3/5: Hang Seng Bk 2002 (2/2)

HSBC Holdings PLC
03 March 2003



Financial review (continued)


Long-term investments (continued)

Investment in held-to-maturity debt securities increased by HK$37.2 billion, or
94.1 per cent, to HK$76.9 billion with funds re-deployed from interbank placings
to enhance net interest yield. Over 95 per cent of the held-to-maturity debt
securities will mature within five years.

The fair value of the held-to-maturity debt securities at 31 December 2002
amounted to HK$78.0 billion, with an unrealised gain of HK$1.2 billion.

The following table shows the fair value of held-to-maturity debt securities:
                                                                                Fair value
Figures in HK$m                                                          At 31Dec02                At 31Dec01

Held-to-maturity debt securities
Issued by public bodies
- central governments and central banks                                    10,924                      3,401
- other public sector entities                                              9,645                      6,741
                                                                           20,569                     10,142
Issued by other bodies
- banks and other financial institutions                                   40,213                     15,265
- corporate entities                                                       17,241                     14,663
                                                                           57,454                     29,928
                                                                           78,023                     40,070

Held-to-maturity debt securities
- listed in Hong Kong                                                       2,403                        315
- listed outside Hong Kong                                                 19,777                      9,856
                                                                           22,180                     10,171
- unlisted                                                                 55,843                     29,899
                                                                           78,023                     40,070

Maturity analysis of held-to-maturity debt securities:

                                                                               Carrying value

Figures in HK$m                                                          At 31Dec02                At 31Dec01

Remaining maturity:
- three months or less but not repayable on demand                         14,875                      7,892
- one year or less but over three months                                    8,911                      6,087
- five years or less but over one year                                     50,807                     22,930
- over five years                                                           2,261                      2,696
                                                                           76,854                     39,605


Other assets

Figures in HK$m                                                          At 31Dec02                At 31Dec01

Unrealised gains on off-balance sheet interest rate,
 exchange rate and other derivative contracts
 which are marked to market                                                    981                        570
Deferred taxation                                                               21                         34
Items in the course of collection from other banks                           2,886                      2,881
Prepayments and accrued income                                               2,143                      2,294
Long-term assurance assets attributable to
 policy holders                                                              2,897                         __
Other accounts                                                               3,340                      2,781
                                                                            12,268                      8,560

Remaining maturity:
- three months or less                                                       6,929                      6,467
- one year or less but over three months                                       637                      1,048
- five years or less but over one year                                         968                        913
- over five years                                                            3,693                         98
                                                                            12,227                      8,526
- overdue^
 -- six months or less but over three months                                     5                          5
 -- one year or less but over six months                                         9                          7
 -- over one year                                                               27                         22
                                                                                41                         34
                                                                            12,268                      8,560

^Represented mainly by overdue interest receivable included under 'Prepayments
and accrued income'.

Other assets increased by HK$3,708 million, or 43.3 per cent, to HK$12,268
million, compared with HK$8,560 million at 31 December 2001. The increase mainly
reflects the consolidation of long-term assurance assets attributable to policy
holders of HSLL which became a subsidiary of the bank in November 2002.


Current, savings and other deposit accounts

Figures in HK$m                                                          At 31Dec02                At 31Dec01

Customer deposit accounts
- current accounts                                                         36,242                     31,471
- savings accounts                                                        154,476                    141,608
- time and other deposits                                                 206,973                    222,685
Certificates of deposit in issue                                           15,916                     18,564
Other debt securities in issue                                                 86                         __
                                                                          413,693                    414,328

Customer deposit accounts
Repayable on demand                                                       210,351                    186,557
With agreed maturity dates or periods of
 notice, by remaining maturity:
- three months or less but not repayable on demand                        180,380                    198,405
- one year or less but over three months                                    6,701                     10,664
- five years or less but over one year                                        259                        138
                                                                          397,691                    395,764

Certificates of deposit in issue
Remaining maturity:
- three months or less but not repayable on demand                          2,887                      3,888
- one year or less but over three months                                    9,635                      6,667
- five years or less but over one year                                      3,189                      7,644
- over five years                                                             205                        365
                                                                           15,916                     18,564

Other debt securities in issue
Remaining maturity:
- three months or less but not repayable on demand                             48                         __
- one year or less but over three months                                       38                         __
                                                                               86                         __
                                                                          413,693                    414,328


Customer deposits accounts were maintained at HK$397.7 billion at 31 December
2002, with a marginal growth of HK$1.9 billion, or 0.5 per cent, over the
previous year-end and no material change in currency mix. Funds continued to
shift from time deposits to savings deposits under the persistently low interest
rate environment. In 2002, Hang Seng gained market share of total deposits in
Hong Kong.

Certificates of deposits and other debt securities in issue fell by HK$2.6
billion to HK$16.0 billion with a lower level of new issues made during the
year.


Deposits from banks

Figures in HK$m                                                         At 31Dec02                 At 31Dec01

Repayable on demand                                                            555                      2,406
With agreed maturity dates or periods of
 notice, by remaining maturity:
- three months or less but not repayable
 on demand                                                                     515                        198
- one year or less but over three months                                         2                         18
                                                                             1,072                      2,622


Other liabilities

Figures in HK$m                                                         At 31Dec02                 At 31Dec01

Short positions in securities                                                2,916                      4,648
Unrealised losses on off-balance sheet
 interest rate, exchange rate and
 other derivative contracts which are
 marked to market                                                              832                        520
Current taxation                                                               249                        500
Deferred taxation                                                              104                         __
Items in the course of transmission to
 other banks                                                                 4,629                      3,617
Accruals and deferred income                                                 1,668                      1,522
Provisions for other liabilities and charges                                   313                        268
Long-term liabilities attributable to
 policy holders                                                              2,897                         __
Other                                                                          606                        640
                                                                            14,214                     11,715


Other liabilities increased by HK$2,499 million, or 21.3 per cent, to HK$14.2
billion, compared with HK$11.7 billion at 31 December 2001. The increase was
mainly due to the consolidation of long-term liabilities attributable to policy
holders of HSLL which became a subsidiary of the bank in November 2002 and an
increase in items in the course of transmission to other banks. These were
partly offset by a reduction in short positions in securities.


Shareholders' funds

Figures in HK$m                                                          At 31Dec02                At 31Dec01

Share capital                                                               9,559                      9,559
Retained profits                                                           19,242                     19,618
Premises and investment properties
 revaluation reserves                                                       7,324                      8,119
Long-term equity investment revaluation reserve                             1,031                      2,323
Capital redemption reserve                                                     99                         99
Total reserves                                                             27,696                     30,159
                                                                           37,255                     39,718
Proposed dividends                                                          6,309                      5,353
Shareholders' funds                                                        43,564                     45,071

Return on average shareholders' funds                                        22.9 %                     23.0 %


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$2,463 million, or
6.2 per cent, to HK$37,255 million at 31 December 2002. Retained profits were
reduced by HK$376 million, mainly the net effect of the proposed special interim
dividend of HK$956 million and the current year profit after appropriation of
HK$593 million. Premises and investment properties revaluation reserves fell by
HK$795 million as a result of the further decline in the property market. The
disposal and decrease in the fair value of long-term equities led to a reduction
of HK$1,292 million in the long-term equity investment revaluation reserve.

The return on average shareholders' funds was 22.9 per cent, in line with the
23.0 per cent return in 2001.


Capital resources management


Analysis of capital base and risk-weighted assets

Figures in HK$m                                                          At 31Dec02                At 31Dec01

Capital base
Tier 1 capital
- share capital                                                             9,559                      9,559
- retained profits                                                         18,795                     19,342
- capital redemption reserve                                                   99                         99
- total                                                                    28,453                     29,000

Tier 2 capital
- premises and investment properties
  revaluation reserves                                                      5,153                      5,708
- long-term equity investment revaluation reserve                             705                      1,418
- general provisions                                                        1,108                      1,437
- total                                                                     6,966                      8,563

Unconsolidated investments and other deductions                            (1,376 )                   (1,331 )
Total capital base after deductions                                        34,043                     36,232

Risk-weighted assets
On-balance sheet                                                          222,758                    221,565
Off-balance sheet                                                          16,262                     14,726
Total risk-weighted assets                                                239,020                    236,291
Total risk-weighted assets adjusted for market risk                       239,426                    236,588

Capital adequacy ratios
After adjusting for market risk
- tier 1^                                                                    11.9 %                     12.3 %
- total ^                                                                    14.2 %                     15.3 %

Before adjusting for market risk
- tier 1                                                                     11.9 %                     12.3 %
- total                                                                      14.2 %                     15.3 %


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

The capital base fell by HK$2,189 million, or 6.0 per cent, due to the proposed
special interim dividend to be paid out of retained profit and the fall in
premises and investment properties revaluation reserves and long-term equity
investment revaluation reserve. Total risk-weighted assets adjusted for market
risk rose by HK$2,838 million, or 1.2 per cent, to HK$239.4 billion. The total
capital ratio and tier 1 ratio reduced by 1.1 percentage points and 0.4
percentage point respectively.


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:
                                                                             2002                        2001

The bank and its major banking subsidiaries                                  44.4 %                      45.6 %

Reconciliation of cash flow statement

(a) Reconciliation of operating profit to net cash flow from operating
activities
Figures in HK$m                                                                2002                      2001

Operating profit                                                             10,684                    11,079
Net interest income                                                         (10,805 )                 (11,660 )
Dividend income                                                                 (99 )                     (93 )
Provisions for bad and doubtful debts                                           571                       424
Depreciation                                                                    352                       386
Amortisation of long-term investments                                           (96 )                    (301 )
Advances written off net of recoveries                                       (1,148 )                  (1,389 )
Interest received                                                            13,068                    24,128
Interest paid                                                                (4,450 )                 (14,391 )
Operating profit before changes in
 working capital                                                              8,077                     8,183
Change in cash and short-term funds                                            (762 )                   9,358
Change in placings with banks
 repayable after three months                                                10,908                     8,818
Change in certificates of deposit                                            (7,022 )                  (6,715 )
Change in securities held for dealing purposes                                  969                     2,332
Change in advances to customers                                              (1,549 )                  (3,953 )
Change in amounts due from immediate holding
 company and fellow subsidiary companies                                      1,281                       820
Change in other assets                                                       (3,737 )                     911
Change in customer deposit accounts                                           1,927                   (19,111 )
Change in debt securities in issue                                           (2,562 )                   3,834
Change in deposits from banks                                                (1,550 )                  (1,180 )
Change in amounts due to immediate holding
 company and fellow subsidiary companies                                        564                      (948 )
Change in other liabilities                                                   2,941                    (5,723 )
Elimination of exchange differences and
 other non-cash items                                                        (5,239 )                     928
Cash generated from operating activities                                      4,246                    (2,446 )
Taxation paid                                                                  (742 )                    (407 )
Net cash inflow/(outflow) from
 operating activities                                                         3,504                    (2,853 )

(b) Analysis of the balances of cash and cash equivalents
Figures in HK$m                                                          At 31Dec02                 At 31Dec01

Cash in hand and balances with banks and
 other financial institutions                                                 3,676                      3,789
Money at call and placings with banks
 maturing within one month                                                   70,562                    104,990
Treasury bills                                                                2,531                      2,274
Placings with banks repayable between
 one to three months                                                         28,720                     29,897
Certificates of deposit                                                          48                        153
                                                                            105,537                    141,103


Contingent liabilities, commitments and derivatives
                                                                                    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

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

At 31Dec01

Contingent liabilities:
Guarantees                                                     11,802              11,706               3,761

Commitments:
Documentary credits and short-term
 trade-related transactions                                     5,768               1,154               1,151
Undrawn formal standby facilities, credit
 lines and other commitments to lend:
- under one year                                               64,317                  __                  __
- one year and over                                            19,367               9,683               9,257
Other                                                              47                  47                  47
                                                               89,499              10,884              10,455

Exchange rate contracts:
Spot and forward foreign exchange                              98,143               1,066                 249
Other exchange rate contracts                                   7,917                 102                  21
                                                              106,060               1,168                 270

Interest rate contracts:
Interest rate swaps                                            44,446               1,035                 240
Other interest rate contracts                                   6,842                  __                  __
                                                               51,288               1,035                 240

Other derivative contracts                                         __                  __                  __

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 31Dec02                At 31Dec01

Replacement cost
Exchange rate contracts                                                        485                       310
Interest rate contracts                                                      1,231                       859
Other derivative contracts                                                       1                        __
                                                                             1,717                     1,169


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.

Segmental analysis

Segmental information is presented in respect of business and geographical
segments. Business segment information, which is more relevant to Hang Seng in
making operating and financial decisions, is chosen as the primary reporting
format.

For the purpose of segmental analysis, the allocation of revenue reflects the
benefits of capital and other funding resources allocated to the business or
geographical segments by way of internal capital allocation and funds transfer
pricing mechanisms. Cost allocation is based on the direct cost incurred by the
respective segments and apportionment of management overheads. Rental charges at
market rate for usage of premises are reflected as inter-segment income for the
'Other' segment and inter-segment expenses for the respective business segments.

(a) By business segment

Hang Seng comprises five business segments. Personal financial services provides
banking (including deposits, credit cards, mortgages and other retail lending)
and wealth management services (including insurance and investment) to personal
customers. Commercial banking manages middle market and smaller corporate
relationships and provides trade-related financial services. Corporate and
institutional banking handles relationships with large corporate and
institutional customers. Treasury engages in interbank and capital market
activities and proprietary trading. Treasury also manages the funding and
liquidity positions of the bank and other market risk positions arising from
banking activities. Other mainly represents management of shareholders' funds
and investments in premises, investment properties and long-term equities.

Personal financial services reported a growth of 6.6 per cent in profit before
tax, compared with the previous year. Despite the continued fall in the average
mortgage portfolio yield and the contraction of the Government Home Ownership
Scheme mortgage portfolio, net interest income only recorded a marginal fall of
1.7 per cent, benefiting from the continued shift of customer deposits to lower
cost savings accounts. Other operating income rose by 16.8 per cent. Wealth
management services remained the main growth driver with investment services and
insurance income growing by 53.2 per cent and 25.5 per cent respectively. Sales
of retail investment funds, including the popular Hang Seng Investment Series,
increased by 46.7 per cent. Total funds under management by Hang Seng's asset
management and private banking business units grew by HK$15.2 billion, or 60.1
per cent, to HK$40.6 billion at 31 December 2002.

Commercial banking recorded a decrease of 6.9 per cent in profit before tax.
Despite satisfactory loan growth of 13.1 per cent, mainly in trade finance and
other lending to the manufacturing sector, net interest income suffered from the
compression in lending and deposit spreads. The operating result was also
affected by a reduction in Mandatory Provident Fund services income due to
higher commissions received from new customers in the previous year.

Corporate and institutional banking recorded a decline of 4.9 per cent in profit
before tax. The operating result was affected by the compression in corporate
lending spreads, a fall in customer deposits and a reduction in credit
facilities income.

Treasury reported a growth of 2.9 per cent in profit before tax. Net interest
income rose by 3.8 per cent as more funds were re-deployed from interbank
placings to capital market investments for enhancement of interest yield, while
the fixed rate debt securities portfolio continued to benefit under a low
interest rate environment. Other operating income increased by 25.9 per cent,
mainly in foreign exchange income and securities and other trading. Profit on
disposal of debt securities from the accrual portfolio, however, was lower.

Other showed a decline of 24.7 per cent in profit before tax, mainly
attributable to the substantial reduction in free funds contribution following
the further decline in market interest rates. This was only partly offset by an
increase in profits on disposal of long-term equities.

                            Personal                   Corporate &                                 Inter-
                           financial     Commercial  institutional                                segment
Figures in HK$m             services        banking        banking     Treasury      Other    elimination       Total

Year ended 31Dec2002

Income and expenses

Net interest income             6,583          1,023            640       1,731        828             __     10,805
Operating income                2,422            881            253         350        376             __      4,282
Inter-segment income               __             __             __          __        408           (408 )       __
Total operating income          9,005          1,904            893       2,081      1,612           (408 )   15,087
Operating expenses ^           (2,450 )         (803 )         (111 )      (132 )     (336 )           __     (3,832 )
Inter-segment expenses           (327 )          (67 )           (8 )        (6 )       __            408         __
Operating profit before
 provisions                     6,228          1,034            774       1,943      1,276             __     11,255
Provisions for bad and
 doubtful debts                  (785 )           48            166          __         __             __       (571 )
Operating profit                5,443          1,082            940       1,943      1,276             __     10,684
Profit on tangible fixed
 assets and long-term
 investments                       21             28             __          45        367             __        461
Net deficit on property
 revaluation                       __             __             __          __        (36 )           __        (36 )
Share of profits of
 associated companies              88             __             __          __         45             __        133
Profit on ordinary
activities
 before tax                     5,552          1,110            940       1,988      1,652             __     11,242

Operating profit
excluding
 inter-segment                  5,770          1,149            948       1,949        868             __     10,684
transactions

^Including depreciation          (125 )          (22 )           (3 )        (2 )     (200 )           __       (352 )

At 31Dec02

Total assets                  137,762         25,937         64,783     222,879     23,241             __    474,602
Total liabilities             317,076         70,538         11,746       8,360     22,874             __    430,594
Investments in
 associated companies              __             __             __          __        672             __        672
Capital expenditure
 incurred during the year         120             21              4           2         48             __        195

                            Personal                  Corporate &                                  Inter-
                           financial    Commercial  institutional                                 segment
Figures in HK$m             services       banking        banking    Treasury         Other   elimination       Total

Year ended
31Dec01

Income and expenses

Net interest income           6,700         1,108            732       1,667         1,453            __      11,660
Operating income              2,073           907            288         278           401            __       3,947
Inter-segment income             __            __             __          __           415          (415 )        __
Total operating income        8,773         2,015          1,020       1,945         2,269          (415 )    15,607
Operating expenses ^         (2,691 )        (825 )         (104 )      (119 )        (365 )          __      (4,104 )
Inter-segment expenses         (324 )         (75 )           (9 )        (7 )          __           415          __
Operating profit before
 provisions                   5,758         1,115            907       1,819         1,904            __      11,503
Provisions for bad and
 doubtful debts                (573 )          38             81          __            30            __        (424 )
Operating profit              5,185         1,153            988       1,819         1,934            __      11,079
Profit on tangible fixed
 assets and long-term
 investments                     17            39             __         113           224            __         393
Net deficit on property
 revaluation                     __            __             __          __           (14 )          __         (14 )
Share of profits of
 associated companies             7            __             __          __            49            __          56
Profit on ordinary
activities
 before tax                   5,209         1,192            988       1,932         2,193            __      11,514

Operating profit
excluding
 inter-segment                5,509         1,228            997       1,826         1,519            __      11,079
transactions

^Including                     (136 )         (33 )           (3 )        (2 )      (212 )            __        (386 )
depreciation

At 31Dec01

Total assets                136,233        22,692         63,108     226,656        26,098            __     474,787
Total liabilities           308,404        69,101         16,412      10,022        25,777            __     429,716
Investments in
 associated companies            89            __             __          __           685            __         774
Capital expenditure
 incurred during the            114            20              1           3            55            __         193
year


(b) By geographical region

The geographical regions in this analysis are classified by the location of the
principal operations of the subsidiary companies or, in the case of the bank
itself, by the location of the branches responsible for reporting the results or
advancing the funds.
Figures in HK$m                                       Hong Kong       Americas          Other          Total

Year ended 31Dec02

Income and expenses

Total operating income                                  13,293           1,721             73         15,087
Profit on ordinary activities before tax                 9,474           1,699             69         11,242

At 31Dec02

Total assets                                           394,113          72,359          8,130        474,602
Total liabilities                                      415,857           9,444          5,293        430,594
Capital expenditure incurred
 during the year                                           187               1              7            195
Contingent liabilities and commitments                 106,470              __          1,092        107,562

Year ended 31Dec01

Income and expenses

Total operating income                                  14,227          1,307             73         15,607
Profit on ordinary activities before tax                10,097          1,261            156         11,514


At 31Dec01

Total assets                                           370,489         98,145          6,153        474,787
Total liabilities                                      415,739         10,068          3,909        429,716
Capital expenditure incurred
 during the year                                           190              1              2            193
Contingent liabilities and commitments                 100,704             __            597        101,301

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 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

At 31Dec01

Asia-Pacific excluding Hong Kong
- Australia                                            17,850           1,260          1,691          20,801
- other                                                33,442           2,283          2,707          38,432
                                                       51,292           3,543          4,398          59,233
The Americas
- Canada                                               15,982           3,752            349          20,083
- other                                                 6,737           1,343          7,538          15,618
                                                       22,719           5,095          7,887          35,701
Western Europe
- Germany                                              25,136             954              2          26,092
- United Kingdom                                       20,465              __          1,903          22,368
- other                                                54,393           1,617          2,298          58,308
                                                       99,994           2,571          4,203         106,768

Additional information

1. Accounting policies

This news release has been prepared on a basis consistent with the accounting
policies adopted in the 2001 financial statements except for the following.

Accounting for employee benefits

(a) Defined benefit schemes

In prior years, contributions to defined benefit schemes were made in accordance
with the advice of qualified actuaries so as to recognise the cost of retirement
benefits on a systematic basis over the employees' service lives and were
charged to the profit and loss account for the year. In accordance with the Hong
Kong Statement of Standard Accounting Practice 34 (HKSSAP 34) on 'Employee
benefits' which was issued in December 2001 and took effect for accounting
periods beginning on or after 1 January 2002, the retirement benefit cost of
defined benefit schemes charged to the current year profit and loss account is
determined by calculating the current service cost, interest cost and expected
return on scheme assets in accordance with a set of actuarial assumptions and
taking into account the amount of net actuarial losses required to be
recognised.

The transitional assets/liabilities in respect of defined benefit schemes as of
1 January 2002, calculated by estimating the amount of future benefit that the
employees have earned in return for their service in the prior periods,
discounted to present value, and deducting the fair value of the scheme assets,
have been recognised through a prior year adjustment. An amount of HK$189
million, being the net amount of transitional assets and liabilities, has been
debited to 'Retained profits' brought forward at 1 January 2002. Accordingly,
adjustments have been made to 'Other assets' to include the transitional assets
of HK$53 million, and to 'Other liabilities' to include the transitional
liabilities of HK$242 million.

(b) Accumulating compensated leave

In accordance with HKSSAP 34, the amount of accumulating compensated leave
entitlement at the balance sheet date, which can be carried forward into future
periods, should be recognised as a liability. At 31 December 2002, the
accumulated paid leave entitlement of all staff members amounted to HK$139
million. The amount of HK$136 million which was accumulated prior to 1 January
2002 was accounted as a prior year adjustment to 'Retained profits' while the
amount of HK$3 million accumulated during the year 2002 was charged as 'Staff
costs' in the current year profit and loss account.

Accounting for long term assurance business

To reflect the value placed on Hang Seng's share of interest in the long-term
assurance business of Hang Seng Life Limited (HSLL) (a company held by the bank
and HSBC Insurance (Asia-Pacific) Holdings Limited in equal shareholding), Hang
Seng has decided to recognise a prudent valuation of the discounted future
earnings expected to emerge from business currently in force ('value of
long-term assurance business' or 'embedded value') with effect from 1 January
2002. The embedded value was determined in consultation with qualified actuaries
taking into account factors such as recent experience and general economic
conditions.

Up to 31 October 2002, Hang Seng had been applying the equity accounting
treatment in accounting for its share of HSLL's profits through 'Share of
profits of associated companies'. With effect from November 2002, HSLL became a
subsidiary of the bank and is consolidated in the financial statements of Hang
Seng.

The amount of embedded value attributable to the periods prior to 1 January 2002
was HK$411 million and Hang Seng has recognised its 50 per cent share of HK$206
million through 'Retained profits' brought forward at 1 January 2002 and '
Investment in associated companies' in the balance sheet. The increase in
embedded value of HSLL's long-term assurance business for the periods from 1
January to 31 October 2002 amounted to HK$169 million. Hang Seng has also
accounted for its 50 per cent share of HK$85 million through 'Share of profits
of associated companies'. The embedded value decreased by HK$6 million for the
period from 1 November to 31 December 2002 and this amount has been charged
against 'Underwriting profit' under 'Other operating income' after adopting the
full consolidation treatment as described above.

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 2002 who confirmed
that there had been no material change in valuations at 31 December 2002. The
valuations were carried out by qualified valuers who are members of the Hong
Kong Institute of Surveyors. The basis of the 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 of HK$692 million as at 31 December
2002 and a charge to the profit and loss account of HK$36 million in respect of
properties where the valuation has fallen below the depreciated historical cost.

4. Market risk

Market risk is the risk that the movements in interest rates, foreign exchange
rates or equity and commodity prices will 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.

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. The HKMA is also 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 during the years 2002 and 2001 are shown in
the tables below.

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

                                                                          Minimum        Maximum       Average
                                                                           during         during       for the
Figures in HK$m                                       At 31Dec01         the year       the year          year

VAR for all interest rate risk
 and foreign exchange risk                                   352              119            562           248
VAR for foreign exchange risk
 (trading)                                                     4                3              8             5
VAR for interest rate risk
- trading                                                      3                1             18             4
- accrual                                                    353              117            565           247

The average daily revenue earned from market risk-related treasury activities in
2002, including accrual book net interest income and funding related to dealing
positions, was HK$7 million (HK$7 million for 2001). The standard deviation of
these daily revenues was HK$3 million (HK$3 million for 2001). An analysis of
the frequency distribution of daily revenues shows that out of 247 trading days
in 2002, losses were recorded on only one day, with a loss of HK$19 million. The
most frequent result was a daily revenue of between HK$4 million and HK$8
million, with 212 occurrences. The highest daily revenue was HK$33 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 2002 was HK$2 million (HK$1 million for
2001).

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 2002 was HK$5 million (HK$5 million for 2001).

5. Foreign currency positions


Foreign currency exposures include those arising from dealing, non-dealing and
structural positions. At 31 December 2002, 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 31Dec02                At 31Dec01

US dollar non-structural position

Spot assets                                                                 173,129                   237,778
Spot liabilities                                                           (156,175 )                (206,264 )
Forward purchases                                                            35,222                    39,001
Forward sales                                                               (39,974 )                 (61,725 )
Net options positions                                                            __                         4
Net long non-structural position                                             12,202                     8,794

At 31 December 2002, Hang Seng's structural foreign currency positions, which
exceeded 10 per cent of the total net structural foreign currency position in
all currencies, were as follows:

Figures in HK$m                                                          At 31Dec02                At 31Dec01

Structural position
US dollar                                                                       792                       508
Renminbi                                                                         95                        __


6. Material related-party transactions

(a) Immediate holding company and fellow subsidiary companies


In 2002, 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 certain processing services of and shared an automated
teller machine network with its immediate holding company 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 acted as agent
for the marketing of Mandatory Provident Fund products for a fellow subsidiary
company.

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 31Dec
Figures in HK$m                                                               2002                       2001

Interest income                                                               263                        443
Interest expense                                                               15                         51
Other operating income                                                         78                        169
Operating expenses                                                            570                        847

Balances at year-end

Figures in HK$m                                                          At 31Dec02                At 31Dec01

Total amount due from                                                       7,471                      8,297
Total amount due to                                                         1,615                      1,051
Total contract sum of off-balance sheet transactions                       25,558                     21,580


(b) Associated companies

Hang Seng maintained an interest-free shareholders' loan to an associated
company. The balance at 31 December 2002 was HK$208 million (HK$208 million at
31 December 2001). The bank acted as agent for the marketing of life insurance
products for an associated company. Total agency commissions received in 2002
amounted to HK$255 million (HK$257 million for 2001).


(c) Ultimate holding company

In 2002, no transaction was conducted with the bank's ultimate holding company
(unchanged from 2001).

(d) Key management personnel

In 2002, no material transaction was conducted with key management personnel of
Hang Seng and its holding companies and parties related to them (unchanged from
2001).

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 2002, 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 3 March
2003.

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, 19
March 2003 and Thursday, 20 March 2003, during which no transfer of shares can
be registered. In order to qualify for the second interim dividend and special
interim dividend, all transfers, accompanied by the relevant share certificates,
must be lodged with the bank's Registrars, Computershare Hong Kong Investor
Services Limited (formerly known as Central Registration Hong Kong 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, 18 March 2003.
The second interim dividend and the special interim dividend will be payable on
Thursday, 27 March 2003 to shareholders on the Register of Shareholders of the
bank on Thursday, 20 March 2003.


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 2002 Annual Report and Accounts will be available from the same website on
Monday, 3 March 2003 and will also be published on the website of The Stock
Exchange of Hong Kong Limited in due course. Printed copies of the 2002 Annual
Report will be sent to shareholders in late March 2003.


                      This information is provided by RNS
            The company news service from the London Stock Exchange