Hang Seng Bank pt 3/6

HSBC Holdings PLC
30 July 2007

Net fee income

                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m                                               (restated)

- Stockbroking and related services              738                 398                 407
- Retail investment funds                        728                 484                 312
- Structured investment products                 249                  32                  62
- Insurance                                       56                  59                  49
- Account services                               144                 121                 153
- Private banking                                333                 160                 171
- Remittances                                     91                  75                  86
- Cards                                          483                 403                 457
- Credit facilities                               56                  52                  59
- Trade services                                 189                 176                 204
- Other                                           96                  75                  79
Fee income                                     3,163               2,035               2,039
Fee expense                                     (301)               (253)               (324)  
                                               2,862               1,782               1,715

Net fee income reached HK$2,862 million, representing an increase of 60.6 per
cent over the first half of 2006 and 66.9 per cent compared with the second half
of 2006.

Investment services expanded significantly, capturing the opportunities provided
by the buoyant stock market and favourable investment environment. Stockbroking
and related services income rose by 85.4 per cent to HK$738 million, driven by a
78.4 per cent growth in turnover. Investment funds income (including sales
commission and fund management fees) rose by 50.4 per cent to HK$728 million.
Sales turnover of investment funds reached a half-year record of HK$32.4
billion, rising 88.6 per cent over the same period last year. Income from sales
of third-party structured products (mainly equity-linked instruments) rose by
HK$217 million to HK$249 million. Private banking investment services income
rose by 108.1 per cent.

Card services income rose by 19.9 per cent, supported by a rise of 22.3 per cent
in cardholder spending. Deposit services and payment and cash management
business also showed good progress, reporting growth in account services fees
and remittances of 19.0 per cent and 21.3 per cent respectively.

Trading income
                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m                                               (restated)

Trading profits:
- foreign exchange                               394                 610                 568
- securities, derivatives and
  other trading activities                       190                  49                 103
                                                 584                 659                 671


Trading income fell by HK$75 million, or 11.4 per cent, compared with the first
half of 2006. The fall in foreign exchange income of HK$216 million was mainly
attributable to two reasons not related to normal foreign exchange trading.
First, an exchange loss of HK$187 million was incurred in the first half of 2007
(HK$38 million in the first half of 2006) on forward contracts used in 'funding
swap' activities^ in the balance sheet management portfolios. Second, capital
funds of HACN maintained in US dollars pending approval to convert into renminbi
were recorded at historical rate. The subsequent revaluation loss of such US
dollar funds against the renminbi, amounting to HK$47 million in the first half
of 2007, was recognised as a foreign exchange loss.


Income from securities, derivatives and other trading rose significantly by
HK$141 million, or 287.8 per cent, attributable mainly to the 78.8 per cent
increase in the turnover of equity-linked structured products for commercial and
personal customers and an improvement in proprietary trading results.


Compared with the second half of 2006, trading income was down HK$87 million,
mainly attributable to the exchange loss on funding swap transactions.


^Treasury 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 HKAS39, 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.


Other operating income

                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m

Rental income from investment
  properties                                      72                 104                  82
Movement in present value of 
  in-force long-term insurance
  business                                       207                 185                 178
Other                                            118                 103                 193
                                                 397                 392                 453

Analysis of income from wealth management business

                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m                                               (restated)

Investment income:
- retail investment funds                        728                 484                 312
- structured investment products^                511                 235                 278
- private banking ^^                             337                 165                 175
- securities broking and related services        738                 398                 407
- margin trading and others                       30                  33                  32
                                               2,344               1,315               1,204
Insurance income:
- life insurance                                 943                 688                 788
- general insurance and others                   142                 165                 121
                                               1,085                 853                 909
Total                                          3,429               2,168               2,113

^ 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.

^^ Icome 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 reached a record HK$3,429 million in the first half of
2007, an increase of 58.2 per cent over a year earlier. This was contributed by
a 78.3 per cent growth in investment services income and 37.1 per cent rise in
life insurance income.

Investment fund sales reached a half-year record of HK$32.4 billion and rose by
88.6 per cent over the same period last year. The achievement reflected the
success of the Hang Seng fund series in the launch of new funds (the Hang Seng
Consumer Sector FlexiPower Fund, the first consumer sector fund authorised in
Hong Kong focusing on the mainland and Hong Kong markets, and the Hang Seng
China B-Share Focus Fund, which is the first retail fund in Hong Kong to focus
on China B-shares) and the good performance of existing funds (particularly the
Hang Seng China Equity Fund and the Hang Seng High Yield Bond Fund). In addition,
a wide variety of third-party funds were selected to meet customers' different
investment objectives. Funds under management (excluding private banking) rose
by 8.8 per cent to HK$67.4 billion from the previous year-end. Investment fund
income (including sales commission and management fees) rose by 50.4 per cent to
HK$728 million.

The bank adopted an open architecture model to source and package the most
competitive structured products (including both Hang Seng and third party
products) allowing customers to timely capture market opportunities. The success
of this approach brought a 28.3 per cent rise in turnover and 117.4 per cent
increase in income from structured investment products (mainly equity-linked
instruments).

Further investments were made in securities services to enhance the efficiency
and capacity of the e-Banking and phone banking trading platforms to capture
business opportunities provided by the buoyant stock market. Leveraging on its
extensive network, customer base and funding capabilities, the bank participated
actively in IPO activities by acting as a receiving bank and offered
preferential packages to customers for IPO subscription. Our promotional
campaigns were also successful in acquiring new securities accounts and boosting
trading volume, registering 17.2 per cent and 78.4 per cent year-on-year growth
respectively. Stockbroking and related service income rose by 85.4 per cent to
HK$738 million.

Private banking further strengthened its relationship management team and
investment service support. Customer base and assets under management rose by
8.5 per cent and 20.6 per cent respectively. Its investment services income rose
by an impressive 104.2 per cent.

Life insurance recorded encouraging income growth of 37.1 per cent to reach
HK$943 million (analysed in the table below). Hang Seng ranked first in the
market for new regular-pay (non-linked) life insurance premiums in the first
quarter of 2007. This unprecedented success is attributable to the offering of a
diverse range of retirement solutions and an efficient multi-channel
distribution network.

General insurance income fell by 13.9 per cent to HK$142 million in a
competitive market environment.
                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m

Life insurance:
- net interest income and fee income             429                 294                 371
- investment returns on life insurance
  funds                                          689                  44                 866
- net earned insurance premiums                4,676               3,791               3,743
- claims, benefits and surrenders paid          (618)               (517)               (497)
- movement in policyholders' liabilities^     (4,445)             (3,113)             (3,878)
- reinsurers' share of claims incurred and
  movement in policyholders' liabilities           5                   4                   5
- movement in present value of in-force
  long-term insurance business                   207                 185                 178
                                                 943                 688                 788
General insurance and others                     142                 165                 121
Total                                          1,085                 853                 909

^ Including premium and investment reserves

Loan impairment charges and other credit risk provisions

                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m    

Loan impairment (charges)/releases:
- individually assessed                         (137)                 29                (136)
- collectively assessed                         (143)                (63)                (82)
                                                (280)                (34)               (218)
Of which:
- new and additional                            (349)               (165)               (258)
- releases                                        40                  97                   9
- recoveries                                      29                  34                  31
                                                (280)                (34)               (218)

Other provisions                                   -                   -                 (12)

Loan impairment charges and other
  credit risk provisions                        (280)                (34)               (230)

Loan impairment charges and other credit risk provisions increased by HK$246
million, or 723.5 per cent, to HK$280 million. Individually assessed provisions
recorded a net charge of HK$137 million compared with a net release of HK$29
million for the same period last year, due mainly to higher new charges and
lower releases for corporate and commercial banking customers. Of the
collectively assessed charges, HK$101 million was made on card and personal loan
portfolios, a rise of 71.2 per cent over same period last year. A charge of
HK$42 million was made on advances not individually identified as impaired,
compared with a charge of HK$4 million made in the first half of 2006. This
reflects an update of the historical loss rates used for the first half of 2007.

Operating expenses

                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m

Employee compensation and benefits:
- salaries and other costs                     1,171               1,090               1,098
- performance-related pay                        405                 128                 254
- retirement benefit costs                        22                  59                  65
                                               1,598               1,277               1,417
General and administrative expenses:
- rental expenses                                170                 117                 150
- other premises and equipment                   363                 350                 479
- marketing and advertising expenses             225                 142                 305
- other operating expenses                       378                 298                 373
                                               1,136                 907               1,307
Depreciation of business premises
  and equipment                                  169                 150                 173
Amortisation of intangible assets                 11                   4                   6
                                               2,914               2,338               2,903

Cost efficiency ratio                          26.6%               26.8%               31.0%

                                          At 30Jun07          At 30Jun06          At 31Dec06
Staff numbers^ by region
Hong Kong                                      7,724               7,524               7,748
Mainland                                         843                 471                 661
Others                                            58                  50                  55
Total                                          8,625               8,045               8,464

^ Full-time equivalent

Operating expenses rose by HK$576 million, or 24.6 per cent, compared with the
first half of 2006. Mainland operations accounted for an increase of HK$121
million, attributable mainly to the establishment of HACN and the expansion of
branch network and headcount. Excluding mainland operations, operating expenses
rose by 20.3 per cent.

Employee compensation and benefits increased by HK$321 million, or 25.1 per
cent, over the same period last year. Of this amount, HK$277 million was in the
form of variable performance-related pay, including sales incentives and
bonuses, which made up 25.3 per cent of total staff costs in the first half of
2007 (10.0 per cent for the first half of 2006). Salaries and other costs
increased by 7.4 per cent, reflecting increased headcount and annual salary
increment.

General and administrative expenses were up HK$229 million, or 25.2 per cent. An
increase of HK$53 million in rental expenses was attributable to branches in
Hong Kong and on the Mainland as well as additional rental after the disposal of
the Hang Seng Building in May 2006 and the new 'Mega Site' back office centre.
Marketing and advertising expenses rose by HK$83 million with the increased
promotion of wealth management products and card services and brand building
both in Hong Kong and on the Mainland. The increase of HK$80 million under the
heading of 'Other operating expenses' included financial data fees to support
securities business growth, professional and other costs associated with the
establishment of HACN and charges by the HSBC Group processing centres due to an
increase in business volume.

The number of full-time equivalent staff increased by 580 year-on-year. New
staff in Hong Kong were hired to further expand private banking's financial
advisory team and strengthen the PFS and CMB relationship management and wealth
management teams. Mainland staff increased from 471 to 843, due to the
establishment of HACN and branch network expansion.

The cost efficiency ratio for the first half of 2007 was 26.6 per cent, compared
with 26.8 per cent for the same period last year.

Profit on disposal of fixed assets and financial investments

                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m

Profit on disposal of
  available-for-sale securities                  248                 126                 212

Profit less loss on disposal of
  fixed assets                                    26                 448                  57
                                                 274                 574                 269

Profit on disposal of fixed assets and financial investments amounted to HK$274
million, a decrease of 52.3 per cent compared with the first half of 2006.
Profit on disposal of equity investments increased by 96.8 per cent to HK$248
million. Profit on disposal of properties fell to HK$26 million, compared with
HK$448 million in the same period last year, which recorded the disposal of the
Hang Seng Bank Building at 77 Des Voeux Road Central.

Tax expenses

Taxation in the consolidated income statement represents:

                                     Half-year ended     Half-year ended     Half-year ended
                                             30Jun07             30Jun06             31Dec06
Figures in HK$m

Current tax - provision for
  Hong Kong profits tax
Tax for the period                             1,077               1,367                 821

Current tax - taxation outside
  Hong Kong
Tax for the period                                28                  11                  25

Deferred tax
Origination and reversal of
  temporary differences                           45                (176)                  1

Total tax expenses                             1,150               1,202                 847

The current tax provision is based on the estimated assessable profit for the
first half of 2007, and is determined for the bank and its subsidiaries
operating in Hong Kong by using the Hong Kong profits tax rate of 17.5 per cent
(the same rate as in 2006). For subsidiaries and branches operating in other
jurisdictions, the appropriate tax rates prevailing in the relevant countries
are used.

Earnings per share

The calculation of earnings per share for the first half of 2007 is based on
earnings of HK$8,867 million (HK$6,190 million and HK$5,848 million for the
first and second halves of 2006 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 2006).

Dividends per share

                                    Half-year ended         Half-year ended        Half-year ended
                                            30Jun07                 30Jun06                31Dec06
                                      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







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