HSBC FY05 REL3; Pt4/5

HSBC Holdings PLC 06 March 2006 Other liabilities At 31Dec05 At 31Dec04 Figures in HK$m restated Items in the course of transmission to other banks 6,517 6,136 Accruals 1,653 2,303 Acceptances and endorsements 2,371 - Other 3,597 3,301 14,138 11,740 Subordinated liabilities During the year, the group issued subordinated notes amounting to HK$2,500 million and obtained a subordinated loan of US$260 million from its immediate holding company. Details of the transactions are as follows: Figures in HK$m At 31Dec05 At 31Dec04 Nominal value Description Amount owed to third parties HK$1,500 million Callable floating rate subordinated notes due June 2015 1,495 - HK$1,000 million 4.125 per cent callable fixed rate subordinated notes due June 2015 967 - Amount owed to HSBC Group undertakings US$260 million Callable floating rate subordinated loan debt due December 2015 2,016 - 4,478 - Representing: - measured at amortised cost 3,511 - - designated at fair value 967 - 4,478 - The above subordinated notes and loan each carries a one-time call option exercisable by the group on a day falling five years plus one day after the relevant date of issue/drawdown. The floating rate notes of HK$1,500 million bear interest at the rate of three-month HIBOR plus 0.35 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 HIBOR plus 0.85 per cent, payable quarterly. The fixed rate notes of HK$1,000 million bear interest at the rate of 4.125 per cent per annum, payable semi-annually from the issue date to the call option date. The notes, if not redeemed on the call option date, will become floating rate notes bearing interest at the rate of three-month HIBOR plus 0.825 per cent payable quarterly. The fixed rate notes are reported as financial liabilities designated at fair value together with the interest rate swap transacted to manage the interest rate risk. The floating rate subordinated loan debt of US$260 million bears interest at the rate of three-month LIBOR plus 0.31 per cent, payable quarterly from the issue date to the call option date. Thereafter, if the loan is not repaid on the call option date, the interest rate will be reset to three-month LIBOR plus 0.81 per cent, payable quarterly. Shareholders' funds At 31Dec05 At 31Dec04 Figures in HK$m restated Share capital 9,559 9,559 Retained profits 26,052 23,856 Property revaluation reserve 3,543 2,778 Long-term equity investment revaluation reserve - 935 Cash flow hedges reserve (483) - Available-for-sale investment reserve (17) - Capital redemption reserve 99 99 Other reserves 185 69 Total reserves 29,379 27,737 38,938 37,296 Proposed dividends 3,633 3,633 Shareholders' funds 42,571 40,929 Return on average shareholders' funds 27.5% 28.5% Save for the issuance of subordinated notes in June 2005, there was no purchase, sale or redemption of the group's listed securities by the bank or any of its subsidiaries during 2005. Shareholders' funds (excluding proposed dividends) rose by HK$1,642 million, or 4.4 per cent, to HK$38,938 million at 31 December 2005. Retained profits increased by HK$2,196 million, and the property revaluation reserve rose by HK$765 million reflecting the improved property market. These were partially offset by the HK$500 million revaluation loss on available-for-sale investment securities, and on interest rate swaps designated as cash flow hedges. The return on average shareholders' funds was 27.5 per cent, compared with 28.5 per cent in 2004. Capital resources management Analysis of capital base and risk-weighted assets Figures in HK$m At 31Dec05 At 31Dec04 Capital base Tier 1 capital - Share capital 9,559 9,559 - Retained profits 21,439 20,560 - Classified as regulatory reserve (510) - - Capital redemption reserve 99 99 - Less: goodwill (318) (302) - Total 30,269 29,916 Tier 2 capital - Property revaluation reserve 5,114 5,322 - Available-for-sale investment and equity revaluation reserve (5) 625 - Collective impairment allowances 510 289 - Regulatory reserve 510 - - Term subordinated debt 4,479 - - Total 10,608 6,236 Unconsolidated investments and other deductions (3,444) (2,829) Total capital base after deductions 37,433 33,323 Risk-weighted assets On-balance sheet 277,617 259,429 Off-balance sheet 14,739 16,577 Total risk-weighted assets 292,356 276,006 Total risk-weighted assets adjusted for market risk 291,570 277,029 At 31Dec05 At 31Dec04 Capital adequacy ratios After adjusting for market risk - Tier 1^ 10.4% 10.8% - Total^ 12.8% 12.0% Before adjusting for market risk - Tier 1 10.4% 10.8% - Total 12.8% 12.1% ^ 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 0.8 percentage points over 2004 to reach 12.8 per cent at 31 December 2005. The capital base increased by HK$4,110 million to HK$37,433 million. During the year, the group issued HK$2,500 million in subordinated notes and obtained a subordinated loan of US$260 million, both qualified as tier 2 capital, to achieve a more balanced capital structure and to support business growth. Risk-weighted assets adjusted for market risk grew by 5.2 per cent, attributable mainly to the increase in advances to customers and financial investments. Liquidity ratio The average liquidity ratio for the year, calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance, is as follows: 2005 2004 The bank and its major banking subsidiaries 45.1% 47.2% Reconciliation of cash flow statement (a)Reconciliation of operating profit to net cash flow from operating activities 2005 2004 Figures in HK$m restated Operating profit 11,068 12,598 Net interest income (11,068) (10,005) Dividend income (60) (89) Loan impairment charges/(releases) and other credit risk provisions 618 (777) Depreciation 280 256 Amortisation of intangible assets 9 8 Amortisation of available-for- sale investments 12 - Amortisation of held-to-maturity debt securities - 426 Advances written off net of recoveries (575) (577) Interest received 13,578 9,369 Interest paid (7,443) (2,646) Operating profit before changes in working capital 6,419 8,563 Change in placings with and advances to banks maturing after one month 2,534 2,658 Change in trading assets 3,983 (2,541) Change in financial assets designated at fair value 1,060 - Change in derivative financial instruments (395) (88) Change in advances to customers (8,857) (21,244) Change in available-for-sale investments 8,113 - Change in held-to-maturity debt securities - (1,590) Change in other assets (11,929) (4,000) Change in current, savings and other deposit accounts (9,189) 15,307 Change in deposits from banks 110 8,938 Change in trading liabilities 29,263 4,326 Change in certificates of deposit and other debt securities in issue (2,589) 8,168 Change in other liabilities 9,423 4,955 Elimination of exchange differences and other non-cash items 315 (4,904) Cash generated from operating activities 28,261 18,548 Taxation paid (1,421) (925) Net cash inflow from operating activities 26,840 17,623 (b) Analysis of the balances of cash and cash equivalents At 31Dec05 At 31Dec04 Figures in HK$m restated Cash and balances with banks and other financial institutions 9,201 7,248 Placings with and advances to banks and other financial institutions maturing within one month 53,294 57,071 Treasury bills 3,018 47 Certificates of deposit - 2,685 65,513 67,051 Credit Risk- Contract equivalent weighted Figures in HK$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 Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec04 Contingent liabilities: Guarantees 7,039 6,764 3,429 Commitments: Documentary credits and short-term trade-related transactions 9,020 1,844 1,805 Undrawn formal standby facilities, credit lines and other commitments to lend: - under one year 86,714 - - - one year and over 23,677 11,839 10,460 Other 38 38 38 119,449 13,721 12,303 Exchange rate contracts: Spot and forward foreign exchange 138,269 1,066 298 Other exchange rate contracts 23,158 323 106 161,427 1,389 404 Interest rate contracts: Interest rate swaps 120,603 1,421 347 Other interest rate contracts 5,067 15 6 125,670 1,436 353 Other derivative contracts 1,373 46 23 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 derivatives 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 marked-to-market values and the potential future credit exposure in accordance with the Third Schedule of the Hong Kong Banking Ordinance. 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 accounting policies for each class of derivatives on adoption of HKAS 39 are set out in the appendix. The following table shows the nominal value and marked-to-market value of assets and liabilities of each class of derivatives. At31Dec05 At31Dec04 Trading/ designated at fair Non- Figures in HK$m value Hedging Trading trading Contract amounts: Interest rate contracts 102,233 63,105 54,755 70,915 Exchange rate contracts 203,264 - 161,117 310 Other derivative contracts 1,194 - 1,373 - 306,691 63,105 217,245 71,225 Derivative assets: Interest rate contracts 481 454 519 - Exchange rate contracts 776 - 1,160 - Other derivative contracts 4 - 5 - 1,261 454 1,684 - Derivative liabilities: Interest rate contracts 998 457 477 - Exchange rate contracts 310 - 796 - Other derivative contracts 27 - - - 1,335 457 1,273 - 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 At31Dec05 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 At31Dec04 Asia-Pacific excluding Hong Kong: - Australia 21,429 62 1,223 22,714 - other 26,222 1,530 5,432 33,184 47,651 1,592 6,655 55,898 The Americas: - Canada 19,748 4,957 1,556 26,261 - other 11,320 2,744 10,252 24,316 31,068 7,701 11,808 50,577 Western Europe: - United Kingdom 23,794 16 5,945 29,755 - other 76,926 2,063 5,711 84,700 100,720 2,079 11,656 114,455 Additional information 1. Statutory accounts and accounting policies The information in this news release 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 ('2005 accounts'), which will be delivered to the Registrar of Companies and the HKMA. The statutory accounts comply with the module on 'Financial Disclosure by Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the HKMA. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 6 March 2006. The 2005 accounts and this news release have been prepared on a basis consistent with the accounting policies adopted in the 2004 accounts except for the changes in accounting policies following the adoption of the new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards ('HKFRSs') issued by The Hong Kong Institute of Certified Public Accountants, which became effective for accounting periods beginning on or after 1 January 2005. The significant changes in accounting policies on adoption of the new HKFRSs and the financial impacts on the current and prior accounting periods are set out in the appendix to this news release. Comparative figures have been restated to conform with the new accounting policies except for those applying to financial instruments under HKAS 39 'Financial instruments: recognition and measurement'. 2. Comparative figures Certain comparative figures have been reclassified to conform with the current year's presentation. 3. Property revaluation On 30 September 2005, the group's premises and investment properties were revalued by DTZ Debenham Tie Leung Limited who confirmed that there had been no material change in valuation at 31 December 2005. The valuation was 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 for existing use and the basis of valuation for investment properties was open market value. The revaluation surplus for group premises amounted to HK$1,199 million of which HK$153 million was a reversal of revaluation deficits previously charged to the income statement. The balance of HK$1,046 million was credited to the property revaluation reserve. Revaluation gains on investment properties of HK$1,160 million were recognised through the income statement on adoption of HKAS 40. The related deferred tax provisions for group premises and investment properties were HK$210 million and HK$203 million respectively. 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. 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 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. In line with the HSBC Group, Hang Seng refined its basis of calculating VAR from one predominantly based on variance/co-variance ('VCV') to one predominantly based on historical simulation ('HS'), effective 3 May 2005. This latter calculation was introduced because it better captures the non-linear characteristics of certain market risk positions. 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 group has changed the assumed holding period from a 10-day period to a one-day period as this reflects the way the risk positions are managed. Comparative VAR numbers have been re-stated to reflect this change. 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 has obtained approval from the HKMA to change the VAR model from VCV to HS for calculating market risk in capital adequacy reporting and the HKMA has expressed itself satisfied with the group's market risk management process. The group's VAR for all interest rate risk and foreign exchange risk positions and on individual risk portfolios during 2005 and 2004 are shown in the tables below. The VAR figures for 2005 are based on four months' VCV and eight months' HS. VAR Minimum Maximum Average during during for the the the Figures in HK$m At31Dec05 year year year VAR for all interest rate risk and foreign exchange risk 113 111 264 181 VAR for foreign exchange risk (trading) 3 - 6 2 VAR for interest rate risk - trading 3 1 21 4 - non-trading 118 117 260 180 Minimum Maximum Average during during for At31Dec04 the the the Figures in HK$m (restated) year year year VAR for all interest rate risk and foreign exchange risk 125 79 191 118 VAR for foreign exchange risk (trading) 1 - 18 11 VAR for interest rate risk - trading 1 - 5 1 - non-trading 125 77 191 117 The average daily revenue earned from market risk-related treasury activities in 2005, including non-trading book net interest income and funding related to dealing positions, was HK$5 million (HK$10 million for 2004). The standard deviation of these daily revenues was HK$8 million (HK$5 million for 2004). An analysis of the frequency distribution of daily revenues shows that out of 247 trading days in 2005, losses were recorded on 15 days and the maximum daily loss was HK$84 million. The most frequent result was a daily revenue of between HK$2 million and HK$6 million, with 127 occurrences. The highest daily revenue was HK$23 million. Interest rate risk arises in both the treasury dealing portfolio and accrual books, 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 2005 was HK$3 million (HK$6 million for 2004). The group'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 average one-day foreign exchange profit for 2005 was HK$2 million (HK$4 million for 2004). Structural foreign exchange positions arising from capital investment in subsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi as set out in Note 5, are managed by the Asset and Liability Management Committee. 5. Foreign currency positions Foreign currency exposures include those arising from dealing, non-dealing and structural positions. At 31 December 2005, the US dollar (US$) was the only currency in which the group had a non-structural foreign currency position which exceeded 10 per cent of the total net position in all foreign currencies. Figures in HK$m At31Dec05 At31Dec04 US$ RMB US$ RMB Non-structural position Spot assets 193,149 5,955 173,071 2,664 Spot liabilities (168,513) (6,008) (171,698) (2,400) Forward purchases 84,026 439 68,726 207 Forward sales (104,960) (300) (69,795) (192) Net options position (77) - (37) - Net long non-structural position 3,625 86 267 279 At 31 December 2005, the group's major structural foreign currency positions were US dollar and renminbi. At31Dec05 At31Dec04 % of % of total net total net structural structural HK$m position HK$m position Structural positions US dollar 1,035 32.5 850 28.8 Renminbi 2,043 64.1 1,998 67.6 6. Ultimate holding company Hang Seng Bank is an indirectly held, 62.14 per cent-owned subsidiary of HSBC Holdings plc. 7. Register of shareholders The register of shareholders of Hang Seng Bank will be closed on Tuesday, 21 March 2006, during which no transfer of shares can be registered. In order to qualify for the fourth 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 4:00 pm on Thursday, 16 March 2006. The fourth interim dividend will be payable on 31 March 2006 to shareholders on the register of shareholders of the bank on 21 March 2006. 8. Proposed timetable for 2006 quarterly dividends First Second Third Fourth interim interim interim interim dividend dividend dividend dividend Announcement 2 May 2006 31 July 2006 6 November 2006 5 March 2007 Book close date 26 May 2006 23 August 2006 20 December 2006 20 March 2007 Payment date 6 June 2006 31 August 2006 3 January 2007 30 March 2007 9. News release Copies of this news release may be obtained from 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 2005 Annual Report and Accounts will be available from the same website on Monday, 6 March 2006 and will also be published on the website of The Stock Exchange of Hong Kong Limited in due course. Printed copies of the 2005 Annual Report will be sent to shareholders in late March 2006. This information is provided by RNS The company news service from the London Stock Exchange

Companies

HSBC Holdings (HSBA)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today