Hang Seng Bank Results (2/2)

HSBC Holdings PLC 05 August 2002 Maturity analysis of held-to-maturity debt securities: Carrying value Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Remaining maturity: - three months or less but not repayable on demand 7,532 7,351 7,892 - one year or less but over three months 10,667 7,168 6,087 - five years or less but over one year 31,481 19,474 22,930 - over five years 2,292 3,043 2,696 51,972 37,036 39,605 Other assets Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Unrealised gains on off-balance sheet interest rate, exchange rate and other derivative contracts which are marked to market 876 862 570 Deferred taxation 34 13 34 Items in the course of collection from other banks 3,756 4,722 2,881 Prepayments and accrued income 2,040 2,991 2,294 Other accounts 1,862 2,870 2,781 8,568 11,458 8,560 Remaining maturity: - three months or less 6,874 8,820 6,467 - one year or less but over three months 621 2,446 1,048 - five years or less but over one year 947 50 913 - over five years 90 103 98 8,532 11,419 8,526 - overdue ^ -- six months or less but over three months 5 5 5 -- one year or less but over six months 7 8 7 -- over one year 24 26 22 36 39 34 8,568 11,458 8,560 ^ Represented mainly by overdue interest receivable included under 'Prepayments and accrued income'. Current, savings and other deposit accounts Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Customer deposit accounts - current accounts 32,548 25,950 31,471 - savings accounts 146,910 128,745 141,608 - time and other deposits 211,020 245,768 222,685 Certificates of deposit in issue 17,809 15,021 18,564 Other debt securities in issue 8 __ __ 408,295 415,484 414,328 Customer deposit accounts Repayable on demand 223,161 176,953 186,557 With agreed maturity dates or periods of notice, by remaining maturity: - three months or less but not repayable on demand 159,948 210,806 198,405 - one year or less but over three months 6,973 12,606 10,664 - five years or less but over one year 396 98 138 390,478 400,463 395,764 Certificates of deposit in issue Remaining maturity: - three months or less but not repayable on demand 6,836 4,272 3,888 - one year or less but over three months 8,827 1,797 6,667 - five years or less but over one year 1,781 8,587 7,644 - over five years 365 365 365 17,809 15,021 18,564 Other debt securities in issue Remaining maturity: - three months or less but not repayable on demand 8 __ __ 8 __ __ 408,295 415,484 414,328 Customer deposit accounts fell by HK$5,286 million, or 1.3 per cent, to HK$390.5 billion, compared with HK$395.8 billion at 31 December 2001. There was a shift of funds from time deposits to savings and current accounts, reflecting customers' preference for liquidity in the low interest rate environment. Certificates of deposit in issue fell by HK$755 million, or 4.1 per cent, to HK$17.8 billion. Deposits from banks Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Repayable on demand 1,146 2,924 2,406 With agreed maturity dates or periods of notice, by remaining maturity: - three months or less but not repayable on demand 1,137 1,096 198 - one year or less but over three months 4 30 18 2,287 4,050 2,622 Shareholders' funds Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Share capital 9,559 9,559 9,559 Retained profits 20,892 20,162 19,618 Premises and investment properties revaluation reserves 8,069 8,672 8,119 Long-term equity investment revaluation reserve 1,651 2,676 2,323 Capital redemption reserve 99 99 99 Reserves 30,711 31,609 30,159 40,270 41,168 39,718 Proposed dividends 4,015 4,015 5,353 Shareholders' funds 44,285 45,183 45,071 Return on average shareholders' funds 23.8 % 24.4 % 21.4 % There was no purchase, sale or redemption of the bank's listed securities by the bank or any of its subsidiaries during the period. Shareholders' funds (excluding proposed dividends) rose by HK$552 million, or 1.4 per cent, to HK$40,270 million at 30 June 2002, mainly reflecting an increase of HK$1,274 million in retained profits and a reduction of HK$672 million in the long-term equity investment revaluation reserve due to the disposal and decrease in fair value of equity investments. The return on average shareholders' funds was 23.8 per cent, compared with 24.4 per cent and 21.4 per cent for the first and second halves of 2001 respectively. Capital resources management Analysis of capital base and risk-weighted assets Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Capital base Tier 1 capital - share capital 9,559 9,559 9,559 - retained profits 20,533 19,821 19,342 - capital redemption reserve 99 99 99 - total 30,191 29,479 29,000 Tier 2 capital - premises and investment properties revaluation reserves 5,674 5,860 5,708 - long-term equity investment revaluation reserve 1,056 1,605 1,418 - general provisions 1,437 1,437 1,437 - total 8,167 8,902 8,563 Unconsolidated investments and other deductions (1,608 ) (1,365 ) (1,331 ) Total capital base after deductions 36,750 37,016 36,232 Risk-weighted assets On-balance sheet 224,802 219,577 221,565 Off-balance sheet 14,058 14,743 14,726 Total risk-weighted assets 238,860 234,320 236,291 Total risk-weighted assets adjusted for market risk 239,200 234,834 236,588 Capital adequacy ratios After adjusting for market risk - tier 1 ^ 12.6 % 12.6 % 12.3 % - total ^ 15.4 % 15.8 % 15.3 % Before adjusting for market risk - tier 1 12.6 % 12.6 % 12.3 % - total 15.4 % 15.8 % 15.3 % ^ The capital ratios take into account market risks in accordance with the relevant Hong Kong Monetary Authority guideline under the Supervisory Policy Manual. The total capital ratio improved by 0.1 percentage point to 15.4 per cent at 30 June 2002, compared with 15.3 per cent at 31 December 2001. The capital base recorded a growth of 1.4 per cent while risk-weighted assets adjusted for market risk rose by 1.1 per cent. The tier 1 capital ratio rose to 12.6 per cent as a result of the 6.2 per cent growth in retained profits. Liquidity ratio The average liquidity ratio for the period, 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 30Jun02 30Jun01 31Dec01 The bank and its major banking subsidiaries 43.4 % 46.0 % 45.2 % Reconciliation of cash flow statement (a) Reconciliation of operating profit to net cash flow from operating activities Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 Operating profit 5,568 5,946 Provisions for bad and doubtful debts 281 21 Depreciation 174 189 Amortisation of long-term investments (42 ) (249 ) Advances written off net of recoveries (624 ) (484 ) Income receivable on long-term investments (953 ) (1,196 ) Net cash inflow from trading activities 4,404 4,227 Change in cash and short-term funds 1,499 5,129 Change in placings with banks repayable after three months 4,014 7,207 Change in certificates of deposit (3,374 ) (1,765 ) Change in securities held for dealing purposes 958 1,662 Change in advances to customers (2,967 ) (1,768 ) Change in amounts due from immediate holding company and fellow subsidiary companies (455 ) (580 ) Change in other assets (38 ) (185 ) Change in customer deposit accounts (5,286 ) (14,412 ) Change in debt securities in issue (747 ) 291 Change in deposits from banks (335 ) 248 Change in amounts due to immediate holding company and fellow subsidiary companies 845 (901 ) Change in other liabilities 1,629 (3,100 ) Taxation paid (68 ) (168 ) Elimination of exchange differences and other non-cash items (1,485 ) 84 Net cash outflow from operating activities (1,406 ) (4,031 ) (b) Analysis of the balances of cash and cash equivalents Figures in HK$m At 30Jun02 At 31Jun01 Cash in hand and balances with banks and other financial institutions 4,244 3,978 Money at call and placings with banks maturing within one month 82,455 105,155 Treasury bills 2,415 1,767 Placings with banks repayable between one to three months 34,887 35,226 Certificates of deposit 398 1,307 124,399 147,433 Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 30 June 2002 Contingent liabilities: Guarantees 14,635 14,481 4,311 Commitments: Documentary credits and short-term trade-related transactions 7,470 1,501 1,492 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 65,755 __ __ - one year and over 16,668 8,334 7,656 Other 47 47 47 89,940 9,882 9,195 Exchange rate contracts: Spot and forward foreign exchange 106,446 1,016 248 Other exchange rate contracts 11,855 168 42 118,301 1,184 290 Interest rate contracts: Interest rate swaps 52,200 1,077 261 Other interest rate contracts 16,550 __ __ 68,750 1,077 261 Other derivative contracts 16 __ __ Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 30 June 2001 Contingent liabilities: Guarantees 9,124 9,033 3,906 Commitments: Documentary credits and short-term trade-related transactions 6,176 1,240 1,234 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 62,777 __ __ - one year and over 18,296 9,148 8,899 87,249 10,388 10,133 Exchange rate contracts: Spot and forward foreign exchange 143,256 2,103 481 Other exchange rate contracts 5,556 85 17 148,812 2,188 498 Interest rate contracts: Interest rate swaps 47,556 820 206 Other interest rate contracts 7,755 __ __ 55,311 820 206 Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31 December 2001 Contingent liabilities: Guarantees 11,802 11,706 3,761 Commitments: Documentary credits and short-term trade-related transactions 5,768 1,154 1,151 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 64,317 __ __ - one year and over 19,367 9,683 9,257 Other 47 47 47 89,499 10,884 10,455 Exchange rate contracts: Spot and forward foreign exchange 98,143 1,066 249 Other exchange rate contracts 7,917 102 21 106,060 1,168 270 Interest rate contracts: Interest rate swaps 44,446 1,035 240 Other interest rate contracts 6,842 __ __ 51,288 1,035 240 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 purposes of deriving the risk-weighted amounts. These are assessed in accordance with the Third Schedule of the Hong Kong Banking Ordinance on capital adequacy and depend on the status of the counterparty and the maturity characteristics. The risk weights used range from 0 per cent to 100 per cent for contingent liabilities and commitments, and from 0 per cent to 50 per cent for exchange rate, interest rate and other derivative contracts. Contingent liabilities and commitments are credit-related instruments which include acceptances, 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 maintenance and collateral requirements as for 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. Off-balance sheet financial instruments arise from futures, forward, swap and option transactions undertaken in the foreign exchange, interest rate and equity markets. The contract amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date and do not represent amounts at risk. The credit equivalent amount of these instruments is measured as the sum of positive mark-to-market values and the potential future credit exposure in accordance with the Third Schedule of the Hong Kong Banking Ordinance. Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Replacement cost Exchange rate contracts 501 936 310 Interest rate contracts 879 670 859 Other derivative contracts __ __ __ 1,380 1,606 1,169 The replacement cost of contracts represents the mark-to-market assets on all contracts (including non-trading contracts) with a positive value and which have not been subject to any bilateral netting arrangement. Segmental analysis Segmental information is presented in respect of business and geographical segments. Business segment information, which is more relevant to Hang Seng in making operating and financial decisions, is chosen as the primary reporting format. For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the business or geographical segments by way of internal capital allocation and funds transfer pricing mechanisms. Cost allocation is based on the direct cost incurred by the respective segments and apportionment of management overheads. Rental charges at market rate for usage of premises are reflected as inter-segment income for the 'Other' segment and inter-segment expenses for the respective business segments. (a) By business segment Hang Seng comprises five business segments. Personal financial services provides banking (including deposits, credit cards, mortgages and other retail lending) and wealth management services (including insurance and investment) to personal customers. Commercial banking manages middle market and smaller corporate relationships and provides trade-related financial services. Corporate and institutional banking handles relationships with large corporate and institutional customers. Treasury engages in interbank and capital market activities and proprietary trading. Treasury also manages the funding and liquidity positions of the bank and other market risk positions arising from banking activities. Other mainly represents management of shareholders' funds and investments in premises, investment properties and long-term equities. Personal financial services reported growth of 7.7 per cent in profit before tax compared with the first half of 2001. Net interest income improved slightly, benefiting from the shift of customer deposits to lower cost savings although mortgage yields continued to fall. The strong growth of 31.5 per cent in other operating income reflected the development of wealth management services which recorded a rise in contribution of 62.1 per cent to HK$809 million for the first half of 2002. During the first half of 2002, sales of retail investment funds, including the popular Hang Seng Investment Series, amounted to HK$15.2 billion, an increase of 156.4 per cent over the same period last year. Total funds under management by Hang Seng's asset management and private banking business units grew by HK$11.3 billion, or 44.5 per cent, during the first half year to HK$36.6 billion at 30 June 2002. Commercial banking recorded a decrease of 15.8 per cent in profit before tax. Despite the satisfactory growth in trade finance and other lending to the manufacturing sector, net interest income suffered from the reduction in lending margins. The operating result was also affected by a reduction in Mandatory Provident Fund service income and the substantial release and recovery of bad and doubtful debts in the same period last year. Corporate and institutional banking recorded a decline of 17.1 per cent in profit before tax. The operating result was affected by the compression in corporate lending margins, a reduction in credit facilities income and lower levels of recoveries of bad and doubtful debts compared with the same period last year. Treasury achieved an encouraging growth of 19.2 per cent in profit before tax. Interest income rose by 13.7 per cent as the fixed rate debt securities portfolio continued to benefit under a low interest rate environment. Other operating income increased, helped by the growth in dealing profits and income from corporate treasury services. Profit on disposal of debt securities from the accrual portfolio also increased. Other showed a decline of 29.3 per cent in profit before tax, mainly attributable to the substantial reduction in free funds contribution following the further decline in market interest rates. This was despite the increase in profit on disposal of long-term equities. Personal Corporate & Inter- financial Commercial institutional segment Figures in HK$m services banking banking Treasury Other elimination Total Half-year ended 30 June 2002 Income and expenses Net interest income 3,334 507 324 863 425 __ 5,453 Operating income 1,303 426 132 161 190 __ 2,212 Inter-segment income __ __ __ __ 207 (207 ) __ Total operating income 4,637 933 456 1,024 822 (207 ) 7,665 Operating expenses ^ (1,179 ) (353 ) (54 ) (61 ) (169 ) __ (1,816 ) Inter-segment expenses (167 ) (33 ) (4 ) (3 ) __ 207 __ Operating profit before provisions 3,291 547 398 960 653 __ 5,849 Provisions for bad and doubtful debts (383 ) 2 82 __ 18 __ (281 ) Operating profit 2,908 549 480 960 671 __ 5,568 Profit on tangible fixed assets and long-term investments 21 28 __ 75 219 __ 343 Share of profits of associated companies 45 __ __ __ 22 __ 67 Profit on ordinary activities before tax 2,974 577 480 1,035 912 __ 5,978 Operating profit excluding inter-segment 3,075 582 484 963 464 __ 5,568 transactions ^ Including (60 ) (11 ) (2 ) (1 ) (100 ) __ (174 ) depreciation At 30 June 2002 Total assets 136,420 24,752 64,673 219,769 24,992 __ 470,606 Total liabilities 309,819 66,064 12,772 11,935 25,731 __ 426,321 Investments in associated companies 368 __ __ __ 683 __ 1,051 Capital expenditure incurred during the 61 9 1 1 20 __ 92 period Personal Corporate & Inter- financial Commercial institutional segment Figures in HK$m services banking banking Treasury Other elimination Total Half-year ended 30 June 2001 Income and expenses Net interest income 3,298 598 389 759 858 __ 5,902 Operating income 991 460 139 129 212 __ 1,931 Inter-segment income __ __ __ __ 209 (209 ) __ Total operating income 4,289 1,058 528 888 1,279 (209 ) 7,833 Operating expenses ^ (1,185 ) (382 ) (48 ) (60 ) (191 ) __ (1,866 ) Inter-segment expenses (162 ) (39 ) (5 ) (3 ) __ 209 __ Operating profit before provisions 2,942 637 475 825 1,088 __ 5,967 Provisions for bad and doubtful debts (184 ) 45 104 __ 14 __ (21 ) Operating profit 2,758 682 579 825 1,102 __ 5,946 Profit on tangible fixed assets and long-term investments 3 3 __ 43 163 __ 212 Share of profits of associated companies __ __ __ __ 25 __ 25 Profit on ordinary activities before tax 2,761 685 579 868 1,290 __ 6,183 Operating profit excluding inter-segment 2,920 721 584 828 893 __ 5,946 transactions ^ Including (65 ) (17 ) (1 ) (1 ) (105 ) __ (189 ) depreciation At 30 June 2001 Total assets 138,166 23,035 65,055 233,546 22,815 __ 482,617 Total liabilities 310,111 79,867 19,024 12,148 16,284 __ 437,434 Investments in associated companies 68 __ __ __ 740 __ 808 Capital expenditure incurred during the 70 13 1 1 20 __ 105 period Personal Corporate & Inter- financial Commercial institutional segment Figures in HK$m services banking banking Treasury Other elimination Total Half-year ended 31 December 2001 Income and expenses Net interest income 3,402 510 343 908 595 __ 5,758 Operating income 1,082 447 149 149 189 __ 2,016 Inter-segment income __ __ __ __ 206 (206 ) __ Total operating income 4,484 957 492 1,057 990 (206 ) 7,774 Operating expenses ^ (1,506 ) (443 ) (56 ) (59 ) (174 ) __ (2,238 ) Inter-segment expenses (162 ) (36 ) (4 ) (4 ) __ 206 __ Operating profit before provisions 2,816 478 432 994 816 __ 5,536 Provisions for bad and doubtful debts (389 ) (7 ) (23 ) __ 16 __ (403 ) Operating profit 2,427 471 409 994 832 __ 5,133 Profit on tangible fixed assets and long-term investments 14 36 __ 70 61 __ 181 Net deficit on property revaluation __ __ __ __ (14 ) __ (14 ) Share of profits of associated companies 7 __ __ __ 24 __ 31 Profit on ordinary activities before tax 2,448 507 409 1,064 903 __ 5,331 Operating profit excluding inter-segment 2,589 507 413 998 626 __ 5,133 transactions ^ Including (71 ) (16 ) (2 ) (1 ) (107 ) __ (197 ) depreciation At 31 December 2001 Total assets 136,233 22,692 63,108 226,656 26,098 __ 474,787 Total liabilities 308,404 69,101 16,412 10,022 25,777 __ 429,716 Investments in associated companies 89 __ __ __ 685 __ 774 Capital expenditure incurred during the 44 7 __ 2 35 __ 88 period (b) By geographical region 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. Figures in HK$m Hong Kong Americas Other Total Half-year ended 30 June 2002 Income and expenses Total operating income 6,794 835 36 7,665 Profit on ordinary activities before tax 5,105 833 40 5,978 At 30 June 2002 Total assets 360,701 103,615 6,290 470,606 Total liabilities 412,921 9,352 4,048 426,321 Capital expenditure incurred during the period 91 __ 1 92 Contingent liabilities and commitments 103,923 __ 652 104,575 Half-year ended 30 June 2001 Income and expenses Total operating income 7,274 524 35 7,833 Profit on ordinary activities before tax 5,572 509 102 6,183 At 30 June 2001 Total assets 385,709 90,495 6,413 482,617 Total liabilities 420,031 13,138 4,265 437,434 Capital expenditure incurred during the period 103 __ 2 105 Contingent liabilities and commitments 95,612 __ 761 96,373 Figures in HK$m Hong Kong Americas Other Total Half-year ended 31 December 2001 Income and expenses Total operating income 6,953 783 38 7,774 Profit on ordinary activities before tax 4,525 752 54 5,331 At 31 December 2001 Total assets 370,489 98,145 6,153 474,787 Total liabilities 415,739 10,068 3,909 429,716 Capital expenditure incurred during the period 87 1 __ 88 Contingent liabilities and commitments 100,704 __ 597 101,301 Cross border claims Cross border claims include receivables and loans and advances, balances due from banks and holdings of certificates of deposit, bills, promissory notes, commercial paper and other negotiable debt instruments and also include accrued interest and overdue interest on these assets. Claims are classified according to the location of the counterparties after taking into account the transfer of risk. For a claim guaranteed by a party situated in a country different from the counterparty, risk will be transferred to the country of the guarantor. For a claim on the branch of a bank or other financial institution, the risk will be transferred to the country where its head office is situated. Claims on individual countries or areas, after risk transfer, amounting to 10 per cent or more of the aggregate cross border claims are shown as follows: Banks & other Public financial sector Figures in HK$m institutions entities Other Total At 30 June 2002 Asia-Pacific excluding Hong Kong - Australia 16,875 480 2,159 19,514 - other 28,714 954 3,269 32,937 45,589 1,434 5,428 52,451 The Americas - Canada 14,311 5,590 150 20,051 - other 6,969 4,859 6,969 18,797 21,280 10,449 7,119 38,848 Western Europe - Germany 26,277 1,209 120 27,606 - United Kingdom 21,595 83 2,624 24,302 - other 50,056 1,675 2,535 54,266 97,928 2,967 5,279 106,174 Banks & other Public financial sector Figures in HK$m institutions entities Other Total At 30 June 2001 Asia-Pacific excluding Hong Kong - Australia 19,088 1,903 859 21,850 - other 31,476 1,468 2,370 35,314 50,564 3,371 3,229 57,164 The Americas - Canada 15,834 5,657 47 21,538 - other 10,686 2,653 6,412 19,751 26,520 8,310 6,459 41,289 Western Europe - Germany 27,670 1,079 31 28,780 - United Kingdom 22,208 __ 1,221 23,429 - other 53,885 1,236 1,469 56,590 103,763 2,315 2,721 108,799 At 31 December 2001 Asia-Pacific excluding Hong Kong - Australia 17,850 1,260 1,691 20,801 - other 33,442 2,283 2,707 38,432 51,292 3,543 4,398 59,233 The Americas - Canada 15,982 3,752 349 20,083 - other 6,737 1,343 7,538 15,618 22,719 5,095 7,887 35,701 Western Europe - Germany 25,136 954 2 26,092 - United Kingdom 20,465 __ 1,903 22,368 - other 54,393 1,617 2,298 58,308 99,994 2,571 4,203 106,768 Additional information 1. Accounting policies This news release has been prepared on a basis consistent with the accounting policies adopted in the 2001 financial statements except for the following. Accounting for defined benefit schemes In prior years, contributions to defined benefit schemes were made in accordance with the advice of qualified actuaries so as to recognise the cost of retirement benefits on a systematic basis over the employees' service lives and were charged to the profit and loss account for the year. In accordance with Hong Kong Statement of Standard Accounting Practice 34 (HKSSAP 34) on 'Employee benefits' which was issued in December 2001 and takes effect for the accounting periods beginning on or after 1 January 2002, the retirement benefit cost of defined benefit schemes charged to the current period profit and loss account is determined by calculating the current service cost, interest cost and expected return on scheme assets in accordance with a set of actuarial assumptions and taking into account the amount of net actuarial losses required to be recognised. Also in accordance with HKSSAP 34, the transitional assets/liabilities in respect of defined benefit schemes as of 1 January 2002, calculated by estimating the amount of future benefit that the employees have earned in return for their service in the prior periods, discounted to present value, and deducting the fair value of the scheme assets, have been recognised through a prior year adjustment. An amount of HK$189 million, being the net amount of transitional assets and liabilities, has been debited to 'Retained profits' brought forward at 1 January 2002. Accordingly, adjustments have been made to ' Other assets' to include the transitional assets of HK$53 million, and to 'Other liabilities' to include the transitional liabilities of HK$242 million. Accounting for value on long-term assurance business To reflect the value placed on Hang Seng's share of interest in the long-term assurance business of Hang Seng Life Limited, Hang Seng has decided to recognise a prudent valuation of the discounted future earnings expected to emerge from business currently in force, taking into account factors such as recent experience and general economic conditions ('value of long-term assurance business' or 'embedded value') with effect from 1 January 2002. The embedded value was determined in consultation with qualified actuaries and was included in 'Share of profits of associated companies' in the consolidated accounts. The increase in the bank's share of the value of Hang Seng Life's long-term assurance business in the first half of 2002 amounted to HK$45 million. The amount attributable to the periods prior to 1 January 2002, amounting to HK$206 million, has been recognised through 'Retained profits' brought forward at 1 January 2002 and 'Investment in associated companies' in the balance sheet. 2. Comparative figures Certain comparative figures have been reclassified to conform with the current period's presentation. 3. Market risk Market risk is the risk that the movements in interest rates, foreign exchange rates or equity and commodity prices will result in profits or losses to Hang Seng. Market risk arises on financial instruments which are valued at current market prices (mark-to-market basis) and those valued at cost plus any accrued interest (accrual basis). Hang Seng's market risk arises from customer-related business and from position taking. Market risk is managed within risk limits approved by the Board of Directors. Risk limits are set by product and risk type with market liquidity being a principal factor in determining the level of limits set. Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits, as well as value at risk (VAR) limits at a portfolio level. Hang Seng adopts the risk management policies and risk measurement techniques developed by the HSBC Group. The daily risk monitoring process measures actual risk exposures against approved limits and triggers specific action to ensure the overall market risk is managed within an acceptable level. VAR is a technique which estimates the potential losses that could occur on risk positions taken due to movements in market rates and prices over a specified time horizon and to a given level of confidence. The model used by Hang Seng calculates VAR on a variance/covariance basis, using historical movements in market rates and prices, a 99 per cent confidence level and a 10-day holding period, and generally takes account of correlations between different markets and rates. The movement in market prices is calculated by reference to market data for the last two years. Aggregation of VAR from different risk types is based upon the assumption of independence between risk types. Hang Seng has obtained approval from the Hong Kong Monetary Authority (HKMA) for the use of its VAR model to calculate market risk for capital adequacy reporting. The HKMA is also satisfied with Hang Seng's market risk management process. The VAR for all interest rate risk and foreign exchange risk positions at 30 June 2002 was HK$285 million compared with HK$352 million at 31 December 2001. The average VAR for the first half of 2002 was HK$297 million, with a maximum of HK$442 million and a minimum of HK$194 million for the period. On an individual portfolio basis, the values at risk at 30 June 2002 relating to the trading portfolio and accrual portfolio were HK$4 million (HK$5 million at 31 December 2001) and HK$284 million (HK$353 million at 31 December 2001) respectively. The average daily revenue earned from market risk-related treasury activities for the first half of 2002, including accrual book net interest income and funding related to dealing positions, was HK$8 million, compared with HK$6 million for the first half of 2001. The standard deviation of these daily revenues was HK$4 million (HK$3 million for the first half of 2001). No loss was recorded out of 121 trading days in the first half of 2002. The most frequent result was a daily revenue of between HK$4 million and HK$8 million, with 98 occurrences. The highest daily revenue was HK$33 million. Hang Seng's foreign exchange exposures mainly comprise foreign exchange dealing by Treasury and currency exposures originated by its banking business. The latter are transferred to Treasury where they are centrally managed within foreign exchange position limits approved by the Board of Directors. The VAR relating to foreign exchange positions was HK$4 million at 30 June 2002 (HK$4 million at 31 December 2001) and the average amount for the first half of 2002 was HK$4 million, with a maximum of HK$5 million and a minimum of HK$3 million in the period. The average one-day foreign exchange profit for the first half of 2002 was HK$2 million (HK$1 million for the first half of 2001). Interest rate risk arises in both the treasury dealing portfolio and accruals books, which are managed by Treasury under limits approved by the Board of Directors. The VAR relating to interest rate exposures was HK$285 million at 30 June 2002 (HK$352 million at 31 December 2001) and the average amount for the first half of 2002 was HK$297 million, with a maximum of HK$442 million and a minimum of HK$194 million for the period. The average daily revenue earned from treasury-related interest rate activities for the first half of 2002 was HK$6 million (HK$5 million for the first half of 2001). 4. Foreign currency positions Foreign currency exposures include those arising from dealing, non-dealing and structural positions. At 30 June 2002, the US dollar was the only currency in which Hang Seng had a non-structural foreign currency position which exceeded 10 per cent of the total net position in all foreign currencies. Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 US dollar non-structural position Spot assets 238,064 235,047 237,778 Spot liabilities (210,627 ) (207,328 ) (206,264 ) Forward purchases 44,644 64,170 39,001 Forward sales (63,634 ) (83,184 ) (61,725 ) Net options positions __ __ 4 Net long non-structural position 8,447 8,705 8,794 At 30 June 2002, Hang Seng's structural foreign currency positions, which exceeded 10 per cent of the total net structural foreign currency position in all currencies, are as follows: Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Structural position US dollar 792 508 508 Renminbi 95 __ __ 5. Material related-party transactions (a) Immediate holding company and fellow subsidiary companies During the first half of 2002, Hang Seng entered into transactions with its immediate holding company and fellow subsidiary companies in the ordinary course of its interbank activities including the acceptance and placement of interbank deposits, correspondent banking transactions and off-balance sheet transactions. The activities were priced at the relevant market rates at the time of the transactions. Hang Seng used the IT services of, and shared an automated teller machine network with, its immediate holding company on a cost recovery basis. Hang Seng also maintained a staff retirement benefit scheme for which a fellow subsidiary company acts as insurer and administrator, and acted as agent for the marketing of Mandatory Provident Fund products for a fellow subsidiary company. The aggregate amount of income and expenses arising from these transactions during the period, the balances of amounts due to and from the relevant related parties, and the total contract sum of off-balance sheet transactions at the period-end are as follows: Income and expenses for the period Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun02 30Jun01 31Dec01 Interest income 126 265 178 Interest expense 9 33 18 Other operating income 38 77 92 Operating expenses 276 311 536 Balances at period-end Figures in HK$m At 30Jun02 At 30Jun01 At 31Dec01 Total amount due from 10,425 7,641 8,297 Total amount due to 1,896 1,098 1,051 Total contract sum of off-balance sheet transactions 28,664 26,766 21,580 (b) Associated companies Hang Seng maintained an interest-free shareholders' loan to an associated company. The balance at 30 June 2002 was HK$208 million (HK$208 million at 30 June 2001 and 31 December 2001). The bank acted as agent for the marketing of life insurance products for an associated company. Total agency commissions received during the first half of 2002 amounted to HK$142 million (HK$89 million and HK$168 million for the first and second halves of 2001 respectively). (c) Ultimate holding company During the first half of 2002, no transaction was conducted with the bank's ultimate holding company (unchanged from 2001). (d) Key management personnel During the first half of 2002, no material transaction was conducted with key management personnel of Hang Seng and its holding companies and parties related to them (unchanged from 2001). 6. Statutory accounts The information in this news release is unaudited and does not constitute statutory accounts. The statutory accounts for the year ended 31 December 2001 have been delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 4 March 2002. The Annual Report and Accounts for the year ended 31 December 2001, which includes the statutory accounts, can be obtained on request from the Company Secretary Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from Hang Seng Bank's website www.hangseng.com. 7. Ultimate holding company Hang Seng Bank is an indirectly-held, 62.14 per cent-owned subsidiary of HSBC Holdings plc. 8. Statement of compliance This news release has been prepared in accordance with Hong Kong Statement of Standard Accounting Practice 25 'Interim Financial Reporting'. It also complies with the module on 'Interim Financial Disclosure by Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority in November 2001. 9. Register of shareholders The Register of Shareholders of Hang Seng Bank will be closed on Tuesday, 27 August 2002 and Wednesday, 28 August 2002, during which no transfer of shares can be registered. In order to qualify for the first interim dividend, all transfers, accompanied by the relevant share certificates, must be lodged with the bank's Registrars, Computershare Hong Kong Investor Services Limited (formerly known as Central Registration Hong Kong Limited), Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration not later than 4:00 pm on Monday, 26 August 2002. The first interim dividend will be payable on Wednesday, 4 September 2002 to shareholders on the Register of Shareholders of the bank on Wednesday, 28 August 2002. 10. News release Copies of the interim results announcement may be obtained from the Company Secretary Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from Hang Seng's website www.hangseng.com. The 2002 Interim Report will be available from the same website on Monday, 5 August 2002 and will also be published on the website of The Stock Exchange of Hong Kong Limited in due course. Printed copies of the 2002 Interim Report will be sent to shareholders in late August 2002. This information is provided by RNS The company news service from the London Stock Exchange

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