Hang Seng PT5

HSBC Holdings PLC
31 July 2006

Reconciliation of cash flow statement

(a) Reconciliation of operating profit to net cash flow from operating activities

                                                    Half-year             Half-year
                                                        ended                 ended
Figures in HK$m                                       30Jun06               30Jun05

Operating profit                                        6,353                 5,632
Net interest income                                    (6,375)               (5,264)
Dividend income                                           (31)                  (37)
Loan impairment charges and other
  credit risk provisions                                   34                   302
Depreciation                                              150                   135
Amortisation of intangible assets                           4                     4
Amortisation of available-for-sale investments           (222)                    7
Amortisation of held-to-maturity debt securities            -                     1
Advances written off net of recoveries                   (166)                 (112)
Interest received                                      10,530                 5,091
Interest paid                                          (6,609)               (2,537)
Operating profit before changes in 
  working capital                                       3,668                 3,222
Change in treasury bills and certificates of
  deposit with original maturity more than three
  months                                                4,505                 1,277
Change in placings with and advances to banks
  maturing after one month                             (6,190)               (5,350)
Change in trading assets                                4,831                 3,132
Change in financial assets designated at
  fair value                                               78                   299
Change in derivative financial instruments                 18                  (167)
Change in advances to customers                        (5,693)               (8,856)
Change in other assets                                 (2,271)                 (171)
Change in current, savings and other
  deposit accounts                                     17,102                (9,789)
Change in deposits from banks                          10,080                22,804
Change in trading liabilities                          15,826                 7,817
Change in certificates of deposit and
  other debt securities in issue                       (1,711)               (1,454)
Change in other liabilities                              (600)                 (731)
Change in liabilities to customers under
  insurance contract                                       10                     -
Change in financial liabilities designated
  at fair value                                           (17)                   (1)
Elimination of exchange differences
  and other non-cash items                             (1,149)               (1,094)
Cash generated from operating activities               38,487                10,938
Taxation paid                                            (407)                 (222)
Net cash inflow from operating activities              38,080                10,716

(b) Analysis of the balances of cash and cash equivalents

Figures in HK$m                                 At 30Jun06          At 30Jun05

Cash and balances with banks and
  other financial institutions                      13,763               7,816
Placings with and advances to banks and
  other financial institutions maturing
  within one month                                  59,056              41,614
Treasury bills                                       6,852               1,033
Certificates of deposit                              1,191                   2
                                                    80,862              50,465

Contingent liabilities, commitments and derivatives

                                                           Credit          Risk-
                                          Contract     equivalent       weighted
Figures in HK$m                             amount         amount         amount

At 30Jun06

Contingent liabilities:
Guarantees                                   3,604          3,364          3,172

Commitments:
Documentary credits and short-term
  trade-related transactions                 8,820          1,770          1,755
Undrawn formal standby facilities,
  credit lines and other commitments
  to lend:
- under one year                           124,080              -              -
- one year and over                         19,454          9,727          8,953
Other                                          227            227            227
                                           152,581         11,724         10,935

Exchange rate contracts:
Spot and forward foreign exchange          253,985          2,404            526
Other exchange rate contracts               49,693            414             97
                                           303,678          2,818            623

Interest rate contracts:
Interest rate swaps                        155,362          1,627            340
Other interest rate contracts                4,220             10              2
                                           159,582          1,637            342

Other derivative contracts                   4,916            267             65

                                                          Credit          Risk-
                                         Contract     equivalent       weighted
Figures in HK$m                            amount         amount         amount

At 30Jun05

Contingent liabilities:
Guarantees                                  6,266          6,035          3,336

Commitments:
Documentary credits and short-term
  trade-related transactions                8,845          1,782          1,764
Undrawn formal standby facilities,
  credit lines and other commitments
  to lend:
- under one year                          100,918              -              -
- one year and over                        25,593         12,796         11,770
Other                                          26             26             26
                                          135,382         14,604         13,560

Exchange rate contracts:
Spot and forward foreign exchange         131,827          1,346            341
Other exchange rate contracts              31,916            382            118
                                          163,743          1,728            459

Interest rate contracts:
Interest rate swaps                       169,762          1,476            406
Other interest rate contracts               1,669              8              3
                                          171,431          1,484            409

Other derivative contracts                    311             17              9

                                                           Credit          Risk-
                                          Contract     equivalent       weighted
Figures in HK$m                             amount         amount         amount

At 31Dec05

Contingent liabilities:
Guarantees                                   4,133          3,907          3,131

Commitments:
Documentary credits and short-term
  trade-related transactions                 7,402          1,480          1,480
Undrawn formal standby facilities,
  credit lines and other commitments
  to lend:
- under one year                           109,369              -              -
- one year and over                         20,385         10,193          9,158
Other                                          220            220            220
                                           137,376         11,893         10,858

Exchange rate contracts:
Spot and forward foreign exchange          188,088          1,426            333
Other exchange rate contracts               15,176            193             48
                                           203,264          1,619            381

Interest rate contracts:
Interest rate swaps                        161,083          1,472            308
Other interest rate contracts                4,255             20              4
                                           165,338          1,492            312

Other derivative contracts                   1,194             86             17

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 ('the Third Schedule') 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.

In accordance with the Third Schedule, contingent liabilities and commitments
are credit-related instruments that include acceptances and endorsements,
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.

In accordance with HKAS 39, acceptances and endorsements are recognised on the
balance sheet in 'Other assets' and 'Other liabilities'. These acceptances and
endorsements are included in the capital adequacy calculation as contingencies
in accordance with the Third Schedule.

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
marked-to-market values and the potential future credit exposure in accordance
with the Third Schedule.

Derivative financial instruments are held for trading, as financial instruments
designated at fair value, or designated as either fair value hedge or cash flow
hedges. The following table shows the nominal contract amounts and
marked-to-market value of assets and liabilities of each class of derivatives.

                              At 30Jun06                At 30Jun05                  At 31Dec05

                       Trading/                   Trading/                   Trading/
                     designated                 designated                 designated
Figures in HK$m   at fair value     Hedging  at fair value     Hedging  at fair value     Hedging
              

Contract amounts:
Interest rate
  contracts             107,608      51,974        103,968      67,463        102,233      63,105
Exchange rate                    
  contracts             303,678           -        163,743           -        203,264           -
Other derivative
  contracts               4,916           -            311           -          1,194           -
                        416,202      51,974        268,002      67,463        306,691      63,105

Derivative assets:
Interest rate                        
  contracts                 688         480            675         223            481         454
Exchange rate                        
  contracts                 983           -            647           -            776           -
Other derivative
  contracts                  10           -              7           -              4           -
                          1,681         480          1,329         223          1,261         454

Derivative liabilities:
Interest rate                        
  contracts                 999         507            847         591            998         457
Exchange rate                        
  contracts                 578           -            412           -            310           -
Other derivative
  contracts                 172           -              7           -             27           -
                          1,749         507          1,266         591          1,335         457

The above derivative assets and liabilities, being the positive or negative
marked-to-market value of the respective derivative contracts, represent gross
replacement costs, as none of these contracts are subject to any bilateral
netting arrangements.

Cross-border claims

Cross-border claims include receivables and loans and advances, and balances due
from banks and holdings of certificates of deposit, bills, promissory notes,
commercial paper and other negotiable debt instruments, as well as 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, the 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       Sovereign
                                   & other        & public
                                 financial          sector
Figures in HK$m               institutions        entities         Other          Total

At 30Jun06

Asia-Pacific excluding Hong
  Kong:
- Australia                         31,760             146           526         32,432
- Other                             42,580           1,402         7,144         51,126
                                    74,340           1,548         7,670         83,558
The Americas:
- Canada                            18,902           3,628         2,775         25,305
- Other                             21,351           2,602         9,029         32,982
                                    40,253           6,230        11,804         58,287
Western Europe:
- United Kingdom                    31,828               -         9,356         41,184
- Other                             89,253             450         5,555         95,258
                                   121,081             450        14,911        136,442

At 30Jun05

Asia-Pacific excluding Hong
  Kong:
- Australia                         25,194              61           954         26,209
- Other                             27,760           1,600         6,197         35,557
                                    52,954           1,661         7,151         61,766
The Americas:
- Canada                            19,011           4,599         1,571         25,181
- Other                             13,396           2,601        10,882         26,879
                                    32,407           7,200        12,453         52,060
Western Europe:
- United Kingdom                    25,206              15         6,897         32,118
- Other                             79,498           2,577         6,757         88,832
                                   104,704           2,592        13,654        120,950

                                        Banks     Sovereign
                                      & other      & public
                                    financial        sector
Figures in HK$m                  institutions      entities        Other         Total

At 31Dec05

Asia-Pacific excluding Hong
  Kong:
- Australia                            23,961           144          712        24,817
- Other                                38,140         1,447        6,882        46,469
                                       62,101         1,591        7,594        71,286
The Americas:
- Canada                               16,229         3,976        1,677        21,882
- Other                                13,182         2,460       10,712        26,354
                                       29,411         6,436       12,389        48,236
Western Europe:
- United Kingdom                       23,008             -        7,842        30,850
- Other                                81,089         1,430        6,207        88,726
                                      104,097         1,430       14,049       119,576

Additional information

1. Accounting policies

The accounting policies applied in preparing this news release are the same as
those applied in preparing the financial statements for the year ended 31
December 2005, as disclosed in the Annual Report and Financial Statements for
2005 except for the following:

Amendments to Hong Kong Accounting Standard 39 ('HKAS 39') and Hong Kong
Financial Reporting Standard 4 'Financial Instruments: Recognition and
Measurement and Insurance Contracts - Financial Guarantee Contracts'

In prior years, financial guarantee contracts were accounted for under HKAS 37
'Provisions, Contingent Liabilities and Contingent Assets' as contingent
liabilities and were disclosed as off-balance sheet items.

With effect from 1 January 2006 and in accordance with the above amendments,
financial guarantee contracts issued are recognised as financial liabilities and
reported under 'Other liabilities'. Financial guarantees are recognised
initially at fair value and subsequently measured as the higher of (a) the
amount as provisions determined in accordance with HKAS 37; and (b) the amount
initially recognised less cumulative amortisation.

Financial liabilities recorded under 'Other liabilities' at 30 June 2006
amounted to HK$4 million. No restatement of comparative figures was made as the
amounts were immaterial.

2. Statement of compliance

This news release has been prepared in accordance with Hong Kong Accounting
Standard ('HKAS') 34 '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 ('HKMA').

3. Statutory accounts

The information in this news release is not audited and does not constitute
statutory accounts.

Certain financial information in this news release is extracted from the
statutory accounts for the year ended 31 December 2005, which have been
delivered to the Registrar of Companies and the HKMA. The auditors expressed an
unqualified opinion on those statutory accounts in their report dated 6 March
2006.

4. Comparative figures

Certain comparative figures have been reclassified to conform with the current
period's presentation.

5. Property revaluation

A revaluation of Hang Seng's premises and investment properties in Hong Kong was
performed in June 2006 to reflect property market movements in the first half of
2006. The group's premises and investment properties were revalued by DTZ
Debenham Tie Leung Limited, an independent professional valuer, and carried out
by qualified persons who are members of the Hong Kong Institute of Surveyors.
The basis of the valuation of premises was open market value for existing use
and the basis of valuation for investment properties was open market value. The
revaluation surplus for group premises amounted to HK$582 million, of which
HK$13 million was a reversal of revaluation deficits previously charged to the
income statement. The balance of HK$569 million was credited to the property
revaluation reserve. Revaluation gains on investment properties of HK$305
million were recognised through the income statement in accordance with HKAS 40.
The related deferred tax provisions for group premises and investment properties
were HK$102 million and HK$53 million respectively.

6. Market risk

Market risk is the risk that foreign exchange rates, interest rates or equity
and commodity prices will move and result in profits or losses for the group.
The group'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 and
delegated to the Treasurer who will allocate the limits to the individual
traders. 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.

The group 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 that 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. In line with the HSBC Group,
Hang Seng's VAR calculation is predominantly based on historical simulation
('HS') effective 3 May 2005. Prior to May 2005, VAR calculation was
predominantly based on variance/co-variance ('VCV'). HS uses scenarios derived
from historical market rates, and takes account of the relationships between
different markets and rates, for example, interest rates and foreign exchange
rates. Movements in market prices are calculated by reference to market data
from the last two years. The assumed holding period is a one-day period,
reflecting the way the risk positions are managed. Aggregation of VAR from
different risk types is based upon the assumption of independence between risk
types. In recognition of the inherent limitations of VAR methodology, stress
testing is performed to assess the impact of extreme events on market risk
exposures.

The group's VAR for all interest rate risk and foreign exchange risk positions
and on individual risk portfolios during the first halves of 2006 and 2005 are
shown in the tables below. The VAR figures for the first half of 2005 are based
on four months' VCV and two months' HS.

VAR
                                           Minimum   Maximum   Average
                                            during    during       for
                                               the       the       the                     
Figures in HK$m               At 30Jun06    period    period    period

VAR for all interest rate
  risk and foreign exchange
  risk                                47        47       119        86
VAR for foreign exchange risk          
 (trading)                             5         3        16         6
VAR for interest rate risk
- trading                             15         3        15         7
- non-trading                         51        51       123        91


                                           Minimum   Maximum   Average
                                            during    during       for
                                               the       the       the
Figures in HK$m               At 30Jun05    period    period    period

VAR for all interest rate
  risk and foreign exchange
  risk                               194       123       264       205
VAR for foreign exchange risk          
 (trading)                             2         -         3         1
VAR for interest rate risk
- trading                              1         1        21         6
- non-trading                        194       122       261       201

The average daily revenue earned from market risk-related treasury activities
for the first half of 2006, including non-trading book net interest income and
funding related to trading positions, was HK$5 million (HK$7 million for the
first half of 2005). The standard deviation of these daily revenues was HK$3
million (HK$5 million for the first half of 2005).

Interest rate risk arises in both the treasury trading and non-trading portfolio
s, which are managed by treasury under limits approved by the Board of
Directors. The average daily revenue earned from treasury-related interest rate
activities for the first half of 2006 was HK$1 million (HK$5 million for the
first half of 2005).

The group's foreign exchange exposures mainly comprise foreign exchange trading
by treasury and currency exposures originated from 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 average
one-day foreign exchange profit for the first half of 2006 was HK$4 million
(HK$2 million for the first half of 2005).

Structural foreign exchange positions arising from capital investment in
subsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi as
set out in Note 7, are managed by the Asset and Liability Management Committee.

7. Foreign currency positions

Foreign currency exposures include those arising from trading, non-trading and
structural positions. At 30 June 2006, the US dollar (US$) was the only currency
in which the group had a non-structural foreign currency position that exceeded
10 per cent of the total net position in all foreign currencies.

                                    
Figures in HK$m                     At 30Jun06                At 30Jun05                At 31Dec05
                               US$         RMB           US$         RMB           US$         RMB
Non-structural position
Spot assets                202,537       8,960       188,701       4,665       193,149       5,955
Spot liabilities          (189,227)     (8,582)     (177,851)     (4,526)     (168,513)     (6,008)
Forward purchases          124,061         570        61,568         384        84,026         439
Forward sales             (129,724)       (827)      (71,173)       (380)     (104,960)       (300)
Net options position            25           -            (4)          -           (77)          -
Net long non-structural
  position                   7,672         121         1,241         143         3,625          86

At 30 June 2006, the group's major structural foreign currency positions were US
dollar and renminbi.

                                 At 30Jun06                 At 30Jun05                 At 31Dec05
                                       % of                       % of                       % of
                                  total net                  total net                  total net
                                 structural                 structural                 structural
                        HK$m       position       HK$m        position       HK$m        position
Structural positions
US dollar              1,133           33.0      1,037            33.0      1,035            32.5
Renminbi               2,194           63.9      1,997            63.6      2,043            64.1


8. Ultimate holding company

Hang Seng Bank is an indirectly held, 62.14 per cent-owned subsidiary of HSBC
Holdings plc.

9. Register of shareholders

The register of shareholders of Hang Seng Bank will be closed on Wednesday, 23
August 2006, during which no transfer of shares can be registered. In order to
qualify for the second interim dividend, all transfers, accompanied by the
relevant share certificates, must be lodged with the bank's registrars,
Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor,
Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration not
later than 4 pm on Tuesday, 22 August 2006. The second interim dividend will be
payable on Thursday, 31 August 2006 to shareholders on the register of
shareholders of the bank on Wednesday, 23 August 2006.

10. Proposed timetable for the remaining 2006 quarterly dividends

                                      Third                           Fourth
                           interim dividend                 interim dividend

Announcement                6 November 2006                     5 March 2007
Book close date            20 December 2006                    20 March 2007
Payment date                 3 January 2007                    30 March 2007

11. News release

Copies of this news release may be obtained from the Legal and Company
Secretarial Services Department, Level 10, 83 Des Voeux Road Central, Hong Kong;
or from Hang Seng's website http://www.hangseng.com.

The 2006 Interim Report and Financial Statements will be available from the same
website on Monday, 31 July 2006 and will also be published on the website of The
Stock Exchange of Hong Kong Limited in due course. Printed copies of the 2006
Interim Report and Financial Statements will be sent to shareholders in late
August 2006 in accordance with the requirements under the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited.

Media enquiries to:
Walter Cheung            Telephone: [phone]
Cecilia Ko               Telephone: [phone]








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