Hang Seng PT4

HSBC Holdings PLC
31 July 2006

Impaired advances and allowances

Figures in HK$m                    At 30Jun06        At 30Jun05       At 31Dec05  

Gross impaired advances                 1,209             1,946            1,433  
Individually assessed allowances         (377)             (760)            (558)  
Net impaired advances                     832             1,186              875  

Individually assessed allowances
  as a percentage of
  gross impaired advances                31.2%             39.1%            38.9%

Gross impaired advances as a 
  percentage of gross advances 
  to customers                            0.4%              0.7%             0.5% 

Impaired advances are those advances where objective evidence exists that full
repayment of principal or interest is considered unlikely. Impairment allowances
are made to write down the carrying value of the advances to the discounted
value of future recoverable amounts, including the realisation of collateral.

Gross impaired advances as a percentage of gross advances to customers stood at
0.4 per cent and 0.5 per cent at 30 June 2006 and 31 December 2005 respectively.
Gross impaired advances were HK$1,209 million, 15.6 per cent lower than at the
last year-end, mainly due to the recovery and upgrading of certain commercial
banking accounts.

Overdue advances

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

                              At 30Jun06         At 30Jun05           At 31Dec05 
                           HK$m        %      HK$m        %       HK$m         % 

Gross advances to
  customers that have 
  been overdue with 
  respect to either
  principal or interest
  for periods of:
- six months or less
  but over three months     538      0.2       500      0.2        482       0.2 
- one year or less
  but over six months       337      0.1       224      0.1        211       0.1 
- over one year             149      0.1       423      0.1        169         - 
                          1,024      0.4     1,147      0.4        862       0.3 

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

Overdue advances increased by HK$162 million to HK$1,024 million at 30 June
2006, representing 0.4 per cent of gross advances to customers. The increase was
attributable to residential mortgage and commercial banking accounts.

Rescheduled advances

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

                              At 30Jun06       At 30Jun05        At 31Dec05
                          HK$m         %   HK$m         %   HK$m          %

Rescheduled advances
  to customers             349       0.1    357       0.1    361        0.1

Rescheduled advances are those that have been rescheduled or renegotiated for
reasons related to the borrower's financial difficulties. This will normally
involve the granting of concessionary terms and resetting the overdue account to
non-overdue status. A rescheduled advance will continue to be disclosed as such
unless the debt has been performing in accordance with the rescheduled terms for
a period of six to twelve months. Rescheduled advances that have been overdue
for more than three months under the rescheduled terms are reported as overdue
advances to customers (page 43).

Rescheduled advances fell by HK$12 million, or 3.3 per cent, to HK$349 million
at 30 June 2006, representing only 0.1 per cent of gross advances to customers.

Segmental analysis of advances to customers by geographical area

Advances to customers by geographical area are classified according to the
location of the counterparties after taking into account the transfer of risk.
In general, risk transfer applies when an advance is guaranteed by a party
located in an area that is different from that of the counterparty. At 30 June
2006, over 90 per cent of the group's advances to customers, including related
impaired advances and overdue advances, were classified under Hong Kong
(unchanged from the positions at 30 June 2005 and 31 December 2005).

Gross advances to customers by industry sector

The analysis of gross advances to customers by industry sector based on
categories and definitions used by the Hong Kong Monetary Authority ('HKMA') is
as follows:

Figures in HK$m                  At 30Jun06        At 30Jun05       At 31Dec05  

Gross advances to customers
  for use in Hong Kong

Industrial, commercial and
  financial sectors
Property development                 15,728            15,048           16,446  
Property investment                  47,617            41,986           45,964  
Financial concerns                    2,108             4,399              968  
Stockbrokers                            288               298              221  
Wholesale and retail trade            5,972             5,244            5,562  
Manufacturing                         6,894             6,305            6,429  
Transport and transport equipment    11,578            12,080           11,919  
Other                                20,615            25,000           22,960  
                                    110,800           110,360          110,469  
Individuals
Advances for the purchase of
  flats under the Government 
  Home Ownership Scheme, Private
  Sector Participation Scheme and 
  Tenants Purchase Scheme            21,377            24,713           22,879  
Advances for the purchase of
  other residential properties       82,778            81,545           81,318  
Credit card advances                  7,585             6,583            7,735  
Other                                 8,058             7,385            7,563  
                                    119,798           120,226          119,495  
Total gross advances for 
  use in Hong Kong                  230,598           230,586          229,964  
Trade finance                        18,968            16,910           15,874  
Gross advances for use 
  outside Hong Kong                  17,827            14,217           15,876  
Gross advances to customers         267,393           261,713          261,714  

Gross advances to customers rose by 2.2 per cent, compared with the previous
year-end.

During the first half of 2006, lending to the property investment sector,
financial concerns sector (including investment companies) and stockbrokers
recorded satisfactory growth, benefiting from the buoyant investment market. The
encouraging 9.9 per cent loan growth recorded by CMB was the result of 19.5 per
cent rise in trade finance, a 7.4 per cent increase in lending to the wholesale
and retail trade, and 7.2 per cent growth in manufacturing sector loans. Falls
in lending to the property development and 'Other' sectors, which include
conglomerate enterprises, reflect repayments by large corporate customers, and
are in line with the bank's strategy to diversify its loan portfolio.

Excluding the fall in mortgages under the suspended Government Home Ownership
Scheme, lending to individuals grew by HK$1,805 million, or 1.9 per cent.
Residential mortgages rose by 1.8 per cent and gained market share amid
intensely competitive conditions. Personal loans (reported under the 'Other'
category) rose by 16.8 per cent, reflecting PFS's continued efforts to expand
its consumer finance business. Card advances fell by 1.9 per cent, due to the
repayment of tax bill payment balances at the previous year-end. Year on year,
card advances rose by 15.2 per cent.

Loans for use outside Hong Kong increased by HK$1,951 million, or 12.3 per cent,
over the previous year-end, reflecting the 21.7 per cent expansion of lending by
mainland China branches to reach HK$12,783 million at 30 June 2006. Encouraging
growth was recorded for both foreign currency and renminbi lending to CIB and
CMB customers and residential mortgages.

Financial investments

Figures in HK$m                   At 30Jun06     At 30Jun05        At 31Dec05

Available-for-sale at fair value
- debt securities                    197,934        183,030          177,813
- equity shares                        1,656          1,560            1,360
Held-to-maturity debt securities
  at amortised cost                   12,365          8,361           10,731
                                     211,955        192,951          189,904

Fair value of held-to-maturity
  debt securities                     11,853          8,818           10,778

Treasury bills                            78          4,604            4,816
Certificates of deposit               25,572         31,738           27,048
Other debt securities                184,649        155,049          156,680
Debt securities                      210,299        191,391          188,544
Equity shares                          1,656          1,560            1,360
                                     211,955        192,951          189,904
Debt securities:
- listed in Hong Kong                  2,999          5,147            3,008
- listed outside Hong Kong             1,898          1,676            1,947
                                       4,897          6,823            4,955
- unlisted                           205,402        184,568          183,589
                                     210,299        191,391          188,544
Equity shares:
- listed in Hong Kong                  1,214            678            1,049
- listed outside Hong Kong               220            132              186
                                       1,434            810            1,235
- unlisted                               222            750              125
                                       1,656          1,560            1,360
                                     211,955        192,951          189,904

Fair value of listed financial
  investments                          6,305          7,675            6,209

Debt securities:
Issued by public bodies:
- central governments and central
  banks                               10,306         19,603           15,981
- other public sector entities         7,892         10,753            8,667
                                      18,198         30,356           24,648
Issued by other bodies:
- banks and other financial
  institutions                       176,785        145,843          149,557
- corporate entities                  15,316         15,192           14,339
                                     192,101        161,035          163,896
Equity shares:
Issued by corporate entities           1,656          1,560            1,360
                                     211,955        192,951          189,904

Available-for-sale investments include treasury bills, certificates of deposit,
other debt securities and equity shares intended to be held for an indefinite
period of time, but which may be sold in response to needs for liquidity or
changes in the market environment. Available-for-sale investments are carried at
fair value with the gains and losses from change in fair value recognised
through equity reserves.

Held-to-maturity debt securities are stated at amortised cost. Where debt
securities have been purchased at a premium or discount, the carrying value of
the security is adjusted to reflect the effective interest rate of the debt
security taking into account such premium or discount.

Amounts due from/to immediate holding company and fellow subsidiary companies

At balance sheet dates, the amounts due from/to the bank's immediate holding
company and fellow subsidiary companies, included in the assets and liabilities
balances of the consolidated balance sheet, are analysed as follows:

Figures in HK$m                 At 30Jun06       At 30Jun05     At 31Dec05  

Amounts due from:
Cash and balances with banks
  and other financial 
  institutions                       5,036            1,013            718  
Placings with and advances to
  banks and other financial
  institutions                       2,067            4,619          3,495  
Trading assets                           -               50             50  
Financial assets designated
  at fair value                      2,202              155          2,299  
Derivative financial instruments       231              193            145  
Financial investments                1,036            1,236          1,135  
Other assets                            45               35             29  
                                    10,617            7,301          7,871  

Amounts due to:
Customer accounts                      157              136            167  
Deposits from banks                  2,780            9,946          5,136  
Derivative financial instruments       663              468            488  
Subordinated liabilities             2,019                -          2,016  
Other liabilities                      294              302            361  
                                     5,913           10,852          8,168  

Investments in associates

Figures in HK$m                 At 30Jun06       At 30Jun05     At 31Dec05  

Share of net assets                  2,945            2,138          2,611  
Goodwill                               322              311            318  
                                     3,267            2,449          2,929  

Intangible assets

Figures in HK$m                 At 30Jun06       At 30Jun05     At 31Dec05  

Value of in-force long-term
  assurance business                 1,750            1,409          1,565  
Internal developed software             93                -             56  
Other intangible assets                 14               17             15  
                                     1,857            1,426          1,636  

Other assets

Figures in HK$m                 At 30Jun06       At 30Jun05     At 31Dec05  

Items in the course of 
  collection from other banks        4,652            3,858          8,068  
Prepayments and accrued income       4,045            2,727          3,016  
Deferred tax assets                      1                7              9  
Non current assets held for sale       232              237            216  
Acceptances and endorsements^        2,701            2,514          2,371  
Other accounts                       3,314            1,574          1,545  
                                    14,945           10,917         15,225  

^In accordance with Hong Kong Accounting Standard 39: 'Financial Instruments:
Recognition and Measurement' ('HKAS 39'), acceptances and endorsements are
recognised on the balance sheet in 'Other assets' and 'Other liabilities'.


Current, savings and other deposit accounts

Figures in HK$m                 At 30Jun06       At 30Jun05     At 31Dec05  

Current, savings and other 
  deposit accounts:
- as per consolidated balance
  sheet                            448,097          430,395        430,995  
- structured deposits reported
  as trading liabilities            33,414            7,475         24,422  
                                   481,511          437,870        455,417  
By type:
- demand and current accounts       26,579           29,583         27,248  
- savings accounts                 195,488          212,344        188,839  
- time and other deposits          259,444          195,943        239,330  
                                   481,511          437,870        455,417  

Certificates of deposit and other debt securities in issue

Figures in HK$m                 At 30Jun06       At 30Jun05     At 31Dec05  

Certificates of deposit and
  other debt securities in
  issue:
- as per consolidated balance
  sheet                              8,312           11,158         10,023  
- structured certificates of
  deposit and other debt
  securities in issue reported
  as trading liabilities            15,056            9,836         13,616  
                                    23,368           20,994         23,639  

By type:
- certificates of deposit in
  issue                             19,893           20,839         22,525  
- other debt securities in issue     3,475              155          1,114  
                                    23,368           20,994         23,639  

Customer deposits and certificates and other debt securities in issue rose by
5.4 per cent to HK$504.9 billion. This included 27.4 per cent growth in
structured deposits, structured certificates of deposit and other debt
securities in issue, reflecting strong customer demand for yield enhancement
investment and deposit products. Deposits of mainland China branches grew by
11.2 per cent during the first half of 2006.

Trading liabilities

Figures in HK$m                At 30Jun06       At 30Jun05       At 31Dec05  

Structured certificates of
  deposit and other debt 
  securities in issue              15,056            9,836           13,616  
Structured deposits                33,414            7,475           24,422  
Short positions in securities      13,160            7,047            7,766  
                                   61,630           24,358           45,804  

Trading liabilities include customer deposits and certificates of deposit with
embedded options or other derivatives, the market risk of which was managed in
the trading book.

Other liabilities

Figures in HK$m                At 30Jun06       At 30Jun05       At 31Dec05  

Items in the course of
  transmission to other banks       5,022            5,629            6,517  
Accruals                            1,864            1,124            1,653  
Acceptances and endorsements^       2,701            2,514            2,371  
Other                               1,234            1,113            3,597  
                                   10,821           10,380           14,138  

^In accordance with HKAS 39, acceptances and endorsements are recognised on the
 balance sheet in 'Other assets' and 'Other liabilities'.

Subordinated liabilities

Figures in HK$m                              At 30Jun06    At 30Jun05     At 31Dec05  

Nominal value         Description

Amount owed to third parties

HK$1,500 million      Callable floating rate
                      subordinated notes
                      due June 2015               1,491         1,496          1,495  

HK$1,000 million      4.125 per cent callable
                      fixed rate subordinated
                      notes due June 2015           950           995            967  

US$450 million        Callable floating rate
                      subordinated notes
                      due July 2016               3,495             -              -  

Amount owed to HSBC Group undertakings

US$260 million        Callable floating rate
                      subordinated loan debt
                      due December 2015           2,019             -          2,016  
                                                  7,955         2,491          4,478   

Representing:
- measured at amortised cost                      7,005         1,496          3,511  
- designated at fair value                          950           995            967  
                                                  7,955         2,491          4,478  

In June 2006, the bank contracted to issue floating-rate subordinated notes
amounting to US$450 million that mature in July 2016 with a one-time call option
exercisable by the bank in July 2011. The notes were issued at the price of
99.869 per cent, bearing interest at the rate of three-month dollar LIBOR plus
0.30 per cent, payable quarterly from the issue date to the call option date.
Thereafter, if the notes are not redeemed on the call option date, the interest
rate will be reset to three-month dollar LIBOR plus 0.80 per cent payable
quarterly. The notes, which qualify as tier 2 capital, serve to maintain a more
balanced capital structure and support business growth.

Shareholders' funds

Figures in HK$m              At 30Jun06        At 30Jun05         At 31Dec05  

Share capital                     9,559             9,559              9,559  
Retained profits                 28,627            26,222             26,052  
Premises revaluation reserve      3,522             3,387              3,543  
Cash flow hedges reserve           (532)             (256)              (483)  
Available-for-sale investment 
  reserve                            37               294                (17)  
Capital redemption reserve           99                99                 99  
Other reserves                      303                92                185  
Total reserves                   32,056            29,838             29,379  
                                 41,615            39,397             38,938  
Proposed dividends                2,103             2,103              3,633  
Shareholders' funds              43,718            41,500             42,571  

Return on average
  shareholders' funds              29.0%             29.7%              25.2%

Save for the contracted issuance of subordinated notes of US$450 million, there
was no purchase, sale or redemption of the group's listed securities by the bank
or any of its subsidiaries during the six months ended 30 June 2006.

Shareholders' funds (excluding proposed dividends) rose by HK$2,677 million, or
6.9 per cent, to HK$41,615 million at 30 June 2006, mainly due to the growth in
retained profits, which include the realisation of property revaluation reserves
on properties disposed of during the first half of 2006, and surplus on property
revaluation.

The return on average shareholders' funds was 29.0 per cent, compared with 29.7
per cent and 25.2 per cent for the first and second halves of 2005 respectively.

Capital resources management

Analysis of capital base and risk-weighted assets

Figures in HK$m              At 30Jun06         At 30Jun05         At 31Dec05  

Capital base
Tier 1 capital
- Share capital                   9,559              9,559              9,559  
- Retained profits               25,002             21,829             21,439  
- Classified as regulatory
  reserve                          (511)              (468)              (510)  
- Capital redemption reserve         99                 99                 99  
- Less: goodwill                   (322)              (311)              (318)  
- Total                          33,827             30,708             30,269  
Tier 2 capital
- Property revaluation reserve    4,443              4,710              5,114  
- Available-for-sale investment
  and equity revaluation reserve     24                350                 (5)  
- Collective impairment allowances  511                468                510  
- Regulatory reserve                511                468                510  
- Term subordinated debt          7,955              2,491              4,479  
- Total                          13,444              8,487             10,608  
Unconsolidated investments and
  other deductions               (3,779)            (2,871)            (3,444)  
Total capital base after 
  deductions                     43,492             36,324             37,433  

Risk-weighted assets
On-balance sheet                290,447            276,339            277,617  
Off-balance sheet                14,962             17,698             14,739  
Total risk-weighted assets      305,409            294,037            292,356  
Total risk-weighted assets
  adjusted for market risk      306,668            292,331            291,570  

Capital adequacy ratios
After adjusting for market risk
- Tier 1^                          11.0%              10.5%              10.4%  
- Total^                           14.2%              12.4%              12.8%  

Before adjusting for market risk
- Tier 1                           11.1%              10.4%              10.4%  
- Total                            14.2%              12.4%              12.8%  

^The capital ratios take into account market risks in accordance with the
relevant HKMA guideline under the Supervisory Policy Manual.

In accordance with the HKMA guideline 'Impact of the New Hong Kong Accounting
Standards on Authorised Institutions' Capital Base and Regulatory Reporting',
the group has earmarked a 'regulatory reserve' from retained profits. This
regulatory reserve is included as tier 2 capital together with the group's
collective impairment allowances.

The total capital ratio rose by 1.4 percentage points to 14.2 per cent at 30
June 2006, compared with 12.8 per cent at 31 December 2005. The tier 1 ratio
increased from 10.4 per cent to 11.0 per cent. The capital base increased by
HK$6,059 million to HK$43,492 million, mainly due to the increase in retained
profits (including the realisation of property revaluation reserves on disposed
properties) and the issue of US$450 million subordinated notes, which qualify as
tier 2 capital. Risk-weighted assets adjusted for market risk grew by 5.2 per
cent, attributable to the increase in advances to customers and financial
investments.

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
                                 30Jun06             30Jun05             31Dec05

The bank and its major
  banking subsidiaries              50.9%               43.6%               46.6%










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