Hang Seng Bank Results (1/2)

HSBC Holdings PLC 05 August 2002 HANG SENG BANK LIMITED 2002 INTERIM RESULTS - HIGHLIGHTS * Operating profit before provisions down 2.0 per cent to HK$5,849 million (HK$5,967 million for the first half of 2001). * Pre-tax profit down 3.3 per cent to HK$5,978 million (HK$6,183 million for the first half of 2001). * Attributable profit down 2.9 per cent to HK$5,220 million (HK$5,375 million for the first half of 2001). * Return on average shareholders' funds of 23.8 per cent (24.4 per cent for the first half of 2001). * Total assets down 0.9 per cent to HK$470.6 billion (HK$474.8 billion at 31 December 2001). * Earnings per share down 2.8 per cent to HK$2.73 (HK$2.81 per share for the first half of 2001). * First interim dividend per share maintained at HK$2.10 (HK$2.10 per share for the first half of 2001). * Total capital ratio of 15.4 per cent (15.3 per cent at 31 December 2001); tier 1 capital ratio of 12.6 per cent (12.3 per cent at 31 December 2001). * Cost:income ratio of 23.7 per cent (23.8 per cent for the first half of 2001). Hang Seng Bank attributable profit down 2.9 per cent to HK$5,220 million Hang Seng Bank Limited (the bank) and its subsidiary and associated companies (Hang Seng) reported an unaudited profit attributable to shareholders of HK$5,220 million for the first half of 2002, 2.9 per cent lower than the first half of 2001 but an increase of 10.1 per cent compared with the second half of 2001. Operating profit before provisions fell by HK$118 million, or 2.0 per cent, to HK$5,849 million. A reduction of 7.6 per cent in net interest income, mainly attributable to the decline in free funds' contribution, outweighed the combined effect of a 14.6 per cent rise in other operating income and a 2.7 per cent reduction in operating expenses. Operating profit decreased by 6.4 per cent to HK$5,568 million, after taking into account the net charge for provisions for bad and doubtful debts which rose by HK$260 million to HK$281 million due to the exceptionally high releases and recoveries in the same period last year. Profit before tax amounted to HK$5,978 million, which was HK$205 million, or 3.3 per cent, lower than the first half of 2001, after accounting for an increase in profits on disposal of debt securities and locally-listed equities, and the inclusion of the bank's share of the value of the long-term assurance business of Hang Seng Life Limited. Compared with the second half of 2001, operating profit before provisions and profit before tax increased by 5.7 per cent and 12.1 per cent respectively. Total assets were HK$4.2 billion, or 0.9 per cent, lower at HK$470.6 billion, compared with HK$474.8 billion at 31 December 2001. The slight reduction in balance sheet size reflected a decrease of 1.5 per cent in customer deposits. There was a continued shift of time deposits to savings deposits under a persistently low interest rate environment. Advances to customers grew by 1.5 per cent during the first half of 2002, mainly in residential mortgages, corporate lending and trade advances, while mortgages under the Government Home Ownership Scheme decreased. Investment in debt securities also rose, with funds redeployed from lower yielding interbank placements. Shareholders' funds (excluding proposed dividends) grew by HK$552 million, or 1.4 per cent, to HK$40,270 million at 30 June 2002. This was mainly attributable to an increase of HK$1,274 million in retained profits and a reduction of HK$672 million in the long-term equity investment revaluation reserve due to the realisation on disposal and the fall in fair value of long-term equities. The return on average total assets was maintained at 2.2 per cent (2.2 per cent for the first half of 2001). The return on average shareholders' funds was 23.8 per cent, compared with 24.4 per cent in the first half of 2001 and 21.4 per cent in the second half of 2001. The advances to deposits ratio rose to 55.3 per cent at 30 June 2002 from 53.7 per cent at 31 December 2001, a result of the growth in customer advances and the reduction in customer deposits during the first half of 2002. Hang Seng continued to maintain a strong liquidity position, with the average liquidity ratio for the first half of 2002 (calculated in accordance with the Fourth Schedule of the Banking Ordinance) at 43.4 per cent (46.0 per cent for the first half of 2001). The total capital ratio at 30 June 2002 was 15.4 per cent (15.3 per cent at 31 December 2001) and the tier 1 capital ratio was 12.6 per cent (12.3 per cent at 31 December 2001). First interim dividend The Directors have declared a first interim dividend of HK$2.10 per share (HK$2.10 per share for the first half of 2001), which will be payable on Wednesday, 4 September 2002 to shareholders on the Register of Shareholders on Wednesday, 28 August 2002. The dividend as declared should not be taken as an indication of the level of profit or dividend for the full year. Comment by David Eldon, Chairman "With the Hong Kong economy remaining sluggish and the banking environment challenging in the first half of 2002, Hang Seng achieved an attributable profit of HK$5,220 million, a fall of 2.9 per cent from the first half of 2001 but an increase of 10.1 per cent compared with the second half of that year. "A hoped for recovery in re-exports in the second half of 2002 should lead to a modest rebound in the economy but the pace of recovery will probably be slow. Domestic demand and investment are likely to remain subdued in view of the record high unemployment and weak asset prices. The banking industry will continue to be affected by intense competition, weak loan demand, surplus liquidity and continuing pressure on margins. "In this difficult operating environment, Hang Seng will focus on cost control and credit risk management while continuing to build more profitable long-term customer relationships and diversifying income sources to increase shareholder value. We shall also expand further our operations in mainland China to pave the way for future growth." Contents The financial information in this news release is based on the unaudited consolidated accounts of Hang Seng Bank Limited and its subsidiary and associated companies for the six months ended 30 June 2002. Highlights of Results and Chairman's Comment Contents Consolidated Profit and Loss Account (Unaudited) Consolidated Balance Sheet (Unaudited) Consolidated Statement of Changes in Equity (Unaudited) Economic Profit (Unaudited) Consolidated Cash Flow Statement (Unaudited) Financial Review Net interest income Other operating income Operating expenses Provisions for bad and doubtful debts Profit on tangible fixed assets and long-term investments Taxation Earnings per share Dividends per share Cash and short-term funds Placings with banks maturing after one month Certificates of deposit Securities held for dealing purposes Advances to customers Provisions against advances to customers Non-performing advances to customers and provisions Overdue advances to customers Rescheduled advances to customers Segmental analysis of advances to customers by geographical area Gross advances to customers by industry sector Long-term investments Other assets Current, savings and other deposit accounts Deposits from banks Shareholders' funds Capital resources management Liquidity ratio Reconciliation of cash flow statement Contingent liabilities, commitments and derivatives Segmental analysis Cross border claims Additional Information Accounting policies Comparative figures Market risk Foreign currency positions Material related-party transactions Statutory accounts Ultimate holding company Statement of compliance Register of shareholders News release Consolidated Profit and Loss Account (Unaudited) Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Interest income 7,617 14,430 10,079 Interest expense (2,164 ) (8,528 ) (4,321 ) Net interest income 5,453 5,902 5,758 Other operating income 2,212 1,931 2,016 Operating income 7,665 7,833 7,774 Operating expenses (1,816 ) (1,866 ) (2,238 ) Operating profit before provisions 5,849 5,967 5,536 Provisions for bad and doubtful debts (281 ) (21 ) (403 ) Operating profit 5,568 5,946 5,133 Profit on tangible fixed assets and long-term investments 343 212 181 Net deficit on property revaluation __ __ (14 ) Share of profits of associated companies 67 25 31 Profit on ordinary activities before tax 5,978 6,183 5,331 Tax on profit on ordinary activities (758 ) (808 ) (592 ) Profit attributable to shareholders 5,220 5,375 4,739 Retained profits at beginning of period - as previously reported 19,618 18,732 20,162 - arising on change in accounting policies 17 __ __ - as restated 19,635 18,732 20,162 Transfer of depreciation to premises revaluation reserve 48 50 50 Realisation on disposal of premises and investment properties 2 20 22 Exchange adjustments 2 __ (2 ) Proposed dividends (4,015 ) (4,015 ) (5,353 ) Retained profits at end of period 20,892 20,162 19,618 Figures in HK$ Earnings per share 2.73 2.81 2.48 Dividends per share 2.10 2.10 2.80 Consolidated Balance Sheet (Unaudited) Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Assets Cash and short-term funds 88,438 118,172 111,099 Placings with banks maturing after one month 42,192 49,665 43,666 Certificates of deposit 26,822 19,407 23,203 Securities held for dealing purposes 1,209 2,837 2,167 Advances to customers 225,746 219,750 222,436 Amounts due from immediate holding company and fellow subsidiary companies 10,425 7,641 8,297 Long-term investments 54,918 40,963 43,262 Investments in associated companies 1,051 808 774 Tangible fixed assets 11,237 11,916 11,323 Other assets 8,568 11,458 8,560 470,606 482,617 474,787 Liabilities Current, savings and other deposit accounts 408,295 415,484 414,328 Deposits from banks 2,287 4,050 2,622 Amounts due to immediate holding company and fellow subsidiary companies 1,896 1,098 1,051 Other liabilities 13,843 16,802 11,715 426,321 437,434 429,716 Capital resources Share capital 9,559 9,559 9,559 Reserves 30,711 31,609 30,159 Proposed dividends 4,015 4,015 5,353 Shareholders' funds 44,285 45,183 45,071 470,606 482,617 474,787 Consolidated Statement of Changes in Equity (Unaudited) Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Shareholders' funds at beginning of period - as previously reported 45,071 45,937 45,183 - change in accounting policies -- net transitional liabilities on defined benefit schemes (189 ) __ __ -- value on long-term assurance business 206 __ __ 17 __ __ - as restated 45,088 45,937 45,183 Unrealised deficit on revaluation of premises __ __ (209 ) Unrealised deficit on revaluation of investment properties - bank and subsidiary companies __ __ (211 ) - associated company __ __ (61 ) Long-term equity investment revaluation reserve - unrealised deficit on revaluation (395 ) (612 ) (238 ) - realisation on disposal (277 ) (164 ) (115 ) Exchange adjustments 2 __ (2 ) Net losses recognised in the shareholders' funds during the period (670 ) (776 ) (836 ) Profit attributable to shareholders for the period 5,220 5,375 4,739 Dividends paid (5,353 ) (5,353 ) (4,015 ) Shareholders' funds at end of period 44,285 45,183 45,071 Economic profit (Unaudited) Economic profit is calculated from profit after tax, adjusted for non-cash items, and takes into account the cost of capital invested by Hang Seng's shareholders. For consistency, the benchmark cost of capital of 15.0 per cent was applied, which is above Hang Seng's true cost of capital under the current low interest rate environment. The trend of economic profits in this analysis shows that Hang Seng continues to create value for its shareholders. Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Average invested capital 31,260 30,448 31,664 Return on invested capital ^ 5,265 5,423 4,799 Cost of capital (2,322 ) (2,270 ) (2,397 ) Economic profit 2,943 3,153 2,402 ^ Return on invested capital represents profit after tax adjusted for non-cash items. Consolidated cash flow statement (Unaudited) Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 Net cash outflow from operating activities (1,406 ) (4,031 ) Cash flows from investing activities Net cash outflow from investment in an associated company (35 ) (25 ) Purchase of long-term investments (38,148 ) (18,991 ) Proceeds from sale or redemption of long-term investments 27,324 17,101 Purchase of tangible fixed assets (92 ) (105 ) Proceeds from sale of tangible fixed assets 2 49 Dividends received from an associated company 21 27 Income received on long-term investments 983 1,250 Net cash outflow from investing activities (9,945 ) (694 ) Cash flows from financing activities Dividends paid (5,353 ) (5,353 ) Net cash outflow from financing activities (5,353 ) (5,353 ) Decrease in cash and cash equivalents (16,704 ) (10,078 ) Cash and cash equivalents at beginning of period 141,103 157,511 Cash and cash equivalents at end of period 124,399 147,433 Financial Review Net interest income Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Net interest income 5,453 5,902 5,758 Average interest-earning assets 442,284 461,267 448,711 Net interest spread 2.38 % 2.21 % 2.35 % Net interest margin 2.49 % 2.58 % 2.55 % Net interest income decreased by HK$449 million, or 7.6 per cent, while average interest-earning assets fell by HK$19.0 billion, or 4.1 per cent. Net interest spread improved by 17 basis points to 2.38 per cent, but this was more than offset by a reduction of 26 basis points in the contribution from net free funds to 0.11 per cent, leading to a 9 basis point compression in net interest margin to 2.49 per cent. Net interest spread benefited by 21 basis points from improved spreads on holdings of fixed rate securities in a lower interest rate environment and gained 6 and 8 basis points respectively from the growth in lower cost savings deposits and a wider spread earned on time deposits. These were partly offset by a further decline in the average yield on the mortgage portfolio (including those under Government Home Ownership Scheme) and a reduction in interest recovered from non-performing advances which had an adverse impact of 16 and 2 basis points respectively on net interest spread. The contribution from net free funds was affected by the sharp fall in market interest rates, resulting in a reduction of HK$623 million in net interest income compared with the first half of 2001. Compared with the second half of 2001, net interest income fell by HK$305 million, or 5.3 per cent, with a 6 basis point fall in net interest margin to 2.49 per cent. Net interest spread widened by 3 basis points to 2.38 per cent, benefiting from improved spreads on fixed rate securities, growth in lower cost savings deposits and a wider spread earned attributable to time deposits. The fall in market interest rates caused the contribution from net free funds to decrease by 9 basis points to 0.11 per cent, which translated into a decline of HK$208 million in net interest income. As a result of the continued reduction in the pricing of new mortgages and the re-pricing of existing loans, the average yield on the residential mortgage portfolio, excluding Government Home Ownership Scheme mortgages and staff loans, fell to 138 basis points below BLR for the first half of 2002, before accounting for the effect of cash incentive payments. This compared with 65 basis points and 103 basis points below BLR in the first and second halves of 2001 respectively. Other operating income Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Dividend income - listed investments 44 51 35 - unlisted investments 9 6 1 53 57 36 Fees and commissions - securities/stockbroking 130 126 94 - retail investment funds 472 152 218 - insurance 185 168 256 - account services 129 136 144 - remittance 62 61 62 - cards 292 312 321 - credit facilities 146 157 148 - import/export 99 106 108 - other 75 60 67 Fees and commissions receivable 1,590 1,278 1,418 Fees and commissions payable (156 ) (154 ) (134 ) 1,434 1,124 1,284 Dealing profits - foreign exchange 280 259 272 - securities and other trading activities 10 __ (1 ) 290 259 271 Insurance underwriting 125 129 97 Rental income from investment properties 113 123 122 Other 197 239 206 2,212 1,931 2,016 Other operating income rose by HK$281 million, or 14.6 per cent, and contributed 28.9 per cent of total operating income, compared with 24.7 per cent for the first half of 2001. The strong growth of 27.6 per cent in net fees and commissions reflects Hang Seng's successful delivery of wealth management services to target customer segments. This included a 210.5 per cent increase in fees from the distribution and management of retail investment funds to HK$472 million, growth of 59.6 per cent in life insurance sales commissions to HK$142 million and an increase of 3.2 per cent in securities broking and related income to HK$130 million. Dealing profits grew by HK$31 million, or 12.0 per cent, attributable to improvements in foreign exchange income and securities trading. Insurance underwriting profit was maintained under intense market competition while other income fell by HK$42 million, or 17.6 per cent, mainly due to lower loan redemption fees. Operating expenses Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Staff costs - salaries and other costs 915 909 925 - retirement benefit costs 98 112 322 1,013 1,021 1,247 Depreciation 174 189 197 Premises and equipment - rental expenses 84 80 84 - other 282 339 364 366 419 448 Other operating expenses 263 237 346 1,816 1,866 2,238 Cost:income ratio 23.7 % 23.8 % 28.8 % Staff numbers (full-time equivalent) 7,321 7,425 7,488 Operating expenses fell by HK$50 million, or 2.7 per cent, to HK$1,816 million. Staff costs decreased marginally by HK$8 million, or 0.8 per cent. Depreciation charges dropped by HK$15 million, or 7.9 per cent, reflecting a lower level of capital expenditure. Premises and equipment expenses decreased by HK$53 million, or 12.6 per cent, attributable to the reduction in IT expenditure after the initial spending in the previous year to support the development of e-banking initiatives. Other operating expenses increased by HK$26 million, or 11.0 per cent, mainly in marketing and advertising expenses to promote credit cards and other personal banking products. Provisions for bad and doubtful debts Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Net charge/(release) for bad and doubtful debts Advances to customers Specific provisions - new provisions 528 576 559 - releases (222 ) (461 ) (136 ) - recoveries (25 ) (94 ) (20 ) 281 21 403 General provisions __ __ __ Net charge to profit and loss account 281 21 403 The net charge for bad and doubtful debts for the first half of 2002 amounted to HK$281 million against the comparative figure of HK$21 million which benefited significantly from the exceptionally high releases and recoveries during the first half of 2001. New and additional specific provisions were reduced by HK$48 million, or 8.3 per cent, to HK$528 million, with a reduction in specific charges for corporate accounts and residential mortgages offsetting the rise in specific charges for card advances and personal loans. Releases and recoveries reduced by HK$308 million, or 55.5 per cent, to HK$247 million, mainly in corporate accounts and taxi loans. Profit on tangible fixed assets and long-term investments Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Profit on disposal of long-term equity investments - realisation of amounts previously recognised in revaluation reserves at beginning of period 316 181 184 - loss arising in current period (39 ) (17 ) (69 ) 277 164 115 Profit less loss on disposal of held-to-maturity debt securities 75 49 71 Profit less loss on disposal of tangible fixed assets __ (1 ) 6 Provision for impairment of long-term investments (9 ) __ (11 ) 343 212 181 Profit on disposal of tangible fixed assets and long-term investments rose by HK$131 million, or 61.8 per cent, to HK$343 million, with higher profits on the disposal of debt securities from the accrual portfolio and locally-listed equities. Taxation Taxation in the consolidated profit and loss account represents: Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Provision for Hong Kong profits tax 745 802 605 Taxation outside Hong Kong 2 4 3 Deferred taxation __ __ (21 ) 748 804 588 Share of associated companies' taxation 10 4 4 Total charge for taxation 758 808 592 Effective tax rate 12.7 % 13.1 % 11.1 % The provision for Hong Kong profits tax was made at 16.0 per cent (the same rate as for 2001) based on an estimate of the assessable profits for the half-year ended 30 June 2002. Similarly, taxation provisions for subsidiary companies and branches outside the Hong Kong SAR were made at the appropriate rates of taxation prevailing in the countries in which they operate. The effective tax rate was 12.7 per cent, compared with 13.1 per cent for the first half of 2001, mainly due to the increase in non-taxable capital gains on the disposal of locally-listed equities. Earnings per share The calculation of earnings per share for the first half of 2002 is based on earnings of HK$5,220 million (HK$5,375 million in the first half of 2001) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from the first half of 2001). Dividends per share Half-year ended Half-year ended Half-year ended 30Jun02 30Jun01 31Dec01 HK$ HK$m HK$ HK$m HK$ HK$m per share per share per share First interim 2.10 4,015 2.10 4,015 __ __ Second interim __ __ __ __ 2.80 5,353 2.10 4,015 2.10 4,015 2.80 5,353 Cash and short-term funds Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Cash in hand and balances with banks and other financial institutions 3,873 3,916 3,729 Money at call and placings with banks maturing within one month 79,846 104,457 101,293 Treasury bills 4,719 9,799 6,077 88,438 118,172 111,099 Remaining maturity of treasury bills: - within three months 3,520 3,383 3,385 - one year or less but over three months 1,199 6,416 2,692 4,719 9,799 6,077 Placings with banks maturing after one month Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Remaining maturity: - three months or less but over one month 32,375 34,223 29,835 - one year or less but over three months 9,817 15,442 13,831 42,192 49,665 43,666 Certificates of deposit Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Remaining maturity: - three months or less but not repayable on demand 3,242 2,223 2,395 - one year or less but over three months 5,542 7,497 6,096 - five years or less but over one year 17,937 9,687 14,705 - over five years 101 __ 7 26,822 19,407 23,203 Securities held for dealing purposes Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Debt securities by remaining maturity: - three months or less but not repayable on demand 579 158 662 - one year or less but over three months 214 1,385 920 - five years or less but over one year 416 965 516 - over five years __ 208 69 1,209 2,716 2,167 Equity shares __ 121 __ 1,209 2,837 2,167 Advances to customers Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Gross advances to customers 228,893 223,741 225,926 Specific provisions (1,710 ) (2,554) (2,052 ) General provisions (1,437 ) (1,437) (1,438 ) 225,746 219,750 222,436 Remaining maturity: - repayable on demand 12,128 11,764 12,062 - three months or less but not repayable on demand 15,441 17,170 13,213 - one year or less but over three months 26,036 23,847 24,815 - five years or less but over one year 83,242 75,878 82,065 - over five years 84,628 87,505 86,789 - overdue for more than one month 1,452 973 808 - non-performing advances 5,966 6,604 6,174 Gross advances to customers 228,893 223,741 225,926 Provisions for bad and doubtful debts (3,147 ) (3,991 ) (3,490 ) 225,746 219,750 222,436 Included in advances to customers are: - trade bills 2,222 2,085 1,882 - provisions for bad and doubtful debts (66 ) (44 ) (61 ) 2,156 2,041 1,821 Advances to customers (after deduction of interest in suspense and provisions) recorded modest growth of HK$3,310 million, or 1.5 per cent, to HK$225.7 billion at 30 June 2002, as loan demand remained subdued under the uncertain economic environment. Provisions against advances to customers Suspended Figures in HK$m Specific General Total interest At 1 January 2002 2,052 1,438 3,490 509 Amounts written off (649 ) __ (649 ) (117 ) Recoveries of advances written off in previous years 25 __ 25 __ Net charge to profit and loss account 281 __ 281 __ Interest suspended during the period __ __ __ 74 Suspended interest recovered __ __ __ (52 ) Exchange adjustments 1 (1 ) __ __ At 30 June 2002 1,710 1,437 3,147 414 Suspended interest comprises both suspended interest netted against 'Advances to customers' and suspended interest netted against accrued interest receivable in 'Prepayments and accrued income'. Total provisions as a percentage of gross advances to customers are as follows: At 30Jun02 At 30Jun01 At 31Dec01 % % % Specific provisions 0.75 1.14 0.91 General provisions 0.63 0.64 0.64 Total provisions 1.38 1.78 1.55 Total provisions as a percentage of gross advances to customers fell to 1.38 per cent at 30 June 2002, compared with 1.55 per cent at the end of 2001. Specific provisions as a percentage of gross advances decreased by 0.16 percentage points to 0.75 per cent. The reduction mainly reflected the writing-off of the irrecoverable balances and the upgrading of rescheduled advances and doubtful accounts to performing status. General provisions stood at 0.63 per cent of gross advances to customers, compared with 0.64 per cent at the end of 2001. Non-performing advances to customers and provisions Non-performing advances to customers on which interest has been placed in suspense or on which interest has ceased to accrue are as follows: Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Gross non-performing advances on which interest: - has been placed in suspense 5,622 6,578 6,084 - accrual has ceased 479 342 251 6,101 6,920 6,335 Suspended interest (135 ) (316 ) (161 ) Gross non-performing advances ^ (page 22) 5,966 6,604 6,174 Specific provisions (1,710 ) (2,554 ) (2,052 ) Net non-performing advances 4,256 4,050 4,122 Specific provisions as a percentage of gross non-performing advances ^ 28.7 % 38.7 % 33.2 % Gross non-performing advances ^ as a percentage of gross advances to customers 2.6 % 3.0 % 2.7 % ^ Stated after deduction of interest in suspense. Non-performing advances to customers are those advances where full repayment of principal or interest is considered unlikely and are so classified as soon as such a situation becomes apparent. Non-performing advances may include advances that are not yet overdue for more than three months but are considered doubtful. Except in certain limited circumstances, all advances on which principal or interest is overdue for more than three months are classified as non-performing. Specific provisions are made after taking into account the value of collateral held in respect of such advances. Gross non-performing advances (after deduction of interest in suspense) fell by HK$208 million, or 3.4 per cent, to HK$5,966 million, compared with the end of 2001. There was a slight improvement in the ratio of gross non-performing advances to gross advances to customers to 2.6 per cent from 2.7 per cent at the end of 2001. Overdue advances to customers The amounts of advances to customers which are overdue for more than three months and their expression as a percentage of gross advances to customers are as follows: At 30Jun02 At 30Jun01 At 31Dec01 HK$m % HK$m % HK$m % Gross advances to customers ^ which have been overdue with respect to either principal or interest for periods of: - six months or less but over three months 823 0.3 861 0.4 1,338 0.6 - one year or less but over six months 1,321 0.6 1,455 0.6 894 0.4 - over one year 2,910 1.3 3,109 1.4 3,203 1.4 5,054 2.2 5,425 2.4 5,435 2.4 Overdue advances to customers (as above) 5,054 2.2 5,425 2.4 5,435 2.4 Less: overdue advances on which interest is still being accrued (691 ) (0.3 ) (655 ) (0.3 ) (622 ) (0.3 ) Add: advances overdue for periods of three months or less, or which are not yet overdue, and on which interest has been placed in suspense - included in rescheduled advances 321 0.1 1,137 0.5 484 0.2 - other 1,282 0.6 697 0.4 877 0.4 Gross non-performing advances (page 21) 5,966 2.6 6,604 3.0 6,174 2.7 ^ Stated after deduction of interest in suspense. Advances with a specific repayment date are classified as overdue when the principal or interest is overdue and remains unpaid at the period-end. Advances repayable by regular instalments are treated as overdue when an instalment payment is overdue and remains unpaid at the period-end. Advances repayable on demand are classified as overdue either when a demand for repayment has been served on the borrower but repayment has not been made in accordance with the 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. Rescheduled advances to customers The amount of rescheduled advances and its expression as a percentage of gross advances to customers are as follows: At 30Jun02 At 30Jun01 At 31Dec01 HK$m % HK$m % HK$m % Rescheduled advances to customers ^ 391 0.2 2,336 1.0 512 0.2 ^ Stated after deduction of interest in suspense. Rescheduled advances are those advances which have been restructured or renegotiated because of a deterioration in the financial position of the borrower leading to an inability to meet the original repayment schedule. Rescheduled advances to customers are stated net of any advances that have subsequently become overdue for over three months and are included in overdue advances to customers Rescheduled advances to customers were reduced by HK$121 million, or 23.6 per cent, to HK$391 million at 30 June 2002, representing 0.2 per cent of gross advances to customers. The reduction was the result of the upgrading of certain corporate accounts and taxi loans to normal status after resumption of normal repayments for a prescribed period. Segmental analysis of advances to customers by geographical area Advances to customers by geographical area are classified according to the location of the counterparties after taking into account the transfer of risk. In general, risk transfer applies when an advance is guaranteed by a party in an area which is different from that of the counterparty. At 30 June 2002, over 90 per cent of Hang Seng's advances to customers and the related non-performing advances and overdue advances were classified under the area of Hong Kong (unchanged from the positions at 30 June 2001 and 31 December 2001). Gross advances to customers by industry sector The analysis of gross advances to customers (after deduction of interest in suspense) by industry sector based on categories and definitions used by the Hong Kong Monetary Authority is as follows: Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Gross advances to customers for use in Hong Kong Industrial, commercial and financial sectors Property development 19,775 19,199 20,237 Property investment 29,952 28,538 29,403 Financial concerns 2,121 1,693 1,991 Stockbrokers 199 133 115 Wholesale and retail trade 3,755 4,084 3,737 Manufacturing 2,032 1,789 1,683 Transport and transport equipment 9,671 8,205 9,687 Other 19,129 18,741 17,109 86,634 82,382 83,962 Individuals Advances for the purchase of flats under the Government Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme 36,752 39,333 39,295 Advances for the purchase of other residential properties 78,937 76,678 77,537 Credit card advances 5,419 4,986 5,262 Other 6,944 5,945 6,050 128,052 126,942 128,144 Total gross advances for use in Hong Kong 214,686 209,324 212,106 Trade finance 10,002 10,455 9,434 Gross advances for use outside Hong Kong 4,205 3,962 4,386 Gross advances to customers 228,893 223,741 225,926 Lending to the industrial, commercial and financial sectors grew by HK$2,672 million, or 3.2 per cent, since the end of 2001. The manufacturing sector recorded lending growth of 20.7 per cent, reflecting the bank's efforts in developing business with middle market and smaller enterprises. The lending increase in the 'Other' sector of 11.8 per cent was mainly in working capital financing for large corporations in public utility and property development businesses. Advances to individuals were maintained at the same level as at the end of 2001. Government Home Ownership Scheme ('GHOS') mortgages decreased following the suspension of GHOS flat sales during the period from September 2001 to June 2002 while residential mortgages continued to grow amidst intense market competition. Credit card advances and other lending to individuals, mainly tax and personal loans, grew by 3.0 per cent and 14.8 per cent respectively, in line with the bank's strategy to diversify its loan portfolios. Trade finance recorded growth of 6.0 per cent, as Hong Kong's re-export trade began to pick up in the first half of 2002. Long-term investments Carrying value Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Held-to-maturity debt securities Issued by public bodies - central governments and central banks 6,940 3,806 3,324 - other public sector entities 8,375 6,053 6,510 15,315 9,859 9,834 Issued by other bodies - banks and other financial institutions 21,229 14,960 15,234 - corporate entities 15,428 12,217 14,537 36,657 27,177 29,771 51,972 37,036 39,605 Equity investments Issued by corporate entities 2,946 3,927 3,657 54,918 40,963 43,262 Held-to-maturity debt securities - listed in Hong Kong 1,167 371 311 - listed outside Hong Kong 15,368 7,560 9,762 16,535 7,931 10,073 - unlisted 35,437 29,105 29,532 51,972 37,036 39,605 Equity investments - listed in Hong Kong 2,189 3,269 2,848 - listed outside Hong Kong 82 92 95 2,271 3,361 2,943 - unlisted 675 566 714 2,946 3,927 3,657 54,918 40,963 43,262 Held-to-maturity debt securities are stated at cost, adjusted for the amortisation of premiums and accretion of discounts over the period from the date of purchase to the date of redemption. Equity investments are stated at fair value, less provision for impairment. Long-term investments increased by HK$11,656 million, or 26.9 per cent, compared with 31 December 2001. The portfolio of held-to-maturity debt securities rose by HK$12,367 million, or 31.2 per cent, to HK$51,972 million with increases in securities issued by public bodies, banks and financial institutions. The portfolio's fair value was HK$52,531 million at 30 June 2002, with an unrealised revaluation gain of HK$559 million. The equity investment portfolio was HK$711 million, or 19.4 per cent, lower due to disposals and the fall in fair value following stock market movements. The following table shows the fair value of held-to-maturity debt securities: Fair value Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Held-to-maturity debt securities Issued by public bodies - central governments and central banks 7,055 3,825 3,401 - other public sector entities 8,649 6,216 6,741 15,704 10,041 10,142 Issued by other bodies - banks and other financial institutions 21,278 14,974 15,265 - corporate entities 15,549 12,338 14,663 36,827 27,312 29,928 52,531 37,353 40,070 Held-to-maturity debt securities - listed in Hong Kong 1,182 373 315 - listed outside Hong Kong 15,494 7,570 9,856 16,676 7,943 10,171 - unlisted 35,855 29,410 29,899 52,531 37,353 40,070 This information is provided by RNS The company news service from the London Stock Exchange

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