2/4: HK&S BK CORP FY04 PT 1

HSBC Holdings PLC
28 February 2005


             THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
                     2004 CONSOLIDATED RESULTS - HIGHLIGHTS



   •Operating profit before provisions up 8.9 per cent to HK$40,661 million
    (HK$37,341 million in 2003).



   •Pre-tax profit up 29.2 per cent to HK$44,966 million (HK$34,797 million
    in 2003).



   •Attributable profit up 30.1 per cent to HK$33,565 million (HK$25,797
    million in 2003).



   •Return on average shareholders' funds of 27.5 per cent (27.4 per cent in
    2003).



   •Assets up 14.4 per cent to HK$2,459.0 billion (HK$2,148.7 billion at the
    end of 2003).



   •Total capital ratio of 11.9 per cent; tier 1 capital ratio of 11.4 per
    cent (12.0 per cent and 10.2 per cent at 31 December 2003).



   •Cost:income ratio of 39.9 per cent (39.1 per cent for 2003).

Results

Comment by David Eldon, Chairman

In 2004, The Hongkong and Shanghai Banking Corporation Limited made significant
progress in developing its business across all customer groups. This was
reflected in a 30.1 per cent increase in profit attributable to shareholders.
The growth in profit was achieved against a background of low interest rates,
intense competition and uncertain economic conditions both locally and
internationally.

The bank's performance benefited from the benign credit environment. Provisions
for bad and doubtful debts in the period fell to their lowest level since 1995.
Credit quality improved in the period with overdue, rescheduled and
non-performing loans all falling. Additionally, we saw encouraging signs of a
pick-up in credit demand from corporate customers, in particular in the small
and medium-sized sector.

Our customer groups performed strongly, benefiting from the investments made by
the bank as part of the Managing for Growth strategy. Operating profit before
provisions rose 8.9 per cent to a record HK$40,661 million. Highlights include:
   •In Personal Financial Services credit cards in force exceeded seven
    million for the first time, with card receivables growing 30.8 per cent
    across the region.
   •Overall insurance income from personal customers grew by 33.6 per cent to
    HK$3,721 million.
   •Income from fees and commissions on sales of unit trusts and capital
    guaranteed funds, funds under management and securities transactions grew by
    HK$1,284 million or 48.1 per cent.
   •Commercial Banking saw strong growth in deposits and advances, which more
    than offset the impact of the falling net interest margin.
   •Other operating income in the Commercial Banking sector grew by 15.9 per
    cent to HK$5,203 million as the bank leveraged its growing presence in
    mainland China, against a backdrop of strong regional trade flows.
   •Corporate, Investment Banking and Markets grew dealing profits for the
    bank to a record level of HK$6,615 million, benefiting from an enhanced
    capability to offer tailor-made solutions to corporate clients in the low
    interest rate environment.
   •The investment bank continued to strengthen and upgrade its product and
    service capabilities, a process which is now substantially complete. The
    benefits of this were reflected in a number of landmark transactions in Hong
    Kong and across the region.

On the Mainland, the bank acquired a 19.9 per cent stake in Bank of
Communications Limited (BoCom). The transaction represents the largest single
equity investment in a mainland China bank by a foreign bank. In a strategic
cooperation agreement, the two parties agreed to create a joint venture to issue
credit cards on the Mainland, as and when regulations allow. In the meantime,
HSBC and BoCom plan to issue a co-branded card later in 2005.

While there are encouraging signs of recovery throughout the region, the outlook
for 2005 remains challenging. Margins will continue to come under pressure amid
fierce competition and high levels of surplus liquidity across the region.
Overall prospects for the region will continue to be conditional upon the
strength of the United States economic recovery and the success of
macro-economic management measures in China.

Results by Customer Group
                                               Corporate,
                                               Investment
                        Personal                  Banking
                       Financial   Commercial         and   Private
Figures in HK$m         Services      Banking     Markets   Banking     Other     Total


Year ended 31Dec04

Net interest income       20,773        7,075      11,257        36      (909)   38,232
 
Dealing profits              607          515       5,429         5        59     6,615

Other operating income^   12,951        5,203       6,062        43    (1,453)   22,806

Operating income          34,331       12,793      22,748        84    (2,303)   67,653

Operating expenses^      (15,557)      (4,766)     (7,398)      (74)      803   (26,992)

Operating profit
 before provisions        18,774        8,027      15,350        10    (1,500)   40,661

Provisions for bad
 and doubtful debts       (1,276)         685       1,405         -        (2)      812

Provision for
 contingent
 liabilities and               -          (47)        132         -      (128)      (43)
 commitments

Operating profit          17,498        8,665      16,887        10    (1,630)   41,430

Profit/(loss) on
 tangible fixed assets 
 and long-term
 investments                   6           (1)         93         -     2,000     2,098

Surplus arising on
 property revaluation          -            -           -         -     1,024     1,024

Share of profits
 less losses of
 associated companies         97          243          34         -        40       414
 

Profit on ordinary
 activities
 before tax               17,601        8,907      17,014        10     1,434    44,966

Share of pre-tax            
 profit                     39.1%        19.8%       37.9%        -       3.2%      100%


                                               Corporate,
                                               Investment
                        Personal                  Banking
                       Financial   Commercial         and   Private
Figures in HK$m         Services      Banking     Markets   Banking     Other     Total

Year ended 31Dec03


Net interest income       21,106        6,225      12,377        25      (995)   38,738
Dealing profits              492          446       3,299         4      (217)    4,024

Other operating 
 income^                  10,263        4,490       4,787       105    (1,042)   18,603

Operating income          31,861       11,161      20,463       134    (2,254)   61,365

Operating expenses^      (14,254)      (4,437)     (6,328)     (110)    1,105   (24,024)

Operating profit 
 before provisions        17,607        6,724      14,135        24    (1,149)   37,341

Provisions for bad
 and doubtful debts       (3,680)         512        (207)        -       (11)   (3,386)

Provision for
 contingent
 liabilities and         
 commitments                  (1)          (3)        (10)        -       (62)      (76)

Operating profit          13,926        7,233      13,918        24    (1,222)   33,879

Profit on tangible
 fixed assets
 and long-term          
 investments                  13           36          98         -       866     1,013

Deficit arising on
property revaluation           -            -           -         -      (234)     (234)

Share of profits
 less losses of
 associated              
 companies                    37            -           6         -        96       139

Profit on ordinary
 activities before tax    13,976        7,269      14,022        24      (494)   34,797

Share of pre-tax      
 profit                     40.2%        20.9%       40.3%        -      (1.4)%   100.0%

^ Other operating income and operating expenses in 'Other' include an adjustment
of HK$4,947 million to eliminate intra-group items (2003: HK$4,092 million).

Personal Financial Services reported profit before tax of HK$17,601 million,
which was HK$3,625 million, or 25.9 per cent, higher than 2003. This reflected
strong growth in Hong Kong of HK$2,831 million, or 20.8 per cent, in profit
before tax, driven by a significant increase in revenue from wealth management
and insurance products and a lower bad debt charge. In the rest of the
Asia-Pacific region, operating profit before provisions grew by HK$750 million,
or 63.9 per cent, and profit before tax increased by 230.8 per cent to HK$1,138
million, reflecting successful expansion across the region, particularly in
credit cards and mortgage loans, while bad debt provisions remained stable.

Net interest income fell by HK$333 million, or 1.6 per cent. In Hong Kong, net
interest income was HK$1,451 million, or 8.5 per cent, lower than 2003,
primarily due to reduced spreads on deposits in the prevailing low interest rate
environment, combined with intense price competition in the local mortgage
market. Average mortgage yields in Hong Kong, excluding Government Home
Ownership Scheme ('GHOS') and staff loans, fell from 175 basis points below the
bank's best lending rate ('BLR') in 2003 to 202 basis points below BLR in 2004.
In the rest of the Asia-Pacific region, net interest income rose by HK$1,118
million, or 28.3 per cent, reflecting strong asset growth across the region.
Mortgage lending increased in Australia, Singapore, Taiwan, Korea and India,
following strong sales drives and promotional campaigns, with volume growth
outweighing the effect of tighter spreads in most markets. Interest earned on
credit cards was higher in Indonesia, Taiwan, Australia and Thailand.

Other operating income of HK$12,951 million was 26.2 per cent higher than 2003,
mainly attributable to the continued strong performance by the wealth management
and insurance businesses. Income from fees and commissions on sales of unit
trusts and capital guaranteed funds, funds under management and securities
transactions grew by HK$1,284 million, or 48.1 per cent. This reflects increased
marketing effort coupled with buoyant stock market activity this year, and the
sale of structured products offering yield enhancement in the current, low
interest rate environment. New products, including a range of structured
treasury products, capital guaranteed funds, open-ended funds and certificates
of deposit were launched to broaden the range of investment options. Overall,
sales of unit trusts and structured products grew by 9.2 per cent to HK$55.8
billion, resulting in revenue growth of 47.2 per cent.

Fee income from credit cards was HK$516 million, or 16.7 per cent, higher than
2003 and the group maintained its position as the largest card issuer in Hong
Kong with 3.5 million cards in force. In the rest of the Asia-Pacific region,
cards in issue grew by 21 per cent, with credit card receivables also showing
strong growth of HK$3,087 million, or 32.6 per cent, reflecting the success of
targeted acquisition strategies and an enhanced rewards programme. Card spending
across the region grew by HK$32.3 billion, in line with the improving economic
environment. Receivables for the group grew strongly, driven primarily by growth
in the rest of Asia-Pacific, while in Hong Kong balances increased against a
falling market.

The group has continued to grow and develop its insurance business throughout
the region. A series of promotional campaigns was launched, the number of
financial planning managers increased, and the insurance product range was
enhanced. Overall, insurance income from personal customers rose by 33.6 per
cent to HK$3,721 million, reflecting the increase in the number of policies in
force, a rise in underwriting profits and higher embedded value.

Operating expenses increased by HK$1,303 million, or 9.1 per cent, over 2003.
Headcount rose to support business expansion across the region and included the
recruitment of additional financial planning managers in Hong Kong.
Performance-related staff costs rose in line with the increase in sales
revenues. The various growth initiatives also incurred higher marketing costs,
particularly for mortgages, credit cards, insurance and investment products, and
there was particular emphasis on promoting brand awareness in mainland China.

The charge for provisions for bad and doubtful debts fell markedly by HK$2,404
million to HK$1,276 million. Specific provisions fell by HK$2,097 million, with
lower new specific provisions in the credit card, mortgage and other personal 
lending portfolios, reflecting the improved credit conditions across much of the 
region. In particular, credit conditions improved in Hong Kong as the economy 
continued to recover with falling unemployment, lower bankruptcies and higher 
residential property prices, while in the rest of the Asia-Pacific region, 
provisions remained relatively flat against a backdrop of significant asset 
growth. There was also a release of the general provision following an improvement 
in historical loan loss experience relating to mortgages and personal loans.

Income from associates largely represents the share of profits from Bank of
Communications attributable to Personal Financial Services for the period from
the date of investment to 30 September 2004.

Commercial Banking reported profit before tax of HK$8,907 million, an increase
of 22.5 per cent over 2003.

Business alignment between the commercial banking teams in Hong Kong and
mainland China resulted in substantial growth in the number of mutual business
referrals between the two areas, and approval was obtained for nine branches on
the Mainland to provide renminbi services to local businesses. In addition, a
team from Taiwan was seconded to the bank on the Mainland and helped capture
substantial business from Taiwanese customers investing in mainland China. In
Hong Kong, a number of new business banking centres have been set up to provide
small and medium-sized enterprises ('SMEs') with a comprehensive range of
services, and specific customer relationships in the middle market ('MME')
sector have been allocated a dedicated relationship manager to address their
more sophisticated banking needs.

Net interest income increased by HK$850 million, or 13.7 per cent, resulting
from a 34 per cent growth in lending balances and 13 per cent growth in customer
deposits. There was continued pressure on deposit spreads in the low interest
rate environment and increasing competitive pressure on lending margins. The
group benefited from the growth in international trade and the continued
expansion of the Chinese economy, as well as from the improved customer
management initiatives in the SME and MME sectors, including a new customer
relationship management system. Property lending and taxi finance also grew as
economic conditions improved in Hong Kong. In the rest of the Asia-Pacific
region, net interest income increased in mainland China, New Zealand and
Singapore, primarily as a result of asset growth.

Other operating income at HK$5,203 million was 15.9 per cent higher than 2003,
primarily due to a rise in trade finance activity and trade-related income in
Hong Kong and mainland China. In addition, income from the sale of wealth
management and insurance products increased by 20.3 per cent in Hong Kong,
following marketing and incentive campaigns and the introduction of a wider
range of investment products.

Operating expenses rose by HK$329 million, or 7.4 per cent, as the number of
relationship managers and support staff increased, although savings were made
from the migration of back office work to HSBC's Group service centres.

The net release of provisions for bad and doubtful debts was HK$173 million
higher than in 2003, benefiting from a release in the general provision
following an improvement in historical loan loss experience. This was partly
offset by higher new specific provisions in mainland China and Singapore, and
lower releases and recoveries in the bank in Hong Kong, Indonesia and Bahrain.

Income from associates represents the share of profits from Bank of
Communications and Industrial Bank attributable to Commercial Banking, for the
period from the date of investment to 30 September 2004.

Corporate, Investment Banking and Markets reported profit before tax of
HK$17,014 million, 21.3 per cent higher than 2003, driven by a strong increase
in dealing profits, which more than compensated for a decline in net interest
income, and a net release of provisions for bad and doubtful debts.

Net interest income fell by HK$1,120 million, or 9.0 per cent, compared with
2003. In Corporate and Institutional Banking, there was continued pressure on
spreads in Hong Kong with income remaining flat, but revenue increased by 24 
per cent in the rest of the Asia-Pacific region on the back of a 27.1 per cent 
growth in loans. In addition, Korea, Taiwan and India benefited from the growth 
in deposits from securities custody and clearing customers. Global Markets faced 
a challenging interest rate environment,characterised by uncertainty as to the 
magnitude of future interest rate changes and yield curves that were generally 
flat in the medium term, making it difficult to generate healthy margins through 
long-term position-taking. Net interest income in Hong Kong was negatively 
impacted as higher yielding treasury assets matured and were replaced at lower 
rates.

Dealing profits increased by HK$2,130 million, or 64.6 per cent, over 2003.
Income from interest rate derivatives rose substantially both from successful
position taking in a volatile market, particularly in Hong Kong, Korea and
India, and from serving the needs of customers. Throughout the region a more
sophisticated product proposition, supported by a specially tailored customer
risk analysis system, enabled the business to identify and meet demand for
structured investment products and bespoke risk management solutions in the low
rate environment. Foreign exchange profits benefited from an increase in
corporate sales and currency volatility in a number of countries, including Hong
Kong, India and Korea. Losses were incurred on debt securities trading due to
the widening of credit spreads because of political uncertainty in some parts of
the region. These were mitigated by higher customer trading volumes.

Other operating income rose by 26.6 per cent to HK$6,062 million. Corporate and
Institutional Banking saw an increase in fees and commissions from the
securities custody and clearing business, which benefited from increased stock
market activity across the region, notably in Hong Kong, India, Indonesia and
Taiwan. Fee income from the asset management business also grew strongly due to
an increase in funds under management and higher sales of investment products.
The investment banking division was restructured during the year to provide
corporate and institutional clients with enhanced comprehensive advisory and
financing services. This resulted in an increase in fee-based investment banking
revenues, with HSBC acting as global co-ordinator of the Hong Kong SAR
Government's HK$6 billion bridge and tunnel toll securitisation offering, and as
joint global co-ordinator of Ping An Insurance Company's US$1.84 billion initial
public offering, the largest in Hong Kong in 2004.

Operating expenses increased by 16.9 per cent compared with 2003, reflecting
higher performance-related staff costs in line with the strong Global Markets
and Investment Banking results and the inclusion of costs relating to the
Asia-Pacific operations of Bank of Bermuda. However, higher expenses were partly
offset by the non-recurrence of the restructuring costs in India and Singapore
in 2003. Headcount increased to support business expansion including the build
up of the investment banking division and the recruitment of senior relationship
managers to extend coverage along industry sector lines.

There was a net release of provisions for bad and doubtful debts of HK$1,405
million, compared with a net charge of HK$207 million in 2003. New specific
provisions were significantly lower, reflecting the improved credit environment
in Hong Kong, and there was an increase in the release of the general provision
following an improvement in recent historical loan loss experience.

Income from associates largely represents the share of profits from Industrial
Bank attributable to Corporate, Investment Banking and Markets, for the period
from the date of investment to 30 September 2004.

Other includes income and expenses relating to staff housing loans, certain
property activities and investment and other activities that are not allocated
to other customer groups. 2004 benefited from a HK$1,024 million surplus arising
from property revaluation, compared with a deficit in 2003. Gains were
also made on the disposal and revaluation of certain long-term investments and
from the sale of property in Hong Kong.

Consolidated Profit and Loss Account

                                             Year ended     Year ended
Figures in HK$m                                 31Dec04        31Dec03

Interest income                                  57,911         55,770
Interest expense                                (19,679)       (17,032)
Net interest income                              38,232         38,738
Other operating income                           29,421         22,627
Operating income                                 67,653         61,365
Operating expenses                              (26,992)       (24,024)
Operating profit before provisions               40,661         37,341
Provisions for bad and doubtful debts               812         (3,386)
Provisions for contingent liabilities
 and commitments                                    (43)           (76)
Operating profit                                 41,430         33,879
Profit on tangible fixed assets and
 long-term investments                            2,098          1,013
Surplus/(deficit) arising on property
 revaluation                                      1,024           (234)
Share of profits less losses of
 associated companies                               414            139
Profit on ordinary activities before tax         44,966         34,797
Tax on profit on ordinary activities             (7,086)        (5,387)

Profit on ordinary activities after tax          37,880         29,410
Minority interests                               (4,315)        (3,613)
Profit attributable to shareholders              33,565         25,797

Retained profits at 1 January                    37,764         28,952
Exchange and other adjustments                      777          1,089
Transfer of depreciation to premises
 revaluation reserve                                298            240
Transfer to premises revaluation reserve              -           (273)
Realisation on disposal of premises and
 investment properties                              519            233
Ordinary dividends paid in respect of
 the current year                               (15,500)        (8,650)
Ordinary dividends proposed                      (4,800)        (8,450)
Preference dividends payable                     (1,540)        (1,174)
                                                (21,840)       (18,274)
Retained profits at 31 December                  51,083         37,764

Extract from the Consolidated Balance Sheet

Figures in HK$m                                At 31Dec04   At 31Dec03

Assets
Cash and short-term funds                         501,261      359,137
Placings with banks maturing after one month       74,481      113,322
Certificates of deposit                            57,418       56,893
Hong Kong SAR Government certificates
 of indebtedness                                   92,334       85,294
Securities held for dealing purposes               71,747       82,239
Long-term investments                             430,469      399,642
Advances to customers                             919,253      815,004
Amounts due from fellow subsidiary
 companies                                         82,592       57,389
Investments in associated companies                16,918        1,564
Tangible fixed assets                              42,080       34,875
Other assets                                      170,492      143,382
                                                2,459,045    2,148,741

Liabilities
Hong Kong SAR currency notes in circulation        92,334       85,294
Current, savings and other deposit accounts     1,880,673    1,669,704
Deposits by banks                                  73,098       68,111
Amounts due to fellow subsidiary companies         17,137       11,328
Amounts due to ultimate holding company               479          375
Other liabilities                                 220,327      175,071
                                                2,284,048    2,009,883

Capital resources
Loan capital                                       11,142       12,855
Minority interests                                 16,360       15,991
Share capital                                      74,213       51,603
Reserves                                           68,482       49,959
Proposed final interim dividend                     4,800        8,450
Shareholders' funds                               147,495      110,012
                                                  174,997      138,858
                                                2,459,045    2,148,741

Consolidated Statement of Changes in Equity

                                              Year ended    Year ended
Figures in HK$m                                  31Dec04       31Dec03

Shareholders' funds as at 1 January              110,012        91,134

Profit for the year attributable to
 shareholders                                     33,565        25,797

Surplus/(deficit) on revaluation of
 premises                                          5,052        (1,145)

Surplus/(deficit) on revaluation of
 investment properties                               490          (252)

Surplus on revaluation of long-term
 investments                                       1,434           410

Realisation of gain on disposal of
 long-term investments                            (1,022)         (505)

New non-cumulative irredeemable
 preference shares issued                         16,356         6,808

New ordinary shares issued                         6,240             -

Dividends                                        (25,490)      (13,324)

Exchange and other movements                         858         1,089

Shareholders' funds as at 31 December            147,495       110,012

Consolidated Cash Flow Statement

Figures in HK$m                                        2004       2003

Operating activities
Cash generated from operations                      124,185     76,379
Interest received from long-term investments         12,780     12,496
Dividends received from long-term investments           210        216
Dividends received from associated companies             52         58
Interest paid on loan capital                          (576)      (835)
Dividends paid to minority interests                 (3,693)    (4,634)
Ordinary dividends paid                             (23,950)   (12,150)
Preference dividends paid                            (1,269)    (1,140)
Taxation paid                                        (5,083)    (3,619)

Net cash inflow from operating activities           102,656     66,771

Investing activities
Purchase of long-term investments                  (289,347)  (323,578)
Proceeds from sale or redemption of
 long-term investments                              268,963    299,295
Purchase of tangible fixed assets                    (1,475)    (1,220)
Proceeds from sale of tangible fixed assets             842        443
Net cash outflow in respect of acquisition
 of and increased shareholding in
 subsidiary companies                                  (972)      (795)
Net cash inflow in respect of disposal of
 subsidiary company                                      39          -
Net cash outflow in respect of purchase of
 business                                              (588)    (7,787)
Purchase of interest in associated companies        (15,785)      (122)
Proceeds from sale of interest in
 associated company                                      12          2

Net cash outflow from investing activities          (38,311)   (33,762)

Net cash inflow before financing                     64,345     33,009

Financing
Issue of ordinary shares                              6,240          -
Issue of non-cumulative irredeemable preference
 shares                                              16,356      6,808
Repayment of loan capital                            (1,771)    (5,925)

Net cash inflow from financing                       20,825        883

Increase in cash and cash equivalents                85,170     33,892

Additional Information

1. Net interest income
                                           Year ended       Year ended
Figures in HK$m                               31Dec04          31Dec03

Net interest income                            38,232           38,738
Average interest-earning assets             1,932,306        1,726,614
Net interest spread                              1.85%            2.14%
Net interest margin                              1.98%            2.24%

Net interest income of HK$38,232 million was HK$506 million, or 1.3 per cent,
lower than 2003.

Net interest income from the Personal Financial Services business fell by HK$333
million, or 1.6 per cent, primarily due to reduced spreads on deposits taken in
the low interest rate environment in Hong Kong. This was partly offset by strong
growth in net interest income in the rest of the Asia-Pacific region, driven
mainly by increased mortgage lending in Australia, Singapore, Taiwan, Korea and
India, and in Indonesia due to growth of the credit card business and improved
margins. Net interest income from the Commercial Banking business was HK$850
million, or 13.7 per cent, higher than last year mainly due to strong growth in
lending balances and customer deposits, particularly trade finance advances in
Hong Kong and mainland China. Net interest income from Corporate, Investment
Banking and Markets fell by HK$1,120 million, or 9.0 per cent, mainly due to the
maturity of high yielding treasury assets in Hong Kong, and flat yield curves
that gave limited opportunity for position-taking. This was partly offset by
growth of HK$22.7 billion in corporate loan balances, and an increase in
customer deposits of HK$32.0 billion, in the rest of the Asia-Pacific region.

Average interest-earning assets increased by HK$205.7 billion, or 11.9 per cent,
to HK$1,932.3 billion. Average advances to customers grew by HK$87.1 billion, or
11.2 per cent, with strong growth in mortgage lending in Singapore, Korea, India
and Australia, and increases in commercial and corporate lending and trade
finance in Hong Kong, mainland China and Australia. HIBOR-based loans in Hong
Kong grew strongly on the back of historically low HIBOR rates. Average credit
card receivables rose in most countries, notably in Taiwan and Australia, and
other personal lending increased in Singapore. Average loans to banks were
HK$62.0 billion higher, mainly in the bank in Hong Kong, although there was a
decrease in Hang Seng Bank, as funds were redeployed into higher yielding
investments. Investments rose by HK$55.7 billion, mainly in Hang Seng Bank and
the bank in Hong Kong, reflecting a shift from interbank placements to higher
yielding debt securities and, in some areas, a desire for greater liquidity.
Trading securities remained in line with last year.

The group's net interest margin of 1.98 per cent for 2004 was 26 basis points
lower than 2003. Spread narrowed by 29 basis points compared with 2003 and the
contribution from net free funds was three basis points higher.

For the banking operations in Hong Kong (excluding Hang Seng Bank), net interest
margin reduced by 39 basis points to 1.74 per cent for 2004. Spread narrowed by
41 basis points to 1.64 per cent. Wholesale rates increased gradually during the
first nine months of the year as surplus liquidity was withdrawn from the
system, although rates remained below those of 2003. In the last three months of
2004, however, significant liquidity resurfaced as foreign funds entered Hong
Kong to invest in the buoyant stock market, and there were inflows from
investors  anticipating an upward realignment of the currency as the US dollar
weakened.  This caused rates to fall back in the final quarter of the year.
Under the low  interest rate environment, the spreads on Hong Kong dollar
deposits were affected  by a lower value of funds, while interest paid to
customers had little room for  reduction. Lower spreads on Hong Kong dollar
savings, current and deposit  accounts resulted in a reduction of 29 basis
points. Spreads on treasury  products narrowed,contributing to a further decline
of 15 basis points, while  higher spreads on foreign currency deposits caused an
increase of four basis points.  A lower cost of funds on mortgages resulted in
an increase in spread of two basis  points, however, the average yield on the
residential mortgage portfolio,  excluding GHOS and staff loans, in the bank in
Hong Kong declined to 201 basis  points below BLR in 2004, compared with 174
basis points below BLR in 2003.  This reflected the fierce competition in the
market against the backdrop of  surplus liquidity and limited asset growth. Cash
incentive payments on new  mortgage loans of HK$151 million were written off
against interest income in 2004,  compared with HK$115 million in 2003. The
contribution from net free funds rose  by two basis points compared with the
same period last year.

In Hang Seng Bank, net interest margin narrowed by 24 basis points to 2.04 per
cent, with a reduction of 10 basis points in spread due to the maturity of
higher yielding debt securities and a decrease of seven basis points due to the
decline in spreads on time deposits. Corporate lending margins and lower
mortgage yields each accounted for a further fall of six basis points. Average
yield on the residential mortgage portfolio, excluding GHOS and staff loans, in
Hang Seng Bank was 202 basis points below BLR in 2004, compared with 177 basis
points below BLR in the same period last year. Cash incentive payments on new
mortgage loans of HK$157 million have been written off against interest income
in 2004 compared with HK$130 million in 2003. The contribution from net free
funds was unchanged.

In the rest of the Asia-Pacific region, net interest margin at 1.92 per cent for
2004 was 10 basis points lower than 2003. Spread reduced by 13 basis points to
1.74 per cent for 2004, with reductions in several countries, including Taiwan
which faced lower yields on mortgage loans as a result of market competition as
well as narrower margins on credit card advances, and Singapore which saw the
maturity of high yielding treasury assets and lower spreads on mortgages. These
were partly offset by increased margins on mortgages in Australia, higher credit
card spreads in Indonesia, and lower cost current and savings accounts in India.
The contribution from net free funds was three basis points higher.








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