the declining bankruptcy trend, impairment provisions for personal loan portfolios were lower. Impairment allowances for loans not individually identified as impaired also decreased as a result of lower historical loss rates, driven by the improvement in the global credit markets.

 

 

Operating expenses

 

Half-year ended

Half-year ended

Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009







(restated)



(restated)


Employee compensation and benefits:










- salaries and other costs


1,403



1,401



1,313


- performance-related pay


236



123



254


- retirement benefit costs


134



145



142




1,773



1,669



1,709


General and administrative expenses:










- rental expenses


227



210



220


- other premises and equipment


428



442



458


- marketing and advertising expenses


234



174



208


- other operating expenses


487



447



574




1,376



1,273



1,460


Depreciation of business premises










  and equipment


306



286



305


Amortisation of intangible assets


49



40



44




3,504



3,268



3,518












Cost efficiency ratio


33.8

%


30.9

%


34.4

%












At 30 June


At 30 June

At 31 December


Staff numbersW by region


2010



2009



2009












Hong Kong


7,933



7,972



7,834


Mainland


1,497



1,411



1,449


Others


58



55



59


Total


9,488



9,438



9,342


W Full-time equivalent

 

Operating expenses rose by HK$236 million, or 7.2 per cent, compared with the first half of 2009, reflecting the bank's investments to support business growth while continuing to carefully manage costs in the difficult operating environment. Excluding mainland business, operating expenses rose by 6.1 per cent. Compared with the second half of 2009, operating expenses were maintained at broadly the same level.

 

Employee compensation and benefits increased by HK$104 million, or 6.2 per cent. Salaries and other costs rose by 0.1 per cent, reflecting the combined effects of the increase in annual salary increment and reduction in average headcount. Recognition of good staff performance led to a rise in performance-related pay expenses. General and administrative expenses were up 8.1 per cent, attributable to more marketing and advertising to support business growth. Rental expenses rose due to increased rents for branches in Hong Kong as well as new branches on the Mainland. Depreciation charges were up 7.0 per cent, mainly reflecting increases in depreciation on the bank's headquarters building in Hong Kong. 

 

The group's number of full-time equivalent staff rose by 146 compared with 2009 year-end - mainly in the Hong Kong operations. Headcount for the mainland operations also rose when compared with last year-end as a result of the expansion of Hang Seng China's mainland business. The cost efficiency ratio for the first half of 2010 was 33.8 per cent, compared with 30.9 per cent for the first half of 2009, due primarily to the combined effects of the reduction in net operating income before impairment charges and other credit risk provisions and the increase in operating expenses. Compared with the second half of 2009, the cost efficiency ratio improved by 0.6 percentage points.

 

 

 

Gains less losses from financial investments and fixed assets 

 

Half-year ended


Half-year ended


Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009












Net gains from disposal of 










  available-for-sale equity securities


10



159



2

 










 

Net gains/(losses) from disposal of









 

  available-for-sale debt securities


62



(95

)


(57

)











Impairment of available-for-sale










  equity securities


__



(4

)


__












Gains less losses on disposal of










  assets held for sale


__



__



187












Gains less losses on disposal of










  fixed assets


(3

)


(5

)


(1

)



69



55



131












 

Gains less losses from financial investments and fixed assets amounted to HK$69 million - an increase of HK$14 million compared with the first half of 2009. Net gains from disposal of available-for-sale equity securities fell by HK$149 million, or 93.7 per cent, attributable to the profit realised from the disposal of Visa Inc. in the first half of 2009. In the difficult interest rate environment, we capitalized on market opportunities to dispose of selected instruments and invest in high-quality assets. As a result, there was a HK$62 million gain on the disposal of available-for-sale debt securities - reflecting the profit realised from the disposal of government-guaranteed debt securities - compared with a loss of HK$95 million on the disposal of certain debt securities in the first half of 2009.

 

Tax expense

 

Taxation in the consolidated income statement represents:

 

Half-year ended


Half-year ended


Half-year ended



30 June


30 June


31 December


Figures in HK$m


2010



2009



2009






(restated)


(restated)












Current tax - provision for










  Hong Kong profits tax










Tax for the period


933



977



867


Adjustment in respect of










  prior periods


(19

)


(3

)


__












Current tax - taxation outside










  Hong Kong










Tax for the period


39



3



47












Deferred tax










Origination and reversal of










  temporary differences


186



196



175


Total tax expenses


1,139



1,173



1,089












 

The current tax provision is based on the estimated assessable profit for the first half of 2010, and is determined for the bank and its subsidiaries operating in Hong Kong by using the Hong Kong profits tax rate of 16.5 per cent (the same as in 2009). For subsidiaries and branches operating in other jurisdictions, the appropriate tax rates prevailing in the relevant countries are used. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.

 

 

Earnings per share

 

The calculation of earnings per share for the first half of 2010 is based on earnings of HK$6,964 million (HK$6,426 million and HK$6,712 million for the first and second halves of 2009 respectively) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from the first and second halves of 2009).

 

 

Dividends per share

 

Half-year ended


Half-year ended


Half-year ended


 



30 June



30 June


31 December


 



2010



2009



2009


 


HK$

HK$m


HK$

HK$m


HK$

HK$m



per share



per share



per share













First interim

1.10

2,103


1.10

2,103


__

__


Second interim

1.10

2,103


1.10

2,103


__

__


Third interim

__

__


__

__


1.10

2,103


Fourth interim

__

__


__

__


1.90

3,633



2.20

4,206


2.20

4,206


3.00

5,736


 

 

 

Segmental analysis

 

The group's business comprises five customer groups. To be consistent with the way in which information is reported internally for the purposes of resource allocation and performance assessment, the group identified the following five reportable segments:

 

·    Personal Financial Services provides banking (including deposits, credit cards, mortgages and other retail lending) and wealth management services (including private banking, investment and insurance) to personal customers.

·    Commercial Banking manages middle market and smaller corporate relationships and specialises in trade-related financial services.

·    Corporate Banking handles relationships with large corporate and institutional customers.

·    Treasury engages in balance sheet management and proprietary trading. Treasury also manages the funding and liquidity positions of the group and other market risk positions arising from banking activities.

·    'Other' mainly represents management of shareholders' funds and investments in premises, investment properties and equity shares.

 

(a) Segmental result

 

For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the customer groups by way of internal capital allocation and fund transfer-pricing mechanisms. Cost allocation is based on the direct costs incurred by the respective customer groups and apportionment of management overheads. Rental charges at market rates for usage of premises are reflected in other operating income for the 'Other' customer group and total operating expenses for the respective customer groups.

 

Profit before tax contributed by the customer groups for the periods stated is set out in the table below. More customer group analysis and discussions are set out in the 'Customer group performance' section on page 14.

 

 

Personal









Total


 

Financial

Commercial

Corporate





reportable


Figures in HK$m

Services


Banking


Banking


Treasury


Other

segments















Half-year ended

30 June 2010


























Profit before tax

3,937


1,783


560


1,430


393


8,103


Share of profit before tax

48.6

%

22.0

%

6.9

%

17.6

%

4.9

%

100.0

%














Half-year ended

30 June 2009 (restated)













 














Profit before tax

3,467


1,080


449


2,017


586


7,599


Share of profit before tax

45.6

%

14.2

%

5.9

%

26.6

%

7.7

%

100.0

%














 

Half-year ended

31 December 2009 (restated)












 














Profit before tax

3,791


1,557


466


1,376


611


7,801


Share of profit before tax

48.6

%

20.0

%

6.0

%

17.6

%

7.8

%

100.0

%

 

(b) Geographic information

 

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

 

 

 






Mainland




Figures in HK$m

Hong Kong

Americas


and other


Total












Half-year ended 30 June 2010




















Income and expense










Total operating income


16,095


440


568


17,103


Profit before tax


6,479


425


1,199


8,103


 

At 30 June 2010




















Total assets


737,526


63,322


70,239


871,087


Total liabilities


765,674


1,403


39,790


806,867


Interest in associates


946


__


12,895


13,841


Non-current assetsW


20,266


__


306


20,572












Half-year ended 30 June 2009 (restated)




















Income and expense










Total operating income


16,058


499


497


17,054


Profit before tax


6,372


449


778


7,599


 

At 30 June 2009 (restated)




















Total assets


684,863


60,265


49,267


794,395


Total liabilities


708,439


1,169


27,957


737,565


Interest in associates


899


__


8,430


9,329


Non-current assetsW


17,724


__


317


18,041












Half-year ended 31 December 2009(restated)



















Income and expense










Total operating income


14,865


386


511


15,762


Profit before tax


6,453


350


998


7,801


 

At 31 December 2009 (restated)




















Total assets


710,167


63,808


56,693


830,668


Total liabilities


734,618


1,109


32,793


768,520


Interest in associates


916


__


9,310


10,226


Non-current assetsW


19,183


__


317


19,500


W Non-current assets consist of properties, plant and equipment, goodwill and other intangible assets.

 

 

Cash and balances with banks and other financial institutions

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Cash in hand


3,992



3,621



4,299


Balances with central banks


9,404



31,637



3,397


Balances with banks and










   other financial institutions


16,669



15,807



14,390




30,065



51,065



22,086












 

 

Placings with and advances to banks and other financial institutions

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Placings with and advances to banks










  and other financial institutions










  maturing within one month


57,557



28,456



76,579


Placings with and advances to banks










  and other financial institutions










  maturing after one month


47,154



26,767



27,972




104,711



55,223



 104,551


 

 

Trading assets

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Treasury bills


30,156



79,426



62,028


Other debt securities


4,203



4,340



4,562


Debt securities


34,359



83,766



66,590


Equity shares


__



1



6


Total trading securities


34,359



83,767



66,596


OtherW


1,200



750



1


Total trading assets


35,559



84,517



66,597












Debt securities:










- listed in Hong Kong


3,043



2,872



2,712


- listed outside Hong Kong


109



153



157




3,152



3,025



2,869


- unlisted


31,207



80,741



63,721




34,359



83,766



66,590


Equity shares:










- listed in Hong Kong


__



1



6












Total trading securities


34,359



83,767



66,596












Debt securities:










Issued by public bodies:










- central governments and central banks


34,043



83,168



65,817


- other public sector entities


85



373



369




34,128



83,541



66,186


Issued by other bodies:










- banks and other financial institutions


118



80



292


- corporate entities


113



145



112




231



225



404




34,359



83,766



66,590


Equity shares:










Issued by corporate entities


__



1



6


Total trading securities


34,359



83,767



66,596












W This represents amount receivable from counterparties on trading transactions not yet settled.

 

With the global economy staging a gradual recovery and the improved credit environment in the first half of 2010, the bank continued to redeploy surplus funds arising from the maturity of trading assets into interbank placements and available-for-sale debt securities to achieve yield enhancement while prudently managing risk. As a result, trading securities declined by 48.4 per cent to HK$34,359 million when compared with last year-end. These trading securities are mostly in the form of government treasury bills with short tenors. 

 

 

Financial assets designated at fair value 

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Certificates of deposit


10



139



129


Other debt securities


4,569



5,481



4,798


Debt securities


4,579



5,620



4,927


Equity shares


1,581



405



523




6,160



6,025



5,450












Debt securities:










- listed in Hong Kong


3



559



3


- listed outside Hong Kong


195



271



194




198



830



197


- unlisted


4,381



4,790



4,730




4,579



5,620



4,927


Equity shares:










- listed in Hong Kong


157



34



21


- listed outside Hong Kong


57



54



69




214



88



90


- unlisted


1,367



317



433




1,581



405



523




6,160



6,025



5,450












Debt securities:










Issued by public bodies:










- central governments and central banks


151



556



154


- other public sector entities


138



409



168




289



965



322


Issued by other bodies:










- banks and other financial institutions


4,165



4,441



4,464


- corporate entities


125



214



141




4,290



4,655



4,605




4,579



5,620



4,927


Equity shares:










Issued by corporate entities


1,581



405



523




6,160



6,025



5,450












 

 

Advances to customers

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Gross advances to customers


395,935



327,731



346,586


Less:










Loan impairment allowances:










- individually assessed


(1,099

)


(1,492

)


(1,151

)

- collectively assessed


(726

)


(868

)


(814

)



394,110



325,371



344,621






















Included in advances to customers are:










- Trade bills


7,636



2,773



2,802


  Less: loan impairment allowances


(39

)


(39

)


(42

)



7,597



2,734



2,760












 

 

 

Loan impairment allowances against advances to customers

 










 



Individually


Collectively






 

Figures in HK$m


assessed


assessed



Total


 










 

At 1 January 2010


1,151



814



1,965


 

Amounts written off


(129

)


(184

)


(313

)

 

Recoveries of advances










 

  written off in previous years


9



21



30


New impairment allowances










 

  charged to income statement

 

114



167



281


 

Impairment allowances released

 

 


 

 



 


 

  to income statement

 

(37

)


(91

)


(128

)

 

Unwinding of discount of loan

 

 


 

 



 


 

  impairment allowances

 



 






 

  recognised as 'interest income'

 

(9

)

 

(1

)


(10

)

 

At 30 June 2010


1,099



726



1,825


 










 

 

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

 

At 30 June


At 30 June


At 31 December




2010



2009



2009




%



%



%












Loan impairment allowances:










- individually assessed


0.28



0.46



0.33


- collectively assessed


0.18



0.26



0.23


Total loan impairment allowances


0.46



0.72



0.56












 

Total loan impairment allowances as a percentage of gross advances to customers was 0.46 per cent at 30 June 2010 - 0.1 percentage points lower than at the end of 2009. Individually assessed and collectively assessed allowances as a percentage of gross advances both fell by 0.05 percentage points to 0.28 per cent and 0.18 per cent respectively, reflecting the improved credit quality and the bank's good credit risk management control.

 

 

Impaired advances and allowances

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Gross impaired advances


2,429



3,742



2,508


Individually assessed allowances


(1,099

)


(1,492

)


(1,151

)



1,330



2,250



1,357












Individually assessed allowances










  as a percentage of










  gross impaired advances


45.2

%


39.9

%


45.9

%









 


Gross impaired advances










  as a percentage of gross










  advances to customers


0.6

%


1.1

%


0.7

%






 





 

Impaired advances are those advances where objective evidence exists that full repayment of principal or interest is considered unlikely.

 

Gross impaired advances declined by HK$79 million, or 3.1 per cent, to HK$2,429 million compared with last year-end, with the downgrade of certain commercial banking accounts more than offset by the write-off of irrecoverable balances against impairment allowances and customer repayments. Gross impaired advances as a percentage of gross advances to customers stood at 0.6 per cent - an improvement of 0.1 percentage points compared with last year-end.

 

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Gross individually assessed










  impaired advances


2,280



3,650



2,434


Individually assessed allowances


(1,099

)


(1,492

)


(1,151

)



1,181



2,158



1,283












Gross individually assessed










  impaired advances










  as a percentage of










  gross advances to customers


0.6

%


1.1

%


0.7

%











Amount of collateral which










  has been taken into account








 


  in respect of individually assessed










  impaired advances to customers


862



2,105



1,024







 





 

 

Collateral includes any tangible security that carries a fair market value and is readily marketable. This includes (but is not limited to) cash and deposits, stocks and bonds, mortgages over properties and charges over other fixed assets such as plant and equipment. Where collateral values are greater than gross advances, only the amount of collateral up to the gross advance has been included.

 

 

Overdue advances

 

Advances to customers that are more than three months overdue and their expression as a percentage of gross advances to customers are as follows:

 

At 30 June


At 30 June


At 31 December





2010




2009




2009



HK$m


%


HK$m


%


HK$m


%















Gross advances to customers













  which have been overdue













  with respect to either principal













  or interest for periods of:













- more than three months but













  not more than six months

179


0.1


628


0.2


241


0.1


- more than six months but













  not more than one year

164


__


830


0.3


353


0.1


- more than one year

1,055


0.3


500


0.1


864


0.2



1,398


0.4


1,958


0.6


1,458


0.4


 

Advances with a specific repayment date are classified as overdue when the principal or interest is overdue and remains unpaid at period-end. Advances repayable by regular instalments are treated as overdue when an instalment payment is overdue and remains unpaid at period-end. Advances repayable on demand are classified as overdue either when a demand for repayment has been served on the borrower but repayment has not been made in accordance with the demand notice or when the advances have remained continuously outside the approved limit advised to the borrower for more than the overdue period in question.

 

Overdue advances decreased by 4.1 per cent to HK$1,398 million compared with last year-end. Overdue advances as a percentage of gross advances to customers stood at 0.4 per cent.

 

Rescheduled advances

 

Rescheduled advances and their expression as a percentage of gross advances to customers are as follows:

 

At 30 June


At 30 June


At 31 December





2010




2009




2009



HK$m


%


HK$m


%


HK$m


%


Rescheduled advances













   to customers

258


0.1


666


0.2


703


0.2















 

Rescheduled advances are those advances that have been rescheduled or renegotiated for reasons related to the borrower's financial difficulties. This will normally involve the granting of concessionary 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 that have been overdue for more than three months under the rescheduled terms are reported as overdue advances (page 48).

 

Rescheduled advances decreased by HK$445 million, or 63.3 per cent, to HK$258 million at 30 June 2010, representing 0.1 per cent of gross advances to customers. The improvement was due mainly to the upgrade and repayments of customers.

 

 

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 that is different from that of the counterparty. At 30 June 2010, about 90 per cent (over 90 per cent at 30 June 2009 and about 90 per cent at 31 December 2009) of the group's advances to customers, including related impaired advances and overdue advances, were classified under Hong Kong. There was no geographical segment other than Hong Kong to which the bank's advances to customers is not less than 10 per cent of the total loans and advances.

 

 

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 HKMA is as follows:

 

 

At 30 June


At 30 June


At 31 December


 


2010



2009



2009


Figures in HK$m


















Gross advances to customers for










  use in Hong Kong




















Industrial, commercial and










  financial sectors










Property development


28,226



22,865



23,618


Property investment


88,418



66,060



75,264


Financial concerns


3,395



2,130



2,720


Stockbrokers


2,646



2,736



480


Wholesale and retail trade


9,993



6,489



7,812


Manufacturing


14,924



11,350



12,080


Transport and transport equipment


5,565



8,031



6,503


Recreational activities


37



28



37


Information technology


1,227



1,265



1,247


Other


28,083



25,348



24,405




182,514



146,302



154,166


Individuals










Advances for the purchase of flats under










  the Government Home Ownership










  Scheme, Private Sector Participation










  Scheme and Tenants Purchase Scheme


14,179



15,740



14,647


Advances for the purchase of other










  residential properties


102,566



91,656



96,651


Credit card advances


14,289



12,780



13,818


Other


13,363



10,992



11,961




144,397



131,168



137,077


Total gross advances for










  use in Hong Kong


326,911



277,470



291,243


Trade finance


29,319



18,878



19,215


Gross advances for










  use outside Hong Kong


39,705



31,383



36,128


Gross advances to customers


395,935



327,731



346,586












 

 

 

Gross advances to customers grew by HK$49.3 billion, or 14.2 per cent, to HK$395.9 billion compared with the end of 2009.

 

Loans for use in Hong Kong increased by HK$35.7 billion, or 12.2 per cent, with expansion recorded in most industry sectors. The bank proactively managed its loan book and took steps to capture business opportunities arising from the improving credit environment and strong property market. Lending to the property development, property investment and financial concerns (including financial vehicles) sectors grew by 19.5 per cent, 17.5 per cent and 24.8 per cent respectively. Lending to stockbrokers rose sharply by 451.3 per cent, reflecting increased IPO-related financing. The bank was an active participant in Hong Kong government-organised schemes to support SMEs, and recorded loan growth of 27.9 per cent to the wholesale and retail trade sector and 23.5 per cent to manufacturing. The decline in lending to transport and transport equipment was due mainly to loan repayments in the first half of the year. Growth in lending to 'Other' was attributable to certain new working capital financing for large corporate customers.

 

Lending to individuals rose by 5.3 per cent against last year-end. Excluding the fall in Government Home Ownership Scheme mortgages, lending to individuals grew by 6.4 per cent. In the buoyant property market, the bank sustained a leading position for mortgage business based on a competitive pricing strategy and premium service. Residential mortgage lending to individuals increased by 6.1 per cent, despite intense competition and new government measures to regulate property sales. Credit card advances grew by 3.4 per cent, supported by a year-on-year rise of 6.1 per cent in the number of cards in circulation and a 17.8 per cent increase in cardholder spending. Other loans to individuals were up 11.7 per cent, reflecting the bank's successful efforts to prudently expand personal lending.

 

Benefiting from recovering global demand and the rebound in export markets, the bank grew trade finance lending by 52.6 per cent. Commercial Banking took steps to expand trade finance business by maintaining close relationships with strategic partners to support cross-border renminbi trade business and grow trade refinancing lending to other banks on the Mainland.

 

Loans for use outside Hong Kong rose by HK$3.6 billion, or 9.9 per cent, compared with the end of 2009, driven largely by lending on the Mainland. The mainland loan portfolio increased by 13.2 per cent to HK$32.1 billion, underpinned by the expansion of renminbi lending to corporate borrowers.

 

 

Financial investments

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Available-for-sale at fair value:










- debt securities


193,786



180,413



192,486


- equity shares


301



295



347


Held-to-maturity debt securities










   at amortised cost


53,193



44,630



48,669




247,280



225,338



241,502












Fair value of held-to-maturity debt securities


56,328



44,823



49,805


 










Treasury bills


62,962



35,778



53,973


Certificates of deposit


7,005



9,469



7,665


Other debt securities


177,012



179,796



179,517


Debt securities


246,979



225,043



241,155


Equity shares


301



295



347




247,280



225,338



241,502












Debt securities:










- listed in Hong Kong


9,168



5,526



7,607


- listed outside Hong Kong


73,831



65,791



66,618




82,999



71,317



74,225


- unlisted


163,980



153,726



166,930




246,979



225,043



241,155


Equity shares:










- listed in Hong Kong


45



48



60


- listed outside Hong Kong


58



64



85




103



112



145


- unlisted


198



183



202




301



295



347




247,280



225,338



241,502












Fair value of listed financial investments


83,561



71,398



74,493












Debt securities:










Issued by public bodies:










- central governments and central banks


78,730



44,478



64,776


- other public sector entities


20,947



9,463



25,065




99,677



53,941



89,841


Issued by other bodies:










- banks and other financial institutions


129,462



154,640



133,312


- corporate entities


17,840



16,462



18,002




147,302



171,102



151,314




246,979



225,043



241,155


Equity shares:










Issued by corporate entities


301



295



347




247,280



225,338



241,502




 

Debt securities by rating agency designation

 

At 30 June


At 30 June


At 31 December

Figures in HK$m


2010



2009



2009

 









AAA


87,424



86,125



74,339

AA- to AA+


94,497



67,826



98,811

A- to A+


59,869



58,544



58,749

B+ to BBB+


2,048



7,978



5,094

B and lower


__



151



__

Unrated


3,141



4,419



4,162



246,979



225,043



241,155

 

Financial investments include treasury bills, certificates of deposit, other debt securities and equity shares intended to be held for an indefinite period of time.

 

Available-for-sale investments may be sold in response to needs for liquidity or changes in the market environment, and are carried at fair value with the gains and losses from changes in fair value recognised through equity reserves. Held-to-maturity debt securities are stated at amortised cost. Where debt securities have been purchased at a premium or discount, the carrying value of the security is adjusted to reflect the effective interest rate of the debt security taking into account such premiums and discounts.

 

Financial investments rose by HK$5.8 billion, or 2.4 per cent, compared with last year-end. Investments were primarily in high-quality debt securities or debt securities guaranteed by governments, reflecting the bank's strategy to identify quality investment opportunities that enable it to optimise returns while prudently managing risk. At 30 June 2010, 98.7 per cent of the group's holdings of debt securities were assigned investment grade ratings by rating agencies. The unrated debt securities were issued by subsidiaries of investment-grade banks and are guaranteed by their corresponding holding companies. These notes rank pari passu with all of the respective guarantor's other senior debt obligations. The group did not hold any investments in structured investment vehicles or any sub-prime related assets such as collateralised debt obligations, mortgage-backed securities and other asset-backed securities.

 

Investments in associates

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Share of net assets


13,310



8,782



9,691


Intangibles


94



119



106


Goodwill


437



428



429




13,841



9,329



10,226


 

Investments in associates rose by HK$3,615 million, due mainly to the increase in the bank's share of net assets of Industrial Bank and its participation - at an investment cost of RMB2.3 billion - in Industrial Bank's rights issue in the first half of 2010, which increased the bank's equity interest in Industrial Bank from 12.78 per cent to 12.80 per cent at 30 June 2010.

 

 

Intangible assets

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Present value of in-force long-term  










  insurance business


3,933



2,909



3,466


Internally developed software


408



357



385


Acquired software


36



26



34


Goodwill


329



329



329




4,706



3,621



4,214


 

 

Other assets

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Items in the course of collection










  from other banks


5,393



7,059



4,343


Prepayments and accrued income


2,160



2,263



1,835


Assets held for sale










- Repossessed assets


19



59



47


- Other assets held for sale


18



254



__


Acceptances and endorsements


4,662



3,388



3,584


Retirement benefit assets


77



64



86


Other accounts


1,805



1,447



1,174




14,134



14,534



11,069












 

 

Current, savings and other deposit accounts

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Current, savings and










  other deposit accounts:










- as stated in consolidated statement of










  financial position


650,859



591,267



636,369


- structured deposits reported as










  trading liabilities


17,499



28,306



22,212




668,358



619,573



658,581


By type:










- demand and current accounts


54,432



43,594



53,450


- savings accounts


426,942



380,090



437,440


- time and other deposits


186,984



195,889



167,691




668,358



619,573



658,581


 

 

Certificates of deposit and other debt securities in issue

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Certificates of deposit and 










  other debt securities in issue:










- as stated in consolidated statement of










  financial position


1,360



2,294



1,826


- structured certificates of deposit










  and other debt securities in issue










  reported as trading liabilities


2,508



7,329



3,247




3,868



9,623



5,073












By type:










- certificates of deposit in issue


1,574



3,206



2,304


- other debt securities in issue


2,294



6,417



2,769




3,868



9,623



5,073












Customer deposits and certificates of deposit and other debt securities in issue stood at HK$672.2 billion at 30 June 2010 - a rise of 1.3 per cent over the end of 2009 and 6.8 per cent year on year. Higher growth was recorded in time deposits and current account balances, but this was partly offset by the fall in savings balances. Structured deposits and other structured certificates of deposit and other debt securities in issue fell, due primarily to reduced demand for these investment-related products in the uncertain market conditions. Deposits with Hang Seng China rose by 24.6 per cent, driven mainly by renminbi deposits. 

 

Trading liabilities

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Structured certificates of deposit and










  other debt securities in issue


2,508



7,329



3,247


Structured deposits


17,499



28,306



22,212


Short positions in securities and other


20,782



17,752



12,932




40,789



53,387



38,391












 

 

 

Other liabilities

 

At 30 June


At 30 June


At 31 December


Figures in HK$m


2010



2009



2009












Items in the course of transmission










  to other banks


12,540



5,644



6,304


Accruals


1,930



2,106



2,039


Acceptances and endorsements


4,662



3,388



3,584


Retirement benefit liabilities


1,903



2,071



1,712


Other


2,828



1,119



1,646




23,863



14,328



15,285












 

 

Subordinated liabilities

 


At 30 June


At 30 June


At 31 December


Figures in HK$m



2010



2009



2009













Nominal value

Description





















Amount owed to third parties





















HK$1,500 million

Callable floating rate











  subordinated notes











  due June 2015 (Note)


__



1,499



1,499













HK$1,000 million

4.125 per cent callable











  fixed rate subordinated











  notes due June 2015 (Note)


__



1,017



1,003













US$450 million

Callable floating rate











  subordinated notes











  due July 2016


3,498



3,479



3,483













US$300 million

Callable floating rate











  subordinated notes











  due July 2017


2,331



2,319



2,321













Amount owed to HSBC Group undertakings





















US$260 million

Callable floating rate











  subordinated loan debt











  due December 2015


2,024



2,015



  2,017





7,853



10,329



10,323


Representing:











- measured at amortised cost


7,853



9,312



9,320


- designated at fair value


__



1,017



1,003





7,853



10,329



10,323













 

(Note: The bank has exercised its option to redeem these subordinated notes at par of HK$2,500 million in aggregate in June 2010.)

 

 

No subordinated debt was issued during the first half of 2010. The outstanding subordinated notes, which qualify as supplementary capital, serve to help the bank maintain a more balanced capital structure and support business growth.

 

 

Shareholders' funds

 

At 30 June


At 30 June

At 31 December



Figures in HK$m


2010



2009



2009








(restated)



(restated)














Share capital


9,559



9,559



9,559



Retained profits


40,474



36,116



37,752



Premises revaluation reserve


8,356



7,405



7,885



Cash flow hedge reserve


63



293



174



Available-for-sale investment reserve











- on debt securities


(156

)


(2,191

)


(496

)


- on equity securities


204



187



239



Capital redemption reserve


99



99



99



Other reserves


3,518



3,259



3,303



Total reserves


52,558



45,168



48,956





62,117



54,727



58,515



Proposed dividends


2,103



2,103



3,633



Shareholders' funds


64,220



56,830



62,148














Return on average shareholders' funds


22.8

%

23.5

%

22.4

%












 

Shareholders' funds (excluding proposed dividends) grew by HK$3,602 million, or 6.2 per cent, to HK$62,117 million at 30 June 2010. Retained profits rose by HK$2,722 million, mainly reflecting the growth in attributable profit (excluding first and second interim dividends) during the period. The premises revaluation reserve increased by HK$471 million on the back of the continued robust growth in the property market during the first half of 2010. The premises revaluation reserves for the three half-yearly periods also included the leasehold land held under long leases for the bank's headquarters building after adopting the amendment to HKAS 17 'Leases' in the first half of 2010.

 

The available-for-sale investment reserve for debt securities showed a deficit of HK$156 million compared with a deficit of HK$496 million at last year-end, reflecting the improvement and stabilisation in global credit markets and the disposal of high-risk assets under the bank's prudent risk management strategy. The group assessed that there were no impaired debt securities during the period and, accordingly, no impairment loss has been recognised.

 

The return on average shareholders' funds was 22.8 per cent, compared with 23.5 per cent and 22.4 per cent for the first and second halves of 2009 respectively.

 

Save for the redemption of all the (1) Series A - HK$1,000 million 4.125 per cent subordinated notes due 2015 and (2) Series B - HK$1,500 million floating rate subordinated notes due 2015, both at par on 24 June 2010, there was no purchase, sale or redemption by the bank, or any of its subsidiaries, of the bank's securities during the first half of 2010.

 

Capital resources management

 

Analysis of capital base and risk-weighted assets

 

At 30 June


At 30 June


At 31 December



Figures in HK$m


2010



2009


2009







(restated)



(restated)



Capital base











Core capital:











- Share capital


9,559



9,559



9,559



- Retained profits


34,431



28,833



31,741



- Classified as regulatory reserve


(1,254

)


(770

)


(920

)


- Less: deductible of core capital


(972

)


(547

)


(561

)


- Less: 50 per cent of total











  unconsolidated investments and











  other deductions


(9,086

)


(6,709

)


(7,330

)


- Total core capital


32,678



30,366



32,489














Supplementary capital:











- Fair value gains on the revaluation 











  of property


5,894



5,513



5,829



- Fair value gains on the revaluation











  of available-for-sale investment











  and equity


478



612



498



- Collective impairment allowances


75



85



81



- Regulatory reserve


138



85



101



- Surplus provision


__



__



__



- Term subordinated debt


7,893



10,367



10,354



- Less: 50 per cent of total











  unconsolidated investments and











  other deductions


(9,086

)


(6,709

)


(7,330

)


- Total supplementary capital


5,392



9,953



9,533












Total capital base after deductions


38,070



40,319



42,022












Risk-weighted assets










- Credit risk


255,927



195,582



217,134


- Market risk


1,405



1,476



1,278


- Operational risk


37,576



38,863



39,017




294,908



235,921



257,429












Capital adequacy ratio


12.9

%

17.1

%

16.3

%

Core capital ratio


11.1

%

12.9

%

12.6

%





















 

 

Capital ratios at 30 June 2010 were compiled in accordance with the Banking (Capital) Rules ('the Capital Rules') issued by the Hong Kong Monetary Authority ('HKMA') under section 98A of the Hong Kong Banking Ordinance for the implementation of Basel II, which came into effect on 1 January 2007. The bank used the advanced internal ratings-based approach to calculate its credit risk exposure which was approved by the HKMA effective 1 January 2009. The standardised (operational risk) approach and internal models approach were used to calculate its operational risk and market risk respectively.

 

At 30 June 2010, the capital adequacy ratio and core capital ratio were 12.9 per cent and 11.1 per cent, compared with 16.3 per cent and 12.6 per cent at last year-end. These latter ratios have been restated following the adoption of the amendment to HKAS 17 'Leases' in 2010.

 

The decline in both the capital adequacy and core capital ratios largely reflects the combined effect of the increase in deduction from the capital base as a result of participation in Industrial Bank's rights issue in first half of the year, the repayment of HK$2.5 billion in subordinated debt in June 2010 and the increase in risk-weighted assets. This was partly offset by profit growth after accounting for dividends in the first half of the year.

 

The basis of consolidation for the calculation of capital ratios under the Capital Rules follows the basis of consolidation for financial reporting with the exclusion of subsidiaries which are 'regulated financial entities' (e.g. insurance and securities companies) as defined by the Capital Rules. Accordingly, the investment cost of these unconsolidated regulated financial entities is deducted from the capital base.

 

To satisfy the provisions of the Hong Kong Banking Ordinance and regulatory requirements for prudential supervision purposes, the group has earmarked a regulatory reserve of HK$1,254 million (HK$770 million and HK$920 million at 30 June 2009 and 31 December 2009 respectively) from retained profits.

 

 

Liquidity ratio

 

The average liquidity ratio for the periods indicated, 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




30 June



30 June


31 December




2010



2009



2009












The Bank and its subsidiaries










  designated by the HKMA


42.0

%


47.5

%


48.7

%













 

Reconciliation of cash flow statement

 

(a) Reconciliation of operating profit to net cash flow from operating activities

 

 

Half-year ended


Half-year ended


 


30 June



30 June


Figures in HK$m


2010



2009









Operating profit


6,697



6,687


Net interest income


(6,713

)


(7,275

)

Dividend income


(4

)


(5

)

Loan impairment charges and other







  credit risk provisions


153



621


Impairment of available-for-sale equity securities


__



4


Depreciation


306



286


Amortisation of intangible assets


49



40


Amortisation of available-for-sale investments


68



19


Amortisation of held-to-maturity debt securities


2



1


Advances written off net of recoveries


(283

)


(285

)

Interest received


7,090



6,132


Interest paid


(943

)


(769

)

Operating profit before changes in working capital


6,422



5,456


Change in treasury bills and certificates of deposit







  with original maturity more than three months


(9,028

)


(10,310

)

Change in placings with and advances to banks







  maturing after one month


(19,182

)


(4,213

)

Change in trading assets


6,367



92,246


Change in financial assets designated at fair value


189



37


Change in derivative financial instruments


1,670



(3,990

)

Change in advances to customers


(49,359

)


3,415


Change in other assets


(12,352

)


(7,063

)

Change in financial liabilities designated at fair value


(2

)


22


Change in current, savings and other deposit accounts


14,490



29,084


Change in deposits from banks


8,091



(6,833

)

Change in trading liabilities


2,398



5,105


Change in certificates of deposit and







  other debt securities in issue

(466

)


(478

)

Change in other liabilities


17,672



3,161


Elimination of exchange differences







  and other non-cash items


(605

)


(2,497

)

Cash (used in)/ generated from operating activities


(33,695

)


103,142


Taxation paid


(37

)


(311

)

Net cash (outflow)/inflow from operating activities


(33,732

)


102,831


 

 

(b) Analysis of the balances of cash and cash equivalents

 

 

At 30 June


At 30 June


Figures in HK$m


2010



2009









Cash and balances with banks and







  other financial institutions


30,065



51,065


Placings with and advances to banks and other







  financial institutions maturing within one month


55,784



27,539


Treasury bills


13,851



87,611


Certificates of deposit


732



__




100,432



166,215


 

 

Contingent liabilities, commitments and derivatives

 




Credit


Risk-



Contract

equivalent

weighted


Figures in HK$m


amounts


amounts


amounts










At 30 June 2010
















Direct credit substitutes


3,377


3,246


2,182


Transaction-related contingencies


889


540


389


Trade-related contingencies


10,897


3,061


1,736


Forward asset purchases


44


44


44


Undrawn formal standby facilities, credit lines








  and other commitments to lend:








- not unconditionally cancellable W


31,767


16,115


7,736


- unconditionally cancellable


168,893


57,439


16,463




215,867


80,445


28,550










Exchange rate contracts:








Spot and forward foreign exchange


431,420


5,701


950


Other exchange rate contracts


74,168


2,500


1,436




505,588


8,201


2,386










Interest rate contracts:








Interest rate swaps


272,830


2,638


558


Other interest rate contracts


143


__


__




272,973


2,638


558










Other derivative contracts


6,982

 

473


100










 

W The contract amount for undrawn formal standby facilities, credit lines and other commitments to lend with original maturity of 'not more than one year' and 'more than one year' were HK$15,903 million and HK$15,864 million respectively.

 

 




Credit


Risk-



Contract

equivalent

weighted


Figures in HK$m


amounts


amounts


amounts










At 30 June 2009
















Direct credit substitutes


3,063


3,063


1,659


Transaction-related contingencies


570


347


161


Trade-related contingencies


8,905


2,195


1,415


Forward asset purchases


27


27


27


Undrawn formal standby facilities, credit lines








  and other commitments to lend:








- not unconditionally cancellable


30,624


16,776


7,399


- unconditionally cancellable


149,008


51,948


12,208




192,197


74,356


22,869










Exchange rate contracts:








Spot and forward foreign exchange


408,031


5,633


597


Other exchange rate contracts


36,469


1,390


371




444,500


7,023


968










Interest rate contracts:








Interest rate swaps


219,022


3,121


402


Other interest rate contracts


142


1


__




219,164


3,122


402










Other derivative contracts


13,090

 

852


86










 

 

 




Credit


Risk-



Contract

equivalent

weighted


Figures in HK$m


amounts


amounts


amounts










At 31 December 2009
















Direct credit substitutes


3,121


2,987


1,785


Transaction-related contingencies


550


289


155


Trade-related contingencies


9,451


2,465


1,466


Forward asset purchases


36


36


36


Undrawn formal standby facilities, credit lines








  and other commitments to lend:








- not unconditionally cancellable


29,069


16,447


7,720


- unconditionally cancellable


158,817


53,514


15,036




201,044


75,738


26,198










Exchange rate contracts:








Spot and forward foreign exchange


334,133


5,573


689


Other exchange rate contracts


51,624


1,644


489




385,757


7,217


1,178










Interest rate contracts:








Interest rate swaps


230,376


2,640


413


Other interest rate contracts


143


__


__




230,519


2,640


413










Other derivative contracts


7,002

 

474


92










 

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 purpose of deriving the risk-weighted amounts. The nominal contract amounts, credit equivalent amounts, risk-weighted amounts and the consolidation basis for the periods indicated were calculated in accordance with the Banking (Capital) Rules issued by the HKMA, which came into effect on 1 January 2007.

 

For the above analysis, contingent liabilities and commitments are credit-related instruments that include acceptances and endorsements, 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 management and collateral requirements as apply to 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.

Derivative financial instruments are held for trading or designated as either fair value hedges or cash flow hedges. The following table shows the nominal contract amounts and marked-to-market value of assets and liabilities by class of derivatives.

 

At 30 June 2010


At 30 June 2009


At 31 December 2009

Figures in HK$m

Trading


Designated at fair value


Hedging


Trading


Designated at fair value


Hedging


Trading


Designated at fair value


Hedging



















Contract amounts:


















Interest rate contracts

178,553


140


94,461


161,346


 

 

1,683


60,966


163,354


 

 

1,160


66,554

Exchange rate contracts

641,169


134


-


544,640


70


-


473,989


89


-

Other derivative contracts

15,394


-


-


16,728


-


-


11,385


-


-


835,116


274


94,461


722,714


 

1,753


60,966


648,728


 

1,249


66,554



















Derivative assets:


















Interest rate contracts

1,650


-


302


1,780


 

 

29


724


1,552


 

 

17


391

Exchange rate contracts

2,260


 

 

 

-


 

 

 

-


2,132


 

 

 

-


 

 

 

-


2,636


 

 

 

1


 

 

 

-

Other derivative contracts

433


-


-


262


-


-


453


-


-


4,343


-


302


 4,174


 

 29


724 


4,641


 

18


391



















Derivative liabilities:


















Interest rate contracts

1,687


11


1,147


1,841


23


606


1,623


 

 

13


670

Exchange rate contracts

2,405


 

 

 

2


 

 

 

-


1,940


 

 

 

-


 

 

 

-


938


 

 

 

-


 

 

 

-

Other derivative contracts

264


-


-


4,368


-


-


1,007


-


-


4,356


13


1,147


 8,149


23


606 


3,568


 

13


670



















 

 

The above derivative assets and liabilities, being the positive or negative marked-to-market value of the respective derivative contracts, represent gross replacement costs, as none of these contracts are subject to any bilateral netting arrangements.

 

Additional information

 

1. Statutory accounts and accounting policies

 

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

 

Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2009 ('2009 accounts'), which have been delivered to the Registrar of Companies and the HKMA. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 1 March 2010.

 

Disclosures required by the Banking (Disclosure) Rules issued by the HKMA are contained in the bank's Interim Report which will be published on the websites of Hong Kong Exchanges and Clearing Limited and the bank on the date of the issue of this news release.

 

The news release has been prepared on a basis consistent with the accounting policies adopted in the 2009 accounts except for the following:

  

Following the adoption of the amendments to HKAS 17 'Leases', the group has reclassified interests in leasehold land held under long leases from operating leases to finance leases. Before the amendment, these leases were recorded at historical cost and amortised over the term of the lease.  With these leases reclassified as finance leases, they are carried at valuation and included under 'Premises, plant and equipment', with the difference between the amortised cost and valuation recognised in the premises revaluation reserve. The corresponding prior-year comparatives have been adjusted accordingly.

 

The major lines of the financial statements that have been affected are as follows:









Figures in HK$m

As reported



Adjustment



Restated











 Half-year ended 30 June 2009








  Profit for the period

6,451



(25

)


6,426


  Total comprehensive income

9,467



227



9,694











 As at 31 December 2009









  Premises, plant and equipment

7,178



5,236



12,414


  Premises revaluation reserve

3,994



3,891



7,885


  Retained profits

37,719



33



37,752


 

Certain key ratios for comparative periods have also been restated to conform with the current period presentation.

 

 

2. Comparative figures

 

As a result of the adoption of the amendments to HKAS 17 'Leases', certain comparative figures have been adjusted to conform with the current period's presentation and to provide comparative amounts in respect of items disclosed for the first time in 2010.

 

 

3. Property revaluation

 

The group's premises and investment properties were revalued at 30 June 2010 by DTZ Debenham Tie Leung Limited. The valuation was carried out by qualified persons who are members of the Hong Kong Institute of Surveyors. The basis of the valuation of premises was open market value for existing use and the basis of valuation for investment properties was open market value. The net revaluation surplus for group premises amounted to HK$691 million, of which HK$690 million was credited to premises revaluation reserve and HK$1 million was credited to the income statement. Revaluation gains of HK$152 million on investment properties were recognised through the income statement. The related deferred tax provisions for group premises and investment properties were HK$114 million and HK$25 million respectively.

 

The revaluation exercise also covered business premises/investment properties reclassified as properties held for sale. In accordance with HKFRS 5, there was no revaluation gain/loss recognised through the income statement.

 

 

4. Foreign currency positions

 

Foreign currency exposures include those arising from trading, non-trading and structural positions. The net option position is calculated on the basis of delta-weighted positions of all foreign exchange options contracts. At 30 June 2010, the US dollar (US$), Chinese renminbi (RMB), Euro (EUR), Pound Sterling (GBP), Swiss Franc (CHF), Australian dollar (AUD) and Gold (GOL) were the currencies in which the group had non-structural foreign currency positions that were not less than 10 per cent of the total net position in all foreign currencies. The group also had a RMB structural foreign currency position, which was not less than 10 percent of the total net structural position in all foreign currencies.

 

Figures in HK$m

US$


RMB


EUR


GBP


CHF


AUD


GOL

















At 30 June 2010






























Non-structural position















Spot assets

230,684


52,221


8,852


8,183


248


20,071


525


Spot liabilities

(152,310

)

(52,694

)

(9,647

)

(10,167

)

(684

)

(31,777

)

(2,495

)

Forward purchases

236,686


42,463


6,483


6,367


681


16,747


2,854


Forward sales

(315,026

)

(42,216

)

(5,826

)

(4,447

)

(208

)

(5,096

)

(851

)

Net option position

(68

)

__


70


4


__


92


__


Net long/(short)















  non-structural position

(34

)

(226

)

(68

)

(60

)

37


37


33

















Structural positions

286


18,144


__


__


__


__


__







 


 










 

 

Figures in HK$m

US$


RMB


EUR


GBP


CHF


AUD


GOL







 


 








At 30 June 2009





 


 













 


 








Non-structural position





 


 








Spot assets

220,606


36,442


12,096


9,191


75


18,410


490


Spot liabilities

(189,501

)

(36,031

)

(8,907

)

(8,120

)

(409

)

(23,092

)

(2,125

)

Forward purchases

227,596


27,145


8,362


4,081


513


9,354


2,210


Forward sales

(251,599

)

(27,633

)

(11,504

)

(5,210

)

(162

)

(4,692

)

(567

)

Net option position

2


__


(40

)

31


__


(4

)

__


Net long/(short)















  non-structural position

7,104


(77

)

7


(27

)

17


(24

)

8







 


 








Structural positions

285


13,589


__


__


__


__


__







 


 


 


 


 


At 31 December 2009









 


 


 











 


 


 


Non-structural position









 


 


 


Spot assets

214,379


41,638


12,558


9,980


85


20,619


816


Spot liabilities

(164,511

)

(41,564

)

(9,427

)

(9,163

)

(552

)

(28,370

)

(2,387

)

Forward purchases

169,349


29,483


6,885


2,215


832


14,293


2,430


Forward sales

(219,453

)

(29,603

)

(10,103

)

(2,995

)

(371

)

(6,532

)

(851

)

Net option position

(4

)

__


(1

)

__


2


7


__


Net long/(short)















  non-structural position

(240

)

(46

)

(88

)

37


(4

)

17


8

















Structural positions

285


14,550


__


__


__


__


__







 


 


 


 


 


 

 

5. Ultimate holding company

 

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

 

 

6. Register of shareholders

 

The register of shareholders of the bank will be closed on Tuesday, 17 August 2010, 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, 183 Queen's Road East, Wanchai, Hong Kong, for registration no later than 4:30 pm on Monday, 16 August 2010. The second interim dividend will be payable on Wednesday, 1 September 2010 to shareholders whose names appear on the register of shareholders of the bank on Tuesday 17 August 2010. Shares of the bank will be traded ex-dividend as from Friday, 13 August 2010.

 

 

7. Proposed timetable for the remaining 2010 quarterly dividends

 

Third

Fourth


interim dividend

interim dividend




Announcement

1 November 2010

28 February 2011

Book close and record date

16 November 2010

15 March 2011

Payment date

1 December 2010

30 March 2011

 

 

8. Code on Corporate Governance Practices

 

The bank is committed to high standards of corporate governance. The bank has followed the module on 'Corporate Governance of Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority and has fully complied with all the code provisions and most of the recommended best practices set out in the Code on Corporate Governance Practices contained in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited throughout the six months ended 30 June 2010.

 

The Audit Committee of the bank has reviewed the results for the six months ended 30 June 2010.

 

9. Board of Directors

 

At 2 August 2010, the Board of Directors of the bank comprises Dr Raymond K F Ch'ien* (Chairman), Mrs Margaret Leung (Vice-Chairman and Chief Executive), Dr John C C Chan*, Dr Marvin K T Cheung*, Mr Alexander A Flockhart#, Mr Jenkin Hui*,  Mr William W Leung, Dr Eric K C Li*, Dr Vincent H S Lo#, Mr Iain J Mackay#, Mrs Dorothy K Y P Sit#, Mr Richard Y S Tang* and Mr Peter T S Wong#.

 

*   Independent non-executive Directors

#   Non-executive Directors

 

 

10. News release

 

This news release is available from the bank's website www.hangseng.com.

 

The Interim Report 2010, which contains all disclosures required by the Banking (Disclosure) Rules issued by the HKMA, will be published on the websites of Hong Kong Exchanges and Clearing Limited and the bank on the date of the issue of this news release. Printed copies of the Interim Report 2010 will be sent to shareholders in late August 2010.

 

Media enquiries to:

Walter Cheung

Telephone: (852) 2198 4020

Queenie Yip

Telephone: (852) 2198 4227

 

 

 

 

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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