Hang Seng pt 3/6

HSBC Holdings PLC
05 March 2007

Financial Review

Net interest income
                                                                                                                        
                                                                2006        2005
Figures in HK$m                                                        (restated)

Net interest income/(expense) arising from:
- financial assets and liabilities that are not at fair value
  through profit and loss                                     13,689      11,068
- trading assets and liabilities                              (2,039)       (306)
- financial instruments designated at fair value                  44          34
                                                              11,694      10,796

Average interest-earning assets                              578,588     522,922

Net interest spread                                             1.66%       1.85%
Net interest margin                                             2.02%       2.06%

With effect from 2006 (and as restated for 2005), interest income and interest
expense for all interest-bearing financial instruments are reported in 'Interest
income' and 'Interest expense' respectively in the income statement. The change
from the HSBC Group presentation described in page 22 has been made principally
to match the interest expense arising from trading liabilities with the interest
income from non-trading assets. This facilitates the comparison of Hang Seng's
net interest income and net interest margin with peer banks in Hong Kong. The
impact of the change in accounting presentation is set out in note 1 under
'Additional information' on page 56.

Net interest income rose by HK$898 million, or 8.3 per cent, to HK$11,694
million with a 10.6 per cent increase in average interest-earning assets.

Average customer advances rose 4.5 per cent, driven by encouraging growth in
higher yielding card advances, personal loans, trade finance and mainland loans.
BLR-based lending - mainly residential mortgages and certain trade finance,
overdraft and SME loans - benefited from a wider BLR/HIBOR gap. The pricing of
residential mortgages and corporate lending, however, was still under pressure
due to intense market competition. Overall, the total loan portfolio contributed
HK$419 million to the growth in net interest income.

Benefiting from the rise in both interest rate and funds balance, net free funds
added HK$867 million to net interest income. Of this, HK$302 million was
attributable to non-interest-bearing HK dollar current accounts. Net
shareholders' funds increased due to the growth in retained profits and the
proceeds from the disposal of properties, contributing HK$565 million.

The debt securities portfolio of life insurance fund investments grew by 50.9
per cent, adding HK$264 million to net interest income.

Average customer deposits rose by 11.3 per cent, mainly reflecting increases in
time and structured deposits. However, the favourable impact of the growth in
deposits was more than offset by the narrower deposit spread on HK dollar
savings and the change in average deposit mix from savings and current account
deposits to time and structured deposits. Net interest income from deposit
products fell by HK$138 million. For structured deposits, the bank earns a
spread on the derivatives embedded in the structured deposits, which was
reported as trading income. Thus, there was no deposit spread on structured
deposits reported under net interest income.

Yields in treasury balance sheet management portfolios were further compressed
by the rise in funding costs and flattened yield curves, and this resulted in a
fall of HK$514 million in net interest income.

Net interest margin fell by four basis points to 2.02 per cent. Net interest spread
fell 19 basis points to 1.66 per cent, mainly due to the treasury balance sheet
management portfolios and deposit spreads on HK dollar savings and structured
deposits as mentioned above, outweighing the impact of loan growth and margin
enhancement. The fall in net spread was largely offset by the contribution from
net free funds which rose 15 basis points to 0.36 per cent.

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

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

Figures in HK$m                                          2006             2005

Net interest income                                    13,639           11,046
Average interest-earning assets                       564,027          505,221

Net interest spread                                      1.83%            1.94%
Net interest margin                                      2.42%            2.19%

Net fee income
                                                                 2006        2005
Figures in HK$m                                                         (restated)

- Stockbroking and related services                               805         493
- Retail investment products and funds under management           891         916
- Insurance                                                       108         116
- Account services                                                274         225
- Private banking                                                 336         174
- Remittances                                                     161         141
- Cards                                                           860         705
- Credit facilities                                               111         117
- Trade services                                                  380         375
- Other                                                           148         132
Fee income                                                      4,074       3,394
Fee expense                                                      (577)       (438)
                                                                3,497       2,956

Net fee income rose by HK$541 million, or 18.3 per cent, compared with 2005.
Stockbroking and related services rose 63.3 per cent, driven by an 86.6 per cent
growth in turnover with a 20.1 per cent growth in customer base. Benefiting from
the favourable investment environment, income from private banking investment
services rose 93.1 per cent. Card services income rose by 22.0 per cent,
supported by a rise of 10.5 per cent in the number of cards in issue and an 11.7
per cent increase in cardholder spending. Deposit services and payment and cash
management business also showed good progress, reporting growth in account
services fees and remittances of 21.8 per cent and 14.2 per cent respectively.

Trading income
                                                            2006          2005
Figures in HK$m                                                      (restated)

Trading income:
- foreign exchange                                         1,178           785
- securities, derivatives and other trading activities       152           100
                                                           1,330           885

Trading income reached HK$1,330 million, a rise of HK$445 million, or 50.3 per
cent, over 2005. Foreign exchange income increased by HK$393 million, or 50.1
per cent, attributable to active position taking and increased customer
activity. The increase in spreads earned on foreign exchange option-linked
products offered to retail and corporate customers also contributed to foreign
exchange income growth. Securities, derivatives and other trading rose by HK$52
million, attributable to the improvement in trading results and the growth in
trading volume and profit earned on equity-linked products provided to
customers.

With effect from 2006 reporting, interest income and expense from trading assets
and liabilities are reported under 'Net interest income'. Details of the change
in accounting presentation are set out in note 1 under 'Additional information'
on page 56.

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

                                                            2006          2005
Figures in HK$m                                                      (restated)

Net income/(expense) on assets designated at fair
  value which back insurance and investment contracts        910           (25)

Net change in fair value of other financial instruments
  designated at fair value                                   (11)           (7)
                                                             899           (32)

Financial instruments designated at fair value reported a net income of HK$899
million, compared with a net expense of HK$32 million last year, reflecting the
outstanding investment performance of the life insurance fund portfolios.

With effect from 2006 reporting, interest income and expense from financial
instruments designated at fair value are reported under 'Net interest income'.
Details of the change in accounting presentation are set out in note 1 under
'Additional information' on page 56.

Other operating income

Figures in HK$m                                             2006          2005

Rental income from investment properties                     186           207
Movement in present value of in-force long-term
  insurance business                                         363           316
Other                                                        296           275
                                                             845           798

Analysis of income from wealth management business

Figures in HK$m                                             2006          2005
Investment income:
- retail investment products and funds under management      891           916
- structured investment products in issue                    419           283
- private banking^                                           345           188
- stockbroking and related services                          805           493
- margin trading                                              59            63
                                                           2,519         1,943
Insurance income:
- life insurance                                           1,476         1,256
- general insurance and others                               286           289
                                                           1,762         1,545
Total                                                      4,281         3,488

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

Wealth management income gained strong growth momentum in 2006, reporting a rise
of 22.7 per cent over 2005.

Investment services income rose by 29.6 per cent, benefiting from the buoyant
stock market and positive investment sentiment. Our efficient and convenient
e-banking and phone trading channels played key roles in the expansion of our
securities broking business, which grew its customer base and market share. With
the success of campaigns to acquire new accounts and promote active trading as
well as offers such as special packages for IPO subscriptions, stockbroking
turnover rose 86.6 per cent and income increased by 63.3 per cent. Private
banking continued to expand its customer base and product range. Assets under
management rose 39.6 per cent and private banking income grew 83.5 per cent.
Retail investment fund sales grew by 40.6 per cent over 2005, supported by a 
broad range of fund offerings from high-growth China and emerging market equity
funds to capital-guaranteed and fixed-income funds. Equity, foreign exchange 
and other market-linked investment and deposit products also reached record 
highs in terms of issue volume and income earned, which were up by 68.6 per 
cent and 48.1 per cent respectively.

Life insurance recorded satisfactory income growth of 17.5 per cent to reach
HK$1,476 million (as analysed in the table below). During the year, we continued
to launch new products catering for customers' investment and protection needs.
The Monthly Income Retirement Plan was successful in capturing a section of the
lucrative retirement plan market and the MediCash Lifetime Insurance Plan, which
targets mid-market pre-retirees, was also well received.

Figures in HK$m                                               2006       2005

Net interest income and fee income                             665        411
Investment return on life insurance funds                      910        (25)
Net earned insurance premiums                                7,534      7,483
Net insurance claims incurred and movement in
  policyholders' liabilities                                (7,996)    (6,929)
Movement in present value of in-force long-term insurance
  business                                                     363        316
                                                             1,476      1,256

Income from general insurance and others maintained at the same level as the
previous year.

Loan impairment charges and other credit risk provisions

Figures in HK$m                                           2006            2005

Loan impairment (charges)/releases:
- individually assessed                                   (107)           (309)
- collectively assessed                                   (145)           (309)
                                                          (252)           (618)
of which:
- new and additional                                      (423)         (1,070)
- releases                                                 106             351
- recoveries                                                65             101
                                                          (252)           (618)

Other provision                                            (12)              _

Loan impairment charges and other
  credit risk provisions                                  (264)           (618)

Loan impairment charges and other credit risk provisions decreased by HK$354
million, or 57.3 per cent, to HK$264 million, reflecting the benign credit
environment. There was a decrease of HK$202 million in individually assessed
provisions, mainly due to a substantial reduction in new and additional charges
for commercial banking customers. Releases from commercial banking accounts
increased but those from mortgages and personal lending were substantially
lower. Of the collectively assessed charges, HK$139 million was made on card and
personal loan portfolios, a rise of 13.9 per cent over last year. A charge of
HK$6 million was made on advances not identified individually as impaired,
compared with a charge of HK$187 million made in 2005. The reduction in
historical loss rates used at the end of 2006 for calculation of this type of
collectively assessed impairment provisions reflects the continued improvement
in credit conditions in recent years.

Operating expenses

Figures in HK$m                                             2006          2005
Employee compensation and benefits:
- salaries and other costs                                 2,470         2,074
- retirement benefit costs                                   124           137
- share-based payments                                       100            70
                                                           2,694         2,281
General and administrative expenses:
- rental expenses                                            267           207
- other premises and equipment                               829           751
- other operating expenses                                 1,118         1,018
                                                           2,214         1,976
Depreciation of business premises
  and equipment                                              323           280
Amortisation of intangible assets                             10             9
                                                           5,241         4,546

Cost efficiency ratio                                       29.0%         28.0%

Staff numbers^ by region                                    2006          2005

Hong Kong                                                  7,748         7,425
Mainland                                                     661           377
Others                                                        55            43
Total                                                      8,464         7,845

^ Full-time equivalent

Operating expenses rose by HK$695 million, or 15.3 per cent, compared with 2005.
Employee compensation and benefits increased by 18.1 per cent, due to the annual
salary increment, the increase in number of staff, and performance-based
incentives and bonuses. General and administrative expenses were up 12.0 per
cent. Rental expenses increased due to increases in rents for branches in Hong
Kong and new branches on the Mainland. Other premises and equipment expenses
increased by 10.4 per cent, attributable to IT systems development and
enhancement for business expansion and regulatory related projects. The rise in
marketing expenditure was attributable mainly to the launch of the bank's new
brand image and increased promotion of investment and insurance products and
credit cards. Depreciation charges rose by 15.4 per cent as a result of the
increase in fair value of business premises. The bank's mainland operations,
which expanded its network from 12 to 15 outlets and increased its staff force
from 377 to 661 during 2006, also accounted for the bank's increase in operating
expenses.

The number of full-time equivalent staff increased by 619 compared with the
previous year-end. New staff in Hong Kong were hired to further expand private
banking's financial advisory team and CMB's relationship management and
corporate wealth management teams, as well as to support IT systems development
and enhancement. The number of staff at mainland branches rose by 75.3 per cent,
mainly to support the network expansion, building up sales and marketing force
for personal banking business, and strengthening of the corporate and commercial
relationship management and trade services teams.

The cost efficiency ratio for 2006 was 29.0 per cent, compared with 28.0 per
cent in 2005.

Profit on disposal of fixed assets and financial investments

Figures in HK$m                                                     2006    2005

Profit on disposal of available-for-sale securities:
- realisation of amounts previously recognised
  in reserves at 1 January                                           137     611
- net gains/(losses) arising in the year                             201    (153)
                                                                     338     458

Profit less loss on disposal of fixed assets                         505      19
                                                                     843     477

Profit on disposal of fixed assets and financial investments amounted to HK$843
million, an increase of 76.7 per cent over last year. Profit on disposal of
fixed assets, mainly properties, rose by HK$486 million to HK$505 million.
During the year, the group sold properties for a total value of HK$3.1 billion,
including the property at 77 Des Voeux Road Central, to rationalise the bank's
property portfolio and enhance shareholders' return. Profit on the disposal of
equity investments fell to HK$338 million.

Tax expense

Taxation in the consolidated income statement represents:

Figures in HK$m                                               2006       2005

Current tax - provision for Hong Kong profits tax
Tax for the year                                             2,188      1,501

Current tax - taxation outside Hong Kong
Tax for the year                                                36         12

Deferred tax
Origination and reversal of
  temporary differences                                       (175)       282

Total tax expense                                            2,049      1,795

The current tax provision is based on the estimated assessable profit for 2006,
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
2005). For subsidiaries and branches operating in other jurisdictions, the
appropriate tax rates prevailing in the relevant countries are used.

Deferred tax is calculated at the tax rates that are expected to apply in the
year when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
recorded in equity. The carrying amount of deferred tax assets/liabilities
is reviewed at each balance sheet date and is reduced to the extent that it is
no longer probable that sufficient taxable profit will be available to allow the
related tax benefit to be utilised.

Earnings per share

The calculation of earnings per share in 2006 is based on earnings of HK$12,038
million (HK$11,342 million in 2005) and on the weighted average number of
ordinary shares in issue of 1,911,842,736 shares (unchanged from 2005).

Dividends per share

                                         2006                             2005
                             HK$         HK$m               HK$           HK$m
                       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              1.10          2,103
Fourth interim              1.90        3,633              1.90          3,633
                            5.20        9,942              5.20          9,942

Segmental analysis

Segmental information is presented in respect of business and geographical
segments. Business by customer group information, which is more relevant to the
group 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 customer groups
or geographical segments by way of internal capital allocation and funds
transfer pricing mechanisms. Cost allocation is based on the direct costs
incurred by the respective customer groups and apportionment of management
overheads. Rental charges at market rate for usage of premises are reflected as
inter-segment income for the 'Other' customer group and inter-segment expenses
for the respective customer groups.

(a) By customer group

The group's business comprises five customer groups. Personal Financial Services
provides banking (including deposits, credit cards, mortgages and other retail
lending) and wealth management services (including private banking, investment
and insurance) to personal customers. Commercial Banking manages middle market
and smaller corporate relationships and specialises in trade-related financial
services. Corporate Banking handles relationships with large corporate and
institutional customers. Treasury engages in balance sheet management and
proprietary trading. Treasury also manages the funding and liquidity positions
of the group and other market risk positions arising from banking activities.
'Other' mainly represents management of shareholders' funds and investments in
premises, investment properties and equity shares.

Profit before tax contributed by the customer groups in 2006 compared with 2005
is set out in the table below. More customer group analysis and discussions are
set out in the 'Customer group performance' section on page 8.

                           Personal
                          Financial  Commercial   Corporate
Figures in HK$m            Services     Banking     Banking     Treasury     Other     Total

Year ended 31Dec06

Profit before tax             7,730       2,262         557        1,051     2,795    14,395
Share of profit before tax^    52.9%       16.4%        3.8%         7.6%     19.3%    100.0%

Year ended 31Dec05

Profit before tax             7,686       1,078         507        1,072     3,015    13,358
Share of profit before tax^    56.8%        8.8%        3.7%         8.3%     22.4%    100.0%

^ Share of profits from associates is adjusted to pre-tax basis for the purpose
of calculating the Customer Groups' share of profit before tax.

(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  Mainland and       Total
                                                                 other

Year ended 31Dec06
                             
Income and expense
Total operating income                  24,449     1,295           414      26,158
Profit before tax                       12,380     1,262           753      14,395
Capital expenditure
  incurred during the year                 335         _            44         379

At 31Dec06
Total assets                           573,067    65,997        30,000     669,064
Total liabilities                      603,636     4,180        12,550     620,366
Contingent liabilities
  and commitments                      165,541         _         8,701     174,242

Year ended 31Dec05
                             
Income and expense
Total operating income                  21,377     1,644           225      23,246
Profit before tax                       11,253     1,614           491      13,358
Capital expenditure
  incurred during the year                 206         _            25         231

At 31Dec05
Total assets                           497,406    60,845        22,569     580,820
Total liabilities                      520,260     9,395         7,435     537,090
Contingent liabilities
  and commitments                      137,536         _         3,973     141,509




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