3/4: Hang Seng FY03 PT 3

HSBC Holdings PLC
01 March 2004


Financial Review (continued)

Other liabilities
                                               At 31Dec03   At 31Dec02
Figures in HK$m                                               restated^

Short positions in securities                       1,514        2,916
Unrealised losses on off-balance sheet
  interest rate, exchange rate and
  other derivative contracts which
  are marked to market                              1,277          832
Current taxation                                      523          249
Deferred taxation                                     643          635
Items in the course of transmission
  to other banks                                    3,968        4,629
Accruals and deferred income                        2,155        1,668
Provisions for other liabilities and charges          363          313
Long-term liabilities attributable to
  policy holders                                    4,982        2,897
Other                                               3,722          606
                                                   19,147       14,745

^Certain figures for 2002 have been restated to reflect the adoption of Hong
Kong Statement of Standard Accounting Practice 12 (revised) (HKSSAP 12) on
'Income taxes', details of which are set out in Note 1 of the additional
information on page 49.

Other liabilities increased by HK$4,402 million, or 29.9 per cent, to HK$19,147
million, compared with HK$14,745 million at 31 December 2002, reflecting the
increase in long-term liabilities attributable to policy holders, the
subscription money received on launch of retail investment funds and dividend
payable included under the 'Other' item. These were partly offset by a reduction
in the short positions in securities and items in the course of transmission to
other banks.

Shareholders' funds
                                               At 31Dec03   At 31Dec02
Figures in HK$m                                               restated^

Share capital                                       9,559        9,559
Retained profits                                   19,720       19,440
Premises and investment properties
  revaluation reserves                              5,813        6,667
Long-term equity investment
  revaluation reserve                               1,009        1,011
Capital redemption reserve                             99           99
Total reserves                                     26,641       27,217
                                                   36,200       36,776
Proposed dividends                                  3,441        6,309
Shareholders' funds                                39,641       43,085

Return on average shareholders' funds                23.4%        23.1%

^Certain figures for 2002 have been restated to reflect the adoption of Hong
Kong Statement of Standard Accounting Practice 12 (revised) (HKSSAP 12) on
'Income taxes', details of which are set out in Note 1 of the additional
information on page 49.

There was no purchase, sale or redemption of the bank's listed securities by the
bank or any of its subsidiaries during the year.

Shareholders' funds (excluding proposed dividends) fell by HK$576 million, or
1.6 per cent, to HK$36,200 million at 31 December 2003. Retained profits rose by
HK$280 million. Premises and investment properties revaluation reserves fell by
HK$854 million, reflecting the decline in property value compared with the
year-end 2002 and the provision for deferred tax on the property revaluation
surplus following the adoption of the HKSSAP 12.

The return on average shareholders' funds was 23.4 per cent, compared with 23.1
per cent in 2002.

Capital resources management

Analysis of capital base and risk-weighted assets

Figures in HK$m                                At 31Dec03   At 31Dec02

Capital base
Tier 1 capital
- share capital                                     9,559        9,559
- retained profits                                 19,084       18,795
- capital redemption reserve                           99           99
- total                                            28,742       28,453

Tier 2 capital
- premises and investment properties
  revaluation reserves                              4,096        5,153
- long-term equity investment
  revaluation reserve                                 688          705
- general provisions                                1,101        1,108
- total                                             5,885        6,966

Unconsolidated investments and
  other deductions                                 (1,283)      (1,376)
Total capital base after deductions                33,344       34,043

Risk-weighted assets
On-balance sheet                                  234,251      222,758
Off-balance sheet                                  15,047       16,262
Total risk-weighted assets                        249,298      239,020
Total risk-weighted assets adjusted for
  market risk                                     253,326      239,426

Capital adequacy ratios
After adjusting for market risk
- tier 1^                                            11.3%        11.9%
- total^                                             13.2%        14.2%

Before adjusting for market risk
- tier 1                                             11.5%        11.9%
- total                                              13.4%        14.2%

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

The total capital ratio fell by 100 basis points to 13.2 per cent at 31 December
2003, compared with 14.2 per cent at 31 December 2002. The capital base recorded
a reduction of 2.1 per cent, mainly due to the fall in premises and investment
properties revaluation reserves. Risk-weighted assets adjusted for market risk,
on the other hand, grew by 5.8 per cent, mainly attributable to the rise in
total assets which included advances to customers and debt securities.

The tier 1 capital ratio dropped by 60 basis points to 11.3 per cent, as a
result of the growth in risk-weighted assets adjusted for market risk.

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:

                                                        2003     2002
The bank and its major banking subsidiaries             46.2%    44.4%

Reconciliation of cash flow statement

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

Figures in HK$m                                         2003      2002

Operating profit                                      10,683    10,684
Net interest income                                  (10,179)  (10,805)
Dividend income                                          (92)      (99)
Provisions for bad and doubtful debts                    792       571
Depreciation                                             329       352
Amortisation of long-term investments                    203       (96)
Advances written off net of recoveries                (1,172)   (1,148)
Interest received                                     10,240    13,068
Interest paid                                         (2,747)   (4,450)
Operating profit before changes in working capital     8,057     8,077
Change in cash and short-term funds                       99      (762)
Change in placings with banks
  maturing after one month                            12,890    12,085
Change in certificates of deposit                      1,392    (7,022)
Change in securities held for dealing purposes           (34)      969
Change in advances to customers                       (4,524)   (1,549)
Change in amounts due from immediate holding
  company and fellow subsidiary companies                341     1,281
Change in other assets                                (3,491)   (3,737)
Change in customer deposit accounts                   34,280     1,927
Change in debt securities in issue                    (8,060)   (2,562)
Change in deposits from banks                            130    (1,550)
Change in amounts due to immediate holding
  company and fellow subsidiary companies                797       564
Change in other liabilities                            4,199     2,941
Elimination of exchange differences
  and other non-cash items                           (11,984)   (5,239)
Cash generated from operating activities              34,092     5,423
Taxation paid                                           (526)     (742)
Net cash inflow from operating activities             33,566     4,681

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

Figures in HK$m                                  At 31Dec03   At 31Dec02

Cash in hand and balances with banks and
  other financial institutions                        5,823        3,676
Money at call and placings with banks
  maturing within one month                          71,658       70,562
Treasury bills                                           91        2,531
Certificates of deposit                                   3           48
                                                     77,575       76,817

Note: The components of cash and cash equivalents have been reclassified, in
light of their liquid nature, to include cash and balances with banks maturing
within one month (previously bank balances maturing within three months had been
included), and treasury bills and certificates of deposit with less than three
months' maturity from the date of acquisition. The figures for 2002 have been
restated.

Contingent liabilities, commitments and derivatives

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

At 31Dec03

Contingent liabilities:
Guarantees                              12,401       12,143      3,622

Commitments:
Documentary credits and short-term
  trade-related transactions             8,098        1,620      1,613
Undrawn formal standby facilities,
  credit lines and other commitments
  to lend:
- under one year                        69,099            -          -
- one year and over                     19,623        9,811      8,949
Other                                      160          160         62
                                        96,980       11,591     10,624

Exchange rate contracts:
Spot and forward foreign exchange       76,408        1,080        322
Other exchange rate contracts           33,160          401        141
                                       109,568        1,481        463

Interest rate contracts:
Interest rate swaps                     91,629        1,300        315
Other interest rate contracts           17,578           45         21
                                       109,207        1,345        336

Other derivative contracts                 297            9          2

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

At 31Dec02

Contingent liabilities:
Guarantees                              13,864       13,717      4,321

Commitments:
Documentary credits and short-term
  trade-related transactions             6,982        1,400      1,394
Undrawn formal standby facilities,
  credit lines and other commitments
  to lend:
- under one year                        65,110            -          -
- one year and over                     21,565       10,783      9,840
Other                                       41           41         41
                                        93,698       12,224     11,275

Exchange rate contracts:
Spot and forward foreign exchange       73,607          894        251
Other exchange rate contracts           24,104          261         55
                                        97,711        1,155        306

Interest rate contracts:
Interest rate swaps                     64,443        1,454        357
Other interest rate contracts            7,969            8          2
                                        72,412        1,462        359

Other derivative contracts                 177            6          1

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 derivative 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
mark-to-market values and the potential future credit exposure in accordance
with the Third Schedule of the Hong Kong Banking Ordinance.

Figures in HK$m                           At 31Dec03        At 31Dec02

Replacement cost
Exchange rate contracts                          876               485
Interest rate contracts                          997             1,231
Other derivative contracts                         -                 1
                                               1,873             1,717

The replacement cost of contracts represents the mark-to-market assets on all
contracts (including non-trading contracts) with a positive value and which have
not been subject to any bilateral netting arrangement.

Cross border claims

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

At 31Dec03

Asia-Pacific excluding Hong
  Kong
- Australia                       19,251        170    1,362    20,783
- other                           23,543      1,377    3,749    28,669
                                  42,794      1,547    5,111    49,452
The Americas
- Canada                          17,982     10,527      686    29,195
- other                            8,051      7,215    9,441    24,707
                                  26,033     17,742   10,127    53,902
Western Europe
- Germany                         20,417        863      371    21,651
- United Kingdom                  20,378         16    4,091    24,485
- other                           54,061      1,601    4,144    59,806
                                  94,856      2,480    8,606   105,942

At 31Dec02

Asia-Pacific excluding Hong
  Kong
- Australia                       19,259      2,819    2,265    24,343
- other                           24,228        841    3,175    28,244
                                  43,487      3,660    5,440    52,587
The Americas
- Canada                          11,105      7,699      440    19,244
- other                            6,136      4,557    7,199    17,892
                                  17,241     12,256    7,639    37,136
Western Europe
- Germany                         21,349      1,312      548    23,209
- United Kingdom                  22,623          -    4,051    26,674
- other                           47,654      2,557    2,810    53,021
                                  91,626      3,869    7,409   102,904

Additional information

1. Accounting policies

This news release has been prepared on a basis consistent with the accounting
policies adopted in the 2002 financial statements except for the following:

Income Tax

In prior years, deferred tax liabilities were provided for using the liability
method in respect of the taxation effect arising from all material timing
differences between the accounting and tax treatment of income and expenditure,
which were expected with reasonable probability to crystallise in the
foreseeable future. Deferred tax assets were not recognised unless their
realisation was assured beyond reasonable doubt. With effect from 1 January
2003, Hang Seng has changed its policy for deferred tax in order to comply with
Hong Kong Statement of Standard Accounting Practice 12 (revised) (HKSSAP 12) on
'Income Taxes' issued by the Hong Kong Society of Accountants. Details of the
new policy are set out in the note on Taxation on page 18.

The major components of deferred tax assets and liabilities recorded in the
consolidated balance sheet, and the movements in 2003 showing the impact of the
adoption of HKSSAP 12, are as follows:

                      Depreciation   Revaluation
                        allowances            of
                         in excess    properties
                        of related           and      General
Figures in HK$m       depreciation      equities   provisions   Other   Total

At 1Jan03                       20           685         (177)     34     562
Charged/(credited) to
  profit and loss 
  account
- without adopting
  HKSSAP 12                      -             -            -      74      74
- adopting HKSSAP 12             -            (4)         (15)    (30)    (49)
Charged to reserves              -             4            -       -       4
At 31Dec03                      20           685         (192)     78     591

The balances of deferred tax assets and deferred tax liabilities in the
consolidated balance sheet at 31 December 2003 were HK$52 million and HK$643
million respectively (HK$73 million and HK$635 million respectively at 31
December 2002). The deferred tax released to the profit and loss account in 2003
was HK$49 million, compared with a charge of HK$41 million in 2002.

The adoption of HKSSAP 12 represents a change in accounting policy which has
been applied retrospectively. The change in accounting policy has been reflected
by way of a prior year adjustment and the comparative figures for 2002 have been
restated to conform with the current year's presentation accordingly.

Consolidated Profit and Loss Account

                                                            Year ended
Figures in HK$m                                                31Dec02

Tax on profit on ordinary activities
- as previously reported                                        (1,266)
- adoption of HKSSAP 12                                            (41)
- as restated                                                   (1,307)

Consolidated Balance Sheet

                             Premises and     Long-term
                               investment        equity
                               properties    investment   Deferred      Deferred
                  Retained    revaluation   revaluation        tax           tax
Figures in HK$m    profits       reserves       reserve     assets   liabilities

31Dec02

As previously
  reported          19,242          7,324         1,031         21           104
Adoption of
  HKSSAP 12            198           (657)          (20)        52           531
As restated         19,440          6,667         1,011         73           635

31Dec01
As previously
  reported          19,499          8,119         2,323         34             -
Adoption of
  HKSSAP 12            254           (766)          (49)        77           638
As restated         19,753          7,353         2,274        111           638

2. Comparative figures

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

3. Property revaluation

Hang Seng's premises and investment properties were revalued by Chesterton Petty
Limited, an independent professional valuer, at 30 September 2003, who confirmed
that there had been no material change in valuations at 31 December 2003. The
valuations were carried out by qualified valuers who are members of the Hong
Kong Institute of Surveyors. The basis of valuation of premises was open market
value for existing use. The basis of the valuation for investment properties was
open market value. The property revaluation has resulted in a fall in Hang
Seng's revaluation reserves at 31 December 2003 by HK$618 million and a charge
of HK$37 million to the profit and loss account for the year in respect of
properties where the valuation has fallen below the depreciated historical cost.

4. 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 to Hang Seng.
Market risk arises on financial instruments which are valued at current market
prices (mark-to-market basis) and those valued at cost plus any accrued interest
(accrual basis). Hang Seng'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.

Hang Seng 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. The model used by Hang Seng
calculates VAR on a variance/covariance basis, using historical movements in
market rates and prices, a 99 per cent confidence level and a 10-day holding
period, and generally takes account of correlations between different markets
and rates. The movement in market prices is calculated by reference to market
data for the last two years. 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.

Hang Seng has obtained approval from the Hong Kong Monetary Authority (HKMA) for
the use of its VAR model to calculate market risk for capital adequacy reporting
and the HKMA has expressed itself satisfied with Hang Seng's market risk
management process.

Hang Seng's VAR for all interest rate risk and foreign exchange risk positions
and on individual risk portfolios for 2003 and 2002 are shown in the tables
below.

VAR

                                           Minimum   Maximum   Average
                                            during    during       for
                                               the       the       the
Figures in HK$m               At 31Dec03      year      year      year

VAR for all interest rate
  risk and foreign exchange 
  risk                               271       186       473       321
VAR for foreign exchange
  risk (trading)                      57         2       156        32
VAR for interest rate risk
- trading                              1         1        11         4
- accrual                            264       186       472       315

                                           Minimum   Maximum   Average
                                            during    during       for
                                               the       the       the
Figures in HK$m               At 31Dec02      year      year      year

VAR for all interest rate
  risk and foreign exchange 
  risk                               234       194       520       326
VAR for foreign exchange
  risk (trading)                       3         3         5         4
VAR for interest rate risk
- trading                              1         -         9         2
- accrual                            233       192       515       325

The average daily revenue earned from market risk-related treasury activities in
2003, including accrual book net interest income and funding related to dealing
positions, was HK$8 million (HK$7 million for 2002). The standard deviation of
these daily revenues was HK$7 million (HK$3 million for 2002). An analysis of
the frequency distribution of daily revenues shows that out of 248 trading days
in 2003, losses were recorded on only eight days and the maximum daily loss was
HK$67 million. The most frequent result was a daily revenue of between HK$6
million and HK$10 million, with 176 occurrences. The highest daily revenue was
HK$43 million.

Hang Seng'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 2003 was HK$2 million (HK$2 million for
2002). 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 on page 54, are managed by the Asset and Liability Management
Committee (ALCO).

Interest rate risk arises in both the treasury dealing portfolio and accruals
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 2003 was HK$6 million (HK$5 million for 2002).

5. Foreign currency positions

Foreign currency exposures include those arising from dealing, non-dealing and
structural positions. At 31 December 2003, the US dollar was the only currency
in which Hang Seng 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                             At 31Dec03      At 31Dec02

US dollar non-structural position

Spot assets                                    162,330         173,129
Spot liabilities                              (151,706)       (156,175)
Forward purchases                               40,537          35,222
Forward sales                                  (35,587)        (39,974)
Net long non-structural position                15,574          12,202

At 31 December 2003, Hang Seng's major structural foreign currency positions
were US dollar and renminbi.

                                   At 31Dec03                 At 31Dec02
                                         % of                       % of
                                    total net                  total net
                                   structural                 structural
                        HK$m         position      HK$m         position
Structural position
US dollar                841             68.5       792             84.2
Renminbi                 282             23.0        95             10.1

6. Material related-party transactions

(a) Immediate holding company and fellow subsidiary companies

In 2003, Hang Seng entered into transactions with its immediate holding company
and fellow subsidiary companies in the ordinary course of its interbank
activities including the acceptance and placement of interbank deposits,
correspondent banking transactions and off-balance sheet transactions. The
activities were priced at the relevant market rates at the time of the
transactions. Hang Seng participated, in its ordinary course of business, in
certain structured finance deals arranged by its immediate holding company.

Hang Seng used the IT and shared an automated teller machine network with its
immediate holding company, and used certain processing services of a fellow
subsidiary on a cost recovery basis. Hang Seng also maintained a staff
retirement benefit scheme for which a fellow subsidiary company acts as insurer
and administrator, and the bank acted as agent for the marketing of Mandatory
Provident Fund products and distribution of retail investment funds for two
fellow subsidiary companies. The premiums, commissions and other fees on these
transactions are determined on an arm's length basis.

The aggregate amount of income and expenses arising from these transactions
during the year, the balances of amounts due to and from the relevant related
parties, and the total contract sum of off-balance sheet transactions at the
year-end are as follows:

Income and expenses for the year

                                          Year ended        Year ended
Figures in HK$m                              31Dec03           31Dec02

Interest income                                  195               263
Interest expense                                  17                15
Other operating income                           244               135
Operating expenses                               618               570

Balances at year-end

Figures in HK$m                            At 31Dec03       At 31Dec02

Total amount due from                          13,715            7,471
Total amount due to                             2,412            1,615
Total contract sum of
  off-balance sheet transactions               35,121           25,558

(b) Associated companies

Hang Seng maintained an interest-free shareholders' loan to an associated
company. The balance at 31 December 2003 was HK$229 million (HK$208 million at
31 December 2002). Prior to Hang Seng Life Limited (HSLL) becoming a subsidiary
(formerly an associated company) of the bank in November 2002, the agency
commission for the marketing of life insurance products paid by HSLL to the bank
amounted to HK$255 million for 2002.

(c) Ultimate holding company

In 2003, no transaction was conducted with the bank's ultimate holding company
(same as 2002).

(d) Key management personnel

In 2003, no material transaction was conducted with key management personnel of
Hang Seng and its holding companies and parties related to them (same as 2002).

7. Statutory accounts

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 2003, which will be delivered
to the Registrar of Companies and the Hong Kong Monetary Authority. The
statutory accounts comply with the module on 'Financial Disclosure by Locally
Incorporated Authorised Institutions' under the Supervisory Policy Manual issued
by the Hong Kong Monetary Authority in November 2002. The auditors expressed an
unqualified opinion on those statutory accounts in their report dated 1 March
2004.

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, 17
March 2004, during which no transfer of shares can be registered. In order to
qualify for the third 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 Tuesday, 16 March 2004. The third interim dividend will be
payable on Thursday, 25 March 2004 to shareholders on the Register of
Shareholders of the bank on Wednesday, 17 March 2004.

10. News release

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

The 2003 Annual Report and Accounts will be available from the same website on
Monday, 1 March 2004 and will also be published on the website of The Stock
Exchange of Hong Kong Limited in due course. Printed copies of the 2003 Annual
Report will be sent to shareholders in late March 2004.




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