The HK & Shanghai Banking Corp 2012 Interims

RNS Number : 7527I

HSBC Holdings PLC

30 July 2012

 



THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED

2012 INTERIM CONSOLIDATED RESULTS - HIGHLIGHTS

·     Net operating income before loan impairment charges and other credit risk provisions up 16% to HK$84,977m (HK$73,456m in the first half of 2011).

·     Profit before tax up 25% to HK$57,988m (HK$46,234m in the first half of 2011).

·     Attributable profit up 30% to HK$44,690m (HK$34,292m in the first half of 2011).

·     Return on average shareholders' equity of 24.8% (22.5% in the first half of 2011).

·     Total assets up 3% to HK$5,762bn (HK$5,607bn at the end of 2011).

·     Cost efficiency ratio of 40.1% (45.2% for the first half of 2011).

Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. The abbreviations 'HK$m' and 'HK$bn' represent millions and billions (thousands of millions) of Hong Kong dollars respectively.

Comment by Stuart Gulliver, Chairman

After a resilient start to 2012, Asian economies slowed markedly in the second quarter of the year. Concerns over the solution to the European debt crisis contributed to a reduction in demand for Asian exports, particularly from mainland China, which also experienced a moderation in growth in construction and household spending. Demand from the US also remained muted. Lower demand from Europe and mainland China reduced levels of export related activity in Hong Kong and growth slowed, though domestic demand remained buoyant and retail sales grew strongly. Singapore also experienced a slowdown in the second quarter, but inflation remained high. Persistently high inflation also remains a challenge for India, where monetary tightening led to a reduction in growth during the period.

Although weak demand from the West is likely to persist during the remainder of the year, anticipated monetary and fiscal easing in mainland China should stimulate an improvement in Asia's rates of growth in intra-regional trade and economic activity. Asia is now less reliant on the West for trade and growth should therefore remain more resilient than in previous downturns, given the right policy responses. There remains a risk that European banks may once again reduce credit supply in Asia, but the region's banking systems are strong and have proven to be capable of meeting demand for lending where it arises, gaining market share in the process. The global economy remains fragile and vulnerable to setbacks, but Asia is nonetheless likely to maintain good rates of growth, driven primarily by consumption and investment in mainland China, which is increasingly driving regional demand. In this environment, we see good opportunities to continue to serve our customers through our extensive network, and gain market share through meeting their financial needs.

Notwithstanding the challenges posed by the mixed economic environment of the first half of 2012, The Hongkong and Shanghai Banking Corporation Limited delivered a sound and broadly-based performance. Profit before tax for the period was HK$57,988m, 25% higher than in the first half of 2011. This included gains of HK$4,471m from the sale of subscale activities in Japan and Thailand and non-core investments in India and the Philippines. These disposals demonstrate progress in our strategy of simplifying the group and eliminating non-core or subscale businesses, allowing us to focus our capital and resources on our core businesses. In addition to these completed sales, we also announced the sale of our general insurance businesses in Hong Kong and Singapore to AXA and QBE. Following the sale we will continue to distribute general insurance products to our customers under agreements with these buyers. In July 2012, we announced the proposed sale of Global Payments Asia-Pacific Limited to partner Global Payments Inc. In Hong Kong, profits grew strongly driven by growth in lending and trading revenues and further development in our customers' activities with mainland China. In the Rest of Asia Pacific, profits growth was supported by last year's strong loan and deposit increases, and higher contributions from our associates in mainland China.

During the period we maintained our focus on our key priority growth markets in the region, namely Hong Kong, mainland China, India, Indonesia, Singapore, Malaysia and Australia. We continued to execute our strategy to leverage our international connectivity and increase cross-sell activity across our businesses and in a broad range of products and services. We maintained our position as a leading international bank for offshore renminbi products and services and, through our global renminbi trade settlement capability, we are well positioned to capture the growth in renminbi denominated trade finance. Customer loans grew by 4% during the period, while deposits grew by 1%, and at the half-year the loans to deposits ratio stood at 61.9%.

In competitive markets for both loans and deposits, margins remained stable during the period. We maintained tight control of operating expenses, while continuing to invest for future growth, and the cost efficiency ratio improved from 45.2% to 40.1% on a reported basis and to 42.3% excluding the gains on sales noted earlier. The loan impairment charge remained low in Hong Kong, but rose in the Rest of Asia Pacific, largely as a result of impairments on a small number of specific exposures. While there has been a slight deterioration in average corporate credit grades, overall the quality of the loan book remains sound and we continue to exercise vigilance towards lending.

In Retail Banking and Wealth Management ('RBWM'), profits increased by 18%. Revenues grew from higher loan balances following successful marketing campaigns and a strong performance in insurance, partly offset by weaker investor sentiment which impacted brokerage income and unit trust fees. In Hong Kong we maintained our leading market positions in deposits, mortgages, credit cards, life insurance and mandatory provident funds. We continued to invest in enhancing our wealth management services and sales productivity in the region. Asset growth remained focused on residential mortgages and the loan book continued to perform well, with loan impairment charges remaining low. In line with our strategy, we completed the sale of our RBWM business in Thailand. We continued to expand our branch network in order to capture growth opportunities in mainland China, Malaysia and Taiwan.

Commercial Banking ('CMB') increased lending to customers around the region and revenues in both trade finance and Payments and Cash Management continued to grow strongly. Profits were up by 17%. We continued to leverage our global network to capture the growing trade and capital flows with mainland China. Collaboration with Global Banking and Markets ('GB&M') continued to provide a growing contribution to revenues, particularly in foreign exchange products. We strengthened our position in the provision of renminbi denominated products and won a number of prestigious awards in the Asiamoney Offshore Renminbi Survey, coming top in all seven product categories. Costs were well controlled during the period, growing by less than revenues. Our focus remained on supporting our customers in growing their businesses, particularly through financing their international trade, payments, foreign exchange and cash management and providing advisory services.

Global Banking and Markets delivered a robust business performance and profits increased by 18%. We continued to grow lending, notably in mainland China. Fee income increased, particularly in Hong Kong, driven by Payments and Cash Management, credit facilities and debt capital markets transactions. Trading income benefited from client activity in Rates and Foreign Exchange in particular. We maintained a strong focus on asset quality and loan impairment charges remained very low. The positive results of recent investments were evident in a number of significant industry awards. Among these were six Euromoney Awards for Excellence in Asia, including Best Debt House, Best Flow House, Best Risk House, Best Project Finance House, Best Bank in Hong Kong and Best Debt House in Hong Kong.

During the second half of 2012, although the conditions are in place for economic growth in Asia to pick up in response to policy stimulus, confidence is likely to remain fragile while uncertainties persist over Western economies, leading to customer caution and, in consequence, relatively modest growth in demand for lending and other financial services. With our strong capital and liquidity we remain well placed to continue to serve our customers' needs when and where they arise, through an unrivalled network connecting their businesses around the world.

Results by Geographical Region
Geographical regions	Hong Kong		Rest of Asia- Pacific		Intra- segment elimination		Total
	HK$m		HK$m		HK$m		HK$m
Period ended 30 June 2012
Net interest income	19,622		21,370		-		40,992
Net fee income	11,953		7,906		-		19,859
Net trading income	5,027		7,117		-		12,144
Net income from financial instruments designated at fair value	645		297		-		942
Gains less losses from financial investments	2,185		195		-		2,380
Dividend income	329		25		-		354
Net earned insurance premiums	23,967		3,064		-		27,031
Other operating income	6,401		3,625		(2,099)		7,927
Total operating income	70,129		43,599		(2,099)		111,629
Net insurance claims incurred and movement in policyholders' liabilities	(23,990)		(2,662)		-		(26,652)
Net operating income before loan impairment charges and other credit risk provisions	46,139		40,937		(2,099)		84,977
Loan impairment charges and other credit risk provisions	(264)		(1,952)		-		(2,216)
Net operating income	45,875		38,985		(2,099)		82,761
Operating expenses	(18,211)		(17,958)		2,099		(34,070)
Operating profit	27,664		21,027		-		48,691
Share of profit in associates and joint ventures	438		8,859		-		9,297
Profit before tax	28,102		29,886		-		57,988
Share of profit before tax	48.5%		51.5%				100%
Cost efficiency ratio	39.5%		43.9%				40.1%
Net loans and advances to customers	1,233,329		988,292		-		2,221,621
Total assets	3,702,828		2,567,749		(508,118)		5,762,459
Customer accounts	2,326,870		1,260,031		-		3,586,901

Geographical regions	Hong Kong		Rest of Asia- Pacific		Intra- segment elimination		Total
	HK$m		HK$m		HK$m		HK$m
Period ended 30 June 2011
Net interest income	16,872		18,845		(2)		35,715
Net fee income	11,754		8,185		-		19,939
Net trading income	4,362		6,442		2		10,806
Net income from financial instruments designated at fair value	309		39		-		348
Gains less losses from financial investments	247		(178)		-		69
Dividend income	543		2		-		545
Net earned insurance premiums	20,216		2,666		-		22,882
Other operating income	7,151		1,256		(2,219)		6,188
Total operating income	61,454		37,257		(2,219)		96,492
Net insurance claims incurred and movement in policyholders' liabilities	(20,953)		(2,083)		-		(23,036)
Net operating income before loan impairment charges and other credit risk provisions	40,501		35,174		(2,219)		73,456
Loan impairment charges and other credit risk provisions	(186)		(802)		-		(988)
Net operating income	40,315		34,372		(2,219)		72,468
Operating expenses	(17,699)		(17,705)		2,219		(33,185)
Operating profit	22,616		16,667		-		39,283
Share of profit in associates and joint ventures	243		6,708		-		6,951
Profit before tax	22,859		23,375		-		46,234
Share of profit before tax	49.4%		50.6%				100%
Cost efficiency ratio	43.7%		50.3%				45.2%
Net loans and advances to customers	1,193,969		930,218		-		2,124,187
Total assets	3,574,763		2,313,617		(391,321)		5,497,059
Customer accounts	2,220,666		1,230,011		-		3,450,677

 

Results by Geographic Global Business
Hong Kong
	Retail Banking and Wealth Management		Commercial Banking		Global Banking & Markets		Other		Intra- segment elimination		Total
	HK$m		HK$m		HK$m		HK$m		HK$m		HK$m
Period ended 30 June 2012
Net interest income/(expense)	10,871		5,963		4,298		(1,848)		338		19,622
Net fee income	6,401		3,355		2,113		84		-		11,953
Net trading income/(expense)	466		664		4,286		(51)		(338)		5,027
Net income/(loss) from financial instruments designated at fair value	695		(139)		122		(33)		-		645
Gains less losses from financial investments	(7)		-		32		2,160		-		2,185
Dividend income	1		-		14		314		-		329
Net earned insurance premiums	20,884		3,022		61		-		-		23,967
Other operating income	2,772		269		254		4,111		(1,005)		6,401
Total operating income	42,083		13,134		11,180		4,737		(1,005)		70,129
Net insurance claims incurred and movement in policyholders' liabilities	(21,293)		(2,650)		(47)		-		-		(23,990)
Net operating income before loan impairment charges and other credit risk provisions	20,790		10,484		11,133		4,737		(1,005)		46,139
Loan impairment (charges)/ releases and other credit risk provisions	(340)		(13)		89		-		-		(264)
Net operating income	20,450		10,471		11,222		4,737		(1,005)		45,875
Operating expenses	(6,948)		(2,746)		(5,189)		(4,333)		1,005		(18,211)
Operating profit	13,502		7,725		6,033		404		-		27,664
Share of profit in associates and joint ventures	148		48		22		220		-		438
Profit before tax	13,650		7,773		6,055		624		-		28,102
Share of profit before tax	23.5%		13.4%		10.5%		1.1%		-		48.5%
Net loans and advances to customers	452,110		455,246		315,669		10,304		-		1,233,329
Customer accounts	1,433,785		623,470		266,347		3,268		-		2,326,870

Hong Kong
	Retail Banking and Wealth Management		Commercial Banking		Global Banking & Markets		Other		Intra- segment elimination		Total
	HK$m		HK$m		HK$m		HK$m		HK$m		HK$m
Period ended 30 June 2011
Net interest income/(expense)	9,774		4,867		3,899		(1,822)		154		16,872
Net fee income	7,066		2,767		1,843		78		-		11,754
Net trading income/(expense)	479		672		3,424		(58)		(155)		4,362
Net income/(loss) from financial instruments designated at fair value	502		(207)		14		(1)		1		309
Gains less losses from financial investments	-		-		153		94		-		247
Dividend income	1		4		84		454		-		543
Net earned insurance premiums	17,075		3,066		75		-		-		20,216
Other operating income	2,915		641		179		4,311		(895)		7,151
Total operating income	37,812		11,810		9,671		3,056		(895)		61,454
Net insurance claims incurred and movement in policyholders' liabilities	(18,236)		(2,658)		(59)		-		-		(20,953)
Net operating income before loan impairment charges and other credit risk provisions	19,576		9,152		9,612		3,056		(895)		40,501
Loan impairment (charges)/ releases and other credit risk provisions	(300)		(56)		170		-		-		(186)
Net operating income	19,276		9,096		9,782		3,056		(895)		40,315
Operating expenses	(6,939)		(2,687)		(4,915)		(4,053)		895		(17,699)
Operating profit/(loss)	12,337		6,409		4,867		(997)		-		22,616
Share of profit in associates and joint ventures	24		10		7		202		-		243
Profit/(loss) before tax	12,361		6,419		4,874		(795)		-		22,859
Share of profit before tax	26.7%		13.9%		10.5%		(1.7)%		-		49.4%
Net loans and advances to customers	420,233		455,490		304,471		13,775		-		1,193,969
Customer accounts	1,366,892		581,805		267,310		4,659		-		2,220,666

Rest of Asia-Pacific
	Retail Banking and Wealth Management		Commercial Banking		Global Banking & Markets		Global Private Banking		Other		Intra- segment elimination		Total
	HK$m		HK$m		HK$m		HK$m		HK$m		HK$m		HK$m
Period ended 30 June 2012
Net interest income	6,953		5,365		9,393		92		554		(987)		21,370
Net fee income/(expense)	3,207		2,048		2,616		57		(22)		-		7,906
Net trading income/(expense)	336		762		5,058		7		(34)		988		7,117
Net income/(loss) from financial instruments designated at fair value	316		4		(10)		-		(12)		(1)		297
Gains less losses from financial investments	(7)		6		8		(1)		189		-		195
											-
Dividend income	1		-		-		-		24		-		25
Net earned insurance premiums	2,624		439		-		1		-		-		3,064
Other operating income	1,310		342		256		503		1,482		(268)		3,625
Total operating income	14,740		8,966		17,321		659		2,181		(268)		43,599
Net insurance claims incurred and movement in policyholders' liabilities	(2,274)		(387)		-		(1)		-		-		(2,662)
Net operating income before loan impairment charges and other credit risk provisions	12,466		8,579		17,321		658		2,181		(268)		40,937
Loan impairment (charges) /releases and other credit risk provisions	(796)		(1,018)		(137)		1		(2)		-		(1,952)
Net operating income	11,670		7,561		17,184		659		2,179		(268)		38,985
Operating expenses	(8,682)		(3,787)		(4,978)		(155)		(624)		268		(17,958)
Operating profit	2,988		3,774		12,206		504		1,555		-		21,027
Share of profit in associates and joint ventures	1,095		5,678		2,080		-		6		-		8,859
Profit before tax	4,083		9,452		14,286		504		1,561		-		29,886
Share of profit before tax	7.0%		16.3%		24.6%		0.9%		2.7%		-		51.5%
Net loans and advances to customers	327,083		319,961		337,092		2,740		1,416		-		988,292
Customer accounts	465,665		325,751		462,031		5,421		1,163		-		1,260,031

Rest of Asia-Pacific
	Retail Banking and Wealth Management			Commercial Banking		Global Banking & Markets		Global Private Banking		Other		Intra- segment elimination		Total
	HK$m			HK$m		HK$m		HK$m		HK$m		HK$m		HK$m
Period ended 30 June 2011
Net interest income	6,936			4,514		7,752		80		405		(842)		18,845
Net fee income	3,449			2,019		2,670		84		(37)		-		8,185
Net trading income/(expense)	387			584		4,899		37		(307)		842		6,442
Net income/(loss) from financial instruments designated at fair value	56			14		4		-		(35)		-		39
Gains less losses from financial investments	(2)			11		(181)		-		(6)		-		(178)
Dividend income	(1)			-		-		-		3		-		2
Net earned insurance premiums	1,753			913		-		-		-		-		2,666
Other operating income	547			246		251		4		430		(222)		1,256
Total operating income	13,125			8,301		15,395		205		453		(222)		37,257
Net insurance claims incurred and movement in policyholders' liabilities	(1,345)			(738)		-		-		-		-		(2,083)
Net operating income before loan impairment charges and other credit risk provisions	11,780			7,563		15,395		205		453		(222)		35,174
Loan impairment (charges) /releases and other credit risk provisions	(874)			40		32		-		-		-		(802)
Net operating income	10,906			7,603		15,427		205		453		(222)		34,372
Operating expenses	(9,119)			(3,574)		(4,721)		(187)		(326)		222		(17,705)
Operating profit	1,787			4,029		10,706		18		127		-		16,667
Share of profit in associates and joint ventures	836			4,216		1,645		-		11		-		6,708
Profit before tax	2,623			8,245		12,351		18		138		-		23,375
Share of profit before tax	5.7%			17.8%		26.8%		-		0.3%		-		50.6%
Net loans and advances to customers	324,579			281,181		315,012		8,058		1,388		-		930,218
Customer accounts	462,314			311,184		438,547		16,886		1,080		-		1,230,011

Results by Geographic Region (continued)

Hong Kong reported pre-tax profits of HK$28,102m compared with HK$22,859m in the first half of 2011, an increase of 23%.

The increase in profits was driven by higher net interest income in RBWM and CMB coupled with the gain on sale of our shares in two Indian banks. Trading revenues were higher in GB&M resulting from positive performances in the Rates, Foreign Exchange and Credit businesses. These increases were partly offset by higher operating expenses, including staff costs.

In RBWM, we were awarded the 'Best Wealth Management Award' from The Asian Banker. We announced the sale of our general insurance business enabling us to focus on life insurance manufacturing where we maintained our market leadership position. We launched a dual currency Hong Kong dollar and renminbi credit card for customers who travel frequently between Hong Kong and mainland China that offers payment flexibility and protection against fluctuating exchange rates. We maintained our market leadership position in deposits, mortgages and mandatory provident funds as well as credit cards where we received 26 awards from Visa, Mastercard and China UnionPay.

In CMB we capitalised on our international connectivity and our standing as a leading trade finance bank to grow trade-related revenues, particularly with mainland China. Cross-border referrals between Hong Kong and mainland China grew by 13% and by 10% between Hong Kong and the rest of the world. The collaboration between CMB and GB&M continued to strengthen, with growth of 16% in revenues which are shared between the global businesses, most notably from the provision of foreign exchange products to our corporate customers. We also won the 'Best SME Partner Award' from the Hong Kong General Chamber of Small and Medium Business for the seventh consecutive year.

In GB&M we led the market in Hong Kong dollar bond issuance and participated in several significant debt capital markets transactions. We continued to lead the market in offshore renminbi bond issuance with several high profile deals completed in the first half of 2012 for multinationals accessing the market.

We reinforced our position as a leading international bank for offshore renminbi products, topping all seven product categories in Asiamoney's inaugural Offshore Renminbi Survey, including 'Best Overall Products and Services', 'Best Clearance, Transaction Banking and Settlement' and 'Best for Deposits'.

Net interest income was 16% higher than in the first half of 2011, notably in RBWM and in CMB, driven primarily by wider deposit spreads and growth in balances of both customer loans and deposits.

We experienced growth in average lending balances in mortgages and personal loans in RBWM, following increased demand, and trade related lending in CMB as a result of customer acquisition campaigns launched in 2011 as we capitalised on trade and capital flows. In CMB, growth in trade-related lending returned in the first half of 2012 following reductions in the second half of 2011.

Net interest income also rose due to higher average deposit balances as we focused on funding lending growth with deposit acquisition. These were partly offset by narrower asset spreads, notably in residential mortgages in RBWM, as funding costs increased.

Net interest income from Balance Sheet Management was higher in the first half of 2012, through improved fund deployment amidst a consistently low interest rate environment.

Net fee income increased by 2%, primarily from higher trade related volumes as we successfully captured opportunities from international trade and capital flows, as well as our participation in several significant debt capital markets transactions in the first half of 2012. This increase was offset in RBWM, primarily by a reduction in brokerage income from lower market turnover as a result of weaker investor sentiment, and by lower fee income from unit trusts where customer preference shifted towards products with lower fees.

Net trading income increased by 15%, driven by a positive performance in GB&M, notably in Rates trading activities, which reflected greater market volatility and tightening of spreads, and in Foreign Exchange due to increased client activity. Credit trading revenues also rose due to favourable debt securities trading and increased volumes.

Net income from financial instruments designated at fair value was HK$645m compared with HK$309m in the first half of 2011 due to higher investment gains on assets held by the insurance business as a result of more favourable equity market conditions. To the extent that these investment gains were attributed to policyholders of unit-linked insurance policies and insurance contracts with discretionary participation features ('DPF'), there was a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.

Net earned insurance premiums increased by 19%, notably from insurance contracts with DPF, following higher sales volumes, reflecting strong sales and renewals of life insurance products as a result of product launches and marketing campaigns. The growth in premiums resulted in a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.

Gains less losses from financial investments were HK$2,185m, driven by the gain of HK$2,131m from the sale of our shares in Axis Bank Limited and Yes Bank Limited, two non-core investments in India.

Other operating income of HK$6,401m was HK$750m lower than in the first half of 2011. The fall in income was primarily due to the non-recurrence of the gain from the refinement to the present value of in-force insurance business ('PVIF') calculation methodology in the first half of 2011, partly offset by a rise in PVIF reflecting a favourable market conditions update and increased insurance sales in 2012. In addition, the gain on revaluation of investment properties was lower in 2012 than in the previous year.

Loan impairment charges and other credit risk provisions stayed at a low level at HK$264m as the credit environment remained stable and we maintained our focus on high levels of asset quality.

Operating expenses increased by 3% primarily due to wage inflation across the business and higher performance-related costs in GB&M reflecting increased revenue. Premises and equipment costs rose, mainly relating to systems implementation programmes and higher volume-driven processing charges, as well as increased property maintenance and rental costs. We continued to maintain strict cost control and progressed with the implementation of our organisational effectiveness programme that started in 2011.

Rest of Asia-Pacific reported pre-tax profits of HK$29,886m compared with HK$23,375m in the first half of 2011, an increase of 28%. Reported profits include gains from the sale of our RBWM business in Thailand of HK$811m, our global private banking ("GPB") business in Japan of HK$520m, and our interest in a property company in the Philippines of HK$1,009m.

Excluding the above gains, pre-tax profits rose by 18%, reflecting strong growth in lending and deposit balances, coupled with improved liability spreads. These were offset by higher expenses, in part due to HK$856m of restructuring costs arising from the ongoing strategic review of our businesses and support functions in the region, as well as higher loan impairment charges due to a small number of new individual impairments in CMB and GB&M. Increased profits from our associates in mainland China also contributed to our improved profitability.

In RBWM, we focused on capturing wealth management opportunities in the region. We continued to expand our branch network in mainland China, Malaysia and Taiwan and launched initiatives to enhance our multi-channel capabilities, including a mobile banking platform in Vietnam and expansion of the mobile functionality in mainland China, Australia and Singapore. We also carried out a detailed review of our loan approval process which reduced processing times. In Taiwan we launched Fundmax, a product that offers our customers the ability to invest in unit trusts with monthly management fees as an alternative to upfront fees.

In CMB, trade revenues grew as we capitalised on our global network to capture cross-border trade and capital flows, particularly with mainland China. Cross-border referrals between mainland China and the rest of the world increased by 11%. We were recognised as 'Financial institution of the year 2011' by the Brazil-China Chamber of Commerce for our contribution to the growth and development of the fast growing South-South trade corridor.

We continued to be a key participant in the internationalisation of the renminbi and we received approval from the People's Bank of China to be a market maker for direct trading between the renminbi and the Japanese Yen in mainland China's interbank market.

Net interest income increased by 13% due to higher average lending balances in CMB and GB&M, most notably in mainland China, as we captured international trade and capital flows. Residential mortgage balances also grew, primarily in Singapore, Malaysia, mainland China and Australia, driven by promotional campaigns. This was partly offset by narrower asset spreads, particularly in RBWM, due to competitive pricing pressures in residential mortgage lending in a number of markets.

Customer deposit balances rose, notably in Payments and Cash Management from new mandates and deposit acquisition as customers made use of our comprehensive product offering. This reflected our strategy of supporting growth in customer lending with core funding.

Net interest income from Balance Sheet Management was higher in the first half of 2012 primarily in mainland China, reflecting growth in the investment portfolio.

Net fee income decreased by 3%, most notably in RBWM due to lower fees in Japan following the discontinuation of our premier business and in Singapore as a result of weak investor sentiment. This was partly offset by increased fee income from CMB due to higher remittance revenue.

Net trading income increased by 10% compared with the first half of 2011, mainly from a strong performance in Rates trading activities in a number of countries in the region due to favourable movements in interest rates.

Net income from financial instruments designated at fair value was HK$297m compared with HK$39m in the first half of 2011, driven by higher investment gains on assets held by the insurance business, primarily in Singapore, due to positive equity market movements during the first half of 2012. To the extent that these investment gains were attributed to policyholders of unit-linked insurance policies and insurance contracts with DPF, there was a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.

Gains from financial investments were HK$195m compared with losses of HK$178m in first half of 2011, due to a disposal gain on investments managed by a private equity fund and a lower impairment loss on an equity investment in the first half of 2012 compared with 2011 in GB&M.

Net earned insurance premiums increased by 15% to HK$3,064m, primarily in Singapore as a result of increased renewals and new business volumes. The growth in premiums resulted in a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.

Other operating income increased by HK$2,369m, due to gains from the sale of our RBWM business in Thailand of HK$811m, our GPB business in Japan of HK$520m and our interest in a property company in the Philippines of HK$1,009m.

Loan impairment charges and other credit risk provisions increased by HK$1,150m as a result of a specific impairment of a corporate exposure in Australia as well as individual loan impairment charges in India and New Zealand.

Operating expenses increased by 1% due to restructuring costs of HK$856m incurred across several countries as part of the ongoing strategic review of our businesses and support functions in the region. This resulted in a net reduction of more than 3,400 staff numbers in the first half of 2012, which was offset by inflationary pressures and business growth, including branch expansion in mainland China, Malaysia and Taiwan. However, we continued to maintain tight control on costs as part of the organisational effectiveness programme launched in 2011.

Share of profit from associates and joint ventures increased by 32% driven by higher profits from Bank of Communications as a result of loan growth and wider spreads. Fee income also increased from settlements and credit cards. The contribution from Industrial Bank rose as a result of strong growth in customer lending and higher fee-based revenue, which was partly offset by a rise in operating expenses.

Consolidated Income Statement
	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Interest income	57,787		50,677
Interest expense	(16,795)		(14,962)
Net interest income	40,992		35,715
Fee income	23,028		23,267
Fee expense	(3,169)		(3,328)
Net fee income	19,859		19,939
Net trading income	12,144		10,806
Net income from financial instruments designated at fair value	942		348
Gains less losses from financial investments	2,380		69
Dividend income	354		545
Net earned insurance premiums	27,031		22,882
Other operating income	7,927		6,188
Total operating income	111,629		96,492
Net insurance claims incurred and movement in policyholders' liabilities	(26,652)		(23,036)
Net operating income before loan impairment charges
and other credit risk provisions	84,977		73,456
Loan impairment charges and other credit risk provisions	(2,216)		(988)
Net operating income	82,761		72,468
Employee compensation and benefits	(19,525)		(18,970)
General and administrative expenses	(11,597)		(11,335)
Depreciation of property, plant and equipment	(2,043)		(1,884)
Amortisation and impairment of intangible assets	(905)		(996)
Total operating expenses	(34,070)		(33,185)
Operating profit	48,691		39,283
Share of profit in associates and joint ventures	9,297		6,951
Profit before tax	57,988		46,234
Tax expense	(9,424)		(8,897)
Profit for the period	48,564		37,337
Profit attributable to shareholders	44,690		34,292
Profit attributable to non-controlling interests	3,874		3,045

Consolidated Statement of Comprehensive Income
	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Profit for the period	48,564		37,337
Other comprehensive income
Available-for-sale investments:
- fair value changes taken to equity	9,569		(5,536)
- fair value changes transferred to the income statement on disposal	(2,429)		(75)
- fair value changes transferred to the income statement on hedged items
due to hedged risk	(461)		1
- income taxes	(432)		91
Cash flow hedges:
- fair value changes taken to equity	127		319
- fair value changes transferred to the income statement	(181)		(245)
- income taxes	6		(16)
Property revaluation:
- fair value changes taken to equity	2,432		6,451
- income taxes	(389)		(1,057)
Share of changes in equity of associates and joint ventures	644		(618)
Exchange differences	(2,057)		4,720
Actuarial losses on post-employment benefits:
- before income taxes	(568)		(1,025)
- income taxes	86		167
Other comprehensive income for the period, net of tax	6,347		3,177
Total comprehensive income for the period, net of tax	54,911		40,514
Total comprehensive income for the period attributable to:
- shareholders	50,654		36,959
- non-controlling interests	4,257		3,555
	54,911		40,514

Consolidated Statement of Financial Postion
	At 30 June 2012		At 31 December 2011
	HK$m		HK$m
ASSETS
Cash and short-term funds	920,794		919,906
Items in the course of collection from other banks	48,501		34,546
Placings with banks maturing after one month	262,908		198,287
Certificates of deposit	93,854		88,691
Hong Kong Government certificates of indebtedness	165,074		162,524
Trading assets	444,985		447,968
Financial assets designated at fair value	61,993		57,670
Derivatives	385,566		377,296
Loans and advances to customers	2,221,621		2,130,871
Financial investments	665,794		722,433
Amounts due from Group companies	150,496		152,730
Interests in associates and joint ventures	111,289		91,785
Goodwill and intangible assets	37,852		34,839
Property, plant and equipment	86,056		85,294
Deferred tax assets	2,206		2,325
Retirement benefit assets	95		111
Other assets	103,375		100,204
Total assets	5,762,459		5,607,480
LIABILITIES
Hong Kong currency notes in circulation	165,074		162,524
Items in the course of transmission to other banks	61,296		47,163
Deposits by banks	227,276		222,582
Customer accounts	3,586,901		3,565,001
Trading liabilities	197,131		171,431
Financial liabilities designated at fair value	41,171		40,392
Derivatives	385,632		383,252
Debt securities in issue	82,129		77,472
Retirement benefit liabilities	8,718		8,097
Amounts due to Group companies	113,133		108,423
Other liabilities and provisions	111,177		108,314
Liabilities under insurance contracts issued	227,604		209,438
Current tax liabilities	7,783		4,126
Deferred tax liabilities	14,911		14,712
Subordinated liabilities	16,101		16,114
Preference shares	95,003		97,096
Total liabilities	5,341,040		5,236,137
EQUITY
Share capital	45,404		30,190
Other reserves	120,113		112,218
Retained profits	215,796		188,416
Proposed dividend	7,500		10,000
Total shareholders' equity	388,813		340,824
Non-controlling interests	32,606		30,519
Total equity	421,419		371,343
Total equity and liabilities	5,762,459		5,607,480

Consolidated Statement of Changes in Equity
	Half-year ended 30 June 2012		Half-year ended 31 December 2011		Half-year ended 30 June 2011
	HK$m		HK$m		HK$m
Share capital
At beginning of period	30,190		22,494		22,494
Shares issued	15,214		7,696		-
	45,404		30,190		22,494
Retained profits and proposed dividend
At beginning of period	198,416		187,037		173,254
Dividends paid	(17,500)		(14,000)		(19,000)
Movement in respect of share-based payment arrangements	(375)		5		86
Other movements	-		(1)		(2)
Transfers	(1,430)		(6,116)		(823)
Total comprehensive income for the period	44,185		31,491		33,522
	223,296		198,416		187,037
Other reserves
Property revaluation reserve
At beginning of period	38,939		34,489		29,980
Other movements	-		24		(24)
Transfers	(494)		(487)		(382)
Total comprehensive income for the period	1,855		4,913		4,915
	40,300		38,939		34,489
Available-for-sale investment reserve
At beginning of period	29,786		51,543		57,553
Other movements	8		(5)		(2)
Total comprehensive income/(expense) for the period	6,745		(21,752)		(6,008)
	36,539		29,786		51,543
Cash flow hedging reserve
At beginning of period	51		164		106
Total comprehensive income/(expense) for the period	(49)		(113)		58
	2		51		164
Foreign exchange reserve
At beginning of period	14,265		20,354		15,789
Total comprehensive income/(expense) for the period	(1,985)		(6,089)		4,565
	12,280		14,265		20,354
Other reserves
At beginning of period	29,177		21,879		20,954
Movement in respect of share-based payment arrangements	(11)		677		17
Transfers	1,924		6,603		1,205
Other movements	(1)		(1)		(204)
Total comprehensive expense for the period	(97)		19		(93)
	30,992		29,177		21,879

	Half-year ended 30 June 2012		Half-year ended 31 December 2011		Half-year ended 30 June 2011
	HK$m		HK$m		HK$m
Total shareholders equity
At beginning of period	340,824		337,960		320,130
Shares issued	15,214		7,696		-
Dividends paid	(17,500)		(14,000)		(19,000)
Movement in respect of share-based payment arrangements	(386)		682		103
Other movements	7		17		(232)
Total comprehensive income for the period	50,654		8,469		36,959
	388,813		340,824		337,960
Non-controlling interests
At beginning of period	30,519		28,674		27,305
Dividends paid	(2,171)		(1,593)		(2,171)
Movement in respect of share-based payment arrangements	8		16		10
Other movements	(7)		1		(25)
Total comprehensive income for the period	4,257		3,421		3,555
	32,606		30,519		28,674
Total equity
At beginning of period	371,343		366,634		347,435
Shares issued	15,214		7,696		-
Dividends paid	(19,671)		(15,593)		(21,171)
Movement in respect of share-based payment arrangements	(378)		698		113
Other movements	-		18		(257)
Total comprehensive income for the period	54,911		11,890		40,514
	421,419		371,343		366,634

Consolidated Cash Flow Statement
	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Operating activities
Cash generated from/(used in) operations	(80,261)		73,073
Interest received on financial investments	7,558		6,471
Dividends received on financial investments	105		189
Dividends received from associates	2,165		510
Taxation paid	(5,908)		(4,817)
Net cash inflow/(outflow) from operating activities	(76,341)		75,426
Investing activities
Purchase of financial investments	(156,084)		(282,998)
Proceeds from sale or redemption of financial investments	230,557		322,280
Purchase of property, plant and equipment	(730)		(961)
Proceeds from sale of property, plant and equipment and assets held for sale	40		35
Purchase of other intangible assets	(635)		(815)
Net cash outflow in respect of the acquisition of and increased shareholding ... in a subsidiary	-		(143)
Net cash inflow in respect of the sale of a subsidiary	-		1
Net cash outflow in respect of the purchase of interests in associates and joint ventures	(72)		(218)
Proceeds from the sale of interest in an associate	2,095		8
Net cash inflow/(outflow) from the sale of interest in business portfolios	(12,712)		4,670
Net cash inflow from investing activities	62,459		41,859
Net cash inflow/(outflow) before financing	(13,882)		117,285
Financing
Issue of ordinary share capital	15,214		-
Redemption of preference shares	(1,941)		-
Repayment of subordinated liabilities	-		(1,650)
Ordinary dividends paid	(17,500)		(19,000)
Dividends paid to non-controlling interests	(2,171)		(2,171)
Interest paid on preference shares	(1,235)		(1,355)
Interest paid on subordinated liabilities	(438)		(409)
Net cash outflow from financing	(8,071)		(24,585)
Increase/(decrease) in cash and cash equivalents	(21,953)		92,700

Additional Information

1. Net interest income

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Net interest income	40,992		35,715
Average interest-earning assets	4,119,731		3,877,827
Net interest spread	1.89%		1.76%
Net interest margin	2.00%		1.86%

Net interest income increased as a result of loan growth in all key countries, as well as increasing interest rates in certain countries, notably Hong Kong, mainland China and India.

Average interest-earning assets increased by HK$241,904m or 6% compared with the half-year ended 30 June 2011, largely funded by an increase in average deposits. Average customer lending increased 9% with notable growth in both mortgages and term lending. Financial investments also increased by 4%.

Net interest margin increased by 14 basis points to 2.00% compared with the first half of 2011. Interest rate increases in certain countries led to improved deposit spreads and asset spreads were broadly stable. In addition, the larger increase in customer lending compared to financial investments also contributed to the increase in net interest margin. Net interest spread increased by 13 basis points to 1.89%, whilst the contribution from net free funds increased by one basis point to 11 basis points.

In Hong Kong, the bank recorded an increase in net interest margin of 18 basis points to 1.50%. Net interest spread increased by 17 basis points to 1.49% as deposit spreads improved. Average interest-earning assets increased by 6% compared with 30 June 2011, mainly in customer lending. Net interest income increased on the back of loan growth and the improved net interest margin.

At Hang Seng Bank, the net interest margin increased by 25 basis points to 2.15% and the net interest spread increased by 22 basis points to 2.06%, driven by improvements in deposit and loan spreads, notably in corporate and commercial lending.

In the Rest of Asia-Pacific, the net interest margin was 2.08%, 11 basis points lower than 30 June 2011. The reduction in margin arose as liquidity pressures eased in some markets and the lending environment remained competitive. Notable growth in the loan book was recorded in Singapore, mainland China, Australia and Malaysia.

2. Net fee income

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Account services	1,410		1,241
Credit facilities	1,425		1,423
Import/export	2,596		2,412
Remittances	1,474		1,372
Securities/broking	3,430		4,380
Cards	3,358		3,219
Insurance	456		365
Unit trusts	2,061		2,237
Funds under management	2,022		2,357
Underwriting	793		609
Other	4,003		3,652
Fee income	23,028		23,267
Fee expense	(3,169)		(3,328)
	19,859		19,939

Net fee income decreased marginally by HK$80m compared to 2011.

Fees from securities/broking decreased by 22%, as investor sentiment weakened and turnover reduced following stock market declines in the second half of 2011, while fee income from funds under management declined by 14% on the back of lower asset values. Unit trust fees fell by 8%, notably in Hong Kong where customer preference has shifted towards lower risk products with lower fees, and in both Taiwan and Singapore where sales volumes declined.

Underwriting fees rose by 30%, largely in Hong Kong from our participation in several significant debt capital markets transactions in 2012.

Fee income from account services and cards was up by 14% and 4% respectively. Higher account services fees correlated with growth in both transaction volumes and loans. Card fee income benefited from increased retail spending notably in Hong Kong, coupled with the strong uptake of our dual currency Hong Kong dollar and renminbi credit card. Australia was also higher due to the growth in circulation of co-branded credit cards. 

Fees from import/export and remittances increased by 8% and 7% respectively, on the back of growing trade activities from existing and new-to-bank customers, notably in Hong Kong, India, mainland China and Singapore.

3. Net trading income

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Dealing profits	9,659		8,404
Net loss from hedging activities	(17)		(8)
Net interest income on trading assets and liabilities	2,078		2,074
Dividend income from trading securities	424		336
	12,144		10,806

Net trading income increased by HK$1,338m, or 12%, compared to 2011.

Higher dealing profits in Rates came from more volatile market conditions and favourable positioning, notably in Hong Kong, and from Indonesia reflecting the upgrade of the country's credit rating. Foreign exchange income also increased from increased client activities, primarily in Hong Kong, Indonesia, Singapore and Taiwan.

Equities income decreased in 2012, notably in Hong Kong, as business flows reduced and lower revenues were earned from the warrants business as retail participation declined.

4. Gains less losses from financial investments

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Gains on disposal of available-for-sale securities	2,464		192
Impairment of available-for-sale equity investments	(84)		(123)
	2,380		69

Gains less losses from financial investments were HK$2,311m higher than 2011.

Gains on disposal of available-for-sale securities were driven by the gain of HK$2,131m on the sale of our shares in Axis Bank Limited and Yes Bank Limited, two non-core investments in India.

5. Other operating income

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Movement in present value of in-force insurance business	3,100		3,485
Gains on investment properties	259		427
Rental income from investment properties	103		92
Gain/(loss) on disposal of property, plant and equipment, and assets held for sale	19		(23)
Gain on disposal of subsidiaries, associates and business portfolios	2,354		-
Other	2,092		2,207
	7,927		6,188

Other operating income rose by HK$1,739m or 28% in 2012.

The movement in present value of in-force insurance business ('PVIF') decreased by HK$385m or 11%, largely due to the refinement of the calculation of the PVIF asset in 2011 that led to a one-off increase of HK$1,133m. This was partly offset by a favourable market conditions update on existing portfolios in 2012.

Gains on investment properties were lower in 2012 in comparison to 2011, reflecting property market conditions in Hong Kong.

The gain on disposal of subsidiaries, associates and business portfolios includes gains from the sale of our RBWM business in Thailand of HK$811m, from the sale of our Global Private Banking business in Japan of HK$520m and from the sale of an interest in a property company in the Philippines of HK$1,009m.

6. Insurance income

Included in the consolidated income statement are the following revenues earned by the insurance business:

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Net interest income	3,779		3,237
Net fee income	545		454
Net trading loss	(135)		(164)
Net income from financial instruments designated at fair value	875		366
Net earned insurance premiums	27,031		22,882
Movement in present value of in-force insurance business	3,100		3,485
Other operating income	36		179
	35,231		30,439
Net insurance claims incurred and movement in policyholders' liabilities	(26,652)		(23,036)
Net operating income	8,579		7,403

Net interest income increased by 17% as funds under management grew, reflecting net inflows

from new and renewal insurance business.

Net income from financial instruments designated at fair value was HK$875m compared to HK$366m in 2011 due to investment gains on assets held by the insurance business, mainly due to movements in equity markets. To the extent that revaluation is attributed to policyholders, there is an offsetting movement reported under 'Net insurance claims incurred and movement in policyholders' liabilities'.

Net insurance premiums rose by 18% as a result of higher premiums received from policy renewals and successful sales initiatives for annuity products. The growth in premiums resulted in a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policy holders'.

The movement in PVIF decreased by 11%, mainly as a result of a refinement of the calculation of the PVIF asset in 2011. The revised approach explicitly rather than implicitly allows for non-economic risks and the cost of options and guarantees, and led to a one-off increase of HK$1,133m. This was offset in 2012 by a favourable market conditions update on existing portfolios.

7. Loan impairment charges and other credit risk provisions

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Net charge for impairment of loans and advances to customers
- Individually assessed impairment allowances:
New allowances	1,221		786
Releases	(420)		(651)
Recoveries	(86)		(181)
	715		(46)
- Net charge for collectively assessed impairment allowances	1,185		1,047
Net charge/(release) for other credit risk provisions	316		(13)
Net charge for loan impairment and other credit risk provisions	2,216		988

The charge for loan impairment and other credit risk provisions increased by HK$1,228m in 2012.

The net charge for individually assessed impairment allowances increased by HK$761m in 2012, due to impairment of a corporate exposure in Australia, as well as individual impairment charges in India and New Zealand. The increase was also attributable to lower recoveries and releases in 2012, notably in Hong Kong and India.

The net charge for collectively assessed impairment allowances rose by HK$138m or 13% in 2012, reflecting the overall increase in loans and advances to customers. These were partially offset by lower impairment allowances in Indonesia as the overall portfolio credit quality improved.

The net charge for other credit risk provisions was HK$329m higher, representing charges against off-balance sheet exposures in 2012, notably in Australia.

There were no impairment losses or provisions against held-to-maturity investments.

8. Employee compensation and benefits

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Wages and salaries	18,056		17,536
Social security costs	473		454
Retirement benefit costs	996		980
	19,525		18,970
Staff numbers by region - full-time equivalent	At 30 June 2012		At 31 December 2011
Hong Kong	26,883		28,835
Rest of Asia-Pacific	40,166		44,695
Total	67,049		73,530

Employee compensation and benefits increased HK$555m or 3%, compared to 2011.

Salaries and wages included termination benefits in 2012 of HK$615m in several countries across the region, compared with HK$28m in 2011, as part of the ongoing strategic review of our business and support functions. This has resulted in a net reduction of more than 6,400 staff numbers since the second half of 2011.  

Excluding termination benefits, wages and salaries were marginally lower as reduced staff numbers were offset by wage inflation across the region, as well as business growth including branch expansion in mainland China and Malaysia. Performance-related pay increased marginally, as higher variable pay for GB&M in line with performance was offset by lower share-based payment expenses.

9. General and administrative expenses

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Premises and equipment
- Rental expenses	1,623		1,507
- Amortisation of prepaid operating lease payments	9		9
- Other premises and equipment	1,787		1,702
	3,419		3,218
Marketing and advertising expenses	1,793		1,789
Other administrative expenses	6,385		6,328
	11,597		11,335

General and administrative expenses increased by HK$262m or 2% in 2012.

Premises and equipment expenses included restructuring costs of HK$175m, relating to the sale of the RBWM business in Thailand, the sale of the Global Private Banking business in Japan and the implementation of organisational effectiveness programmes in a number of countries. Excluding restructuring costs, premises and equipment expenses increased slightly, mainly driven by higher property maintenance and rental charges in Hong Kong.

Other administrative expenses rose marginally by HK$57m or 1%. Intercompany expenses were higher in 2012, notably in Hong Kong from higher processing costs consistent with higher transaction volumes, and an increase in IT costs, offset by lower expenditure on legal and business integration costs in India.

10. Share of profit in associates and joint ventures

Share of profit in associates and joint ventures principally included the group's share of post-tax profits from Bank of Communications and Industrial Bank.

On 6 March 2012, Industrial Bank announced a proposal for the private placement of additional share capital. As at 30 June 2012, the proposal is subject to regulatory approvals and, if it proceeds, will dilute our interest in Industrial Bank and lead to a reassessment of the current accounting treatment of the investment.

11. Tax expense

The tax expense in the consolidated income statement comprises:

	Half-year ended 30 June 2012		Half-year ended 30 June 2011
	HK$m		HK$m
Current income tax
- Hong Kong profits tax	3,943		3,363
- Overseas taxation	5,857		4,605
Deferred taxation	(376)		929
	9,424		8,897

The effective tax rate for the first half of 2012 was 16.3%, compared with 19.2% for the first half of 2011. As explained in note 21, the tax expense has been reduced by the implementation of Hong Kong Accounting Standard ('HKAS') 12.

12. Dividends

	Half-year ended 30 June 2012				Half-year ended 30 June 2011
	HK$				HK$
	per share		HK$m		per share		HK$m
Ordinary dividends paid
- fourth interim dividend in respect of the previous financial year approved and paid during the year	0.83		10,000		1.33		12,000
- first interim dividend paid	0.58		7,500		0.78		7,000
	1.41		17,500		2.11		19,000

The Directors have declared a second interim dividend in respect of the half-year ended 30 June 2012 of HK$7,500m (HK$0.41 per ordinary share).

13. Loans and advances to customers

	At 30 June 2012		At 31 December 2011
	HK$m		HK$m
Gross loans and advances to customers	2,233,139		2,142,172
Impairment allowances:
- Individually assessed	(7,137)		(6,894)
- Collectively assessed	(4,381)		(4,407)
	(11,518)		(11,301)
Net loans and advances to customers	2,221,621		2,130,871
Allowances as a percentage of gross loans and advances to customers:
- Individually assessed	0.32%		0.32%
- Collectively assessed	0.20%		0.21%
Total allowances	0.52%		0.53%

14. Impairment allowances against loans and advances to customers

	Individually assessed allowances		Collectively assessed allowances		Total
	HK$m		HK$m		HK$m
At 1 January 2012	6,894		4,407		11,301
Amounts written off	(477)		(1,785)		(2,262)
Recoveries of loans and advances written off in previous years	86		618		704
Net charge to income statement	715		1,185		1,900
Unwinding of discount of loan impairment	(32)		(56)		(88)
Exchange and other adjustments	(49)		12		(37)
At 30 June 2012	7,137		4,381		11,518

15. Analysis of loans and advances to customers based on categories used by the HSBC Group

The following analysis of loans and advances to customers is based on categories used by the HSBC Group, including The Hongkong and Shanghai Banking Corporation Limited and its subsidiaries, for risk management purposes.

			Rest of
	Hong Kong		Asia-Pacific		Total
At 30 June 2012	HK$m		HK$m		HK$m
Residential mortgages	376,414		259,023		635,437
Credit card advances	40,127		31,841		71,968
Other personal	50,465		39,595		90,060
Total personal	467,006		330,459		797,465
Commercial, industrial and international trade	324,724		378,972		703,696
Commercial real estate	162,845		73,985		236,830
Other property-related lending	132,469		53,098		185,567
Government	22,541		3,024		25,565
Other commercial	99,303		128,046		227,349
Total corporate and commercial	741,882		637,125		1,379,007
Non-bank financial institutions	26,473		27,557		54,030
Settlement accounts	2,029		608		2,637
Total financial	28,502		28,165		56,667
Gross loans and advances to customers	1,237,390		995,749		2,233,139
Individually assessed impairment allowances	(1,870)		(5,267)		(7,137)
Collectively assessed impairment allowances	(2,191)		(2,190)		(4,381)
Net loans and advances to customers	1,233,329		988,292		2,221,621

Loans and advances to customers in Hong Kong increased by HK$51bn, or 4%, during the first half of 2012, largely through growth in corporate and commercial lending of HK$34bn, reflecting higher demand primarily in manufacturing and international trade. Residential mortgage lending increased by HK$16bn as the property market remained active.

In the Rest of Asia-Pacific, loans and advances to customers increased by HK$40bn, or 4%, including foreign exchange translation effects of HK$0.2bn. The underlying increase was mainly from growth in corporate and commercial lending of HK$24bn from business growth in mainland China, India, Indonesia, Australia and Singapore. Residential mortgage lending increased by HK$9bn, notably in Singapore, Malaysia, mainland China and Australia.

	Hong Kong		Rest of Asia-Pacific		Total
At 31 December 2011	HK$m		HK$m		HK$m
Residential mortgages	360,368		247,767		608,135
Credit card advances	41,200		31,849		73,049
Other personal	51,339		38,093		89,432
Total personal	452,907		317,709		770,616
Commercial, industrial and international trade	295,729		365,579		661,308
Commercial real estate	158,222		74,041		232,263
Other property-related lending	134,910		49,659		184,569
Government	22,669		7,471		30,140
Other commercial	96,398		117,205		213,603
Total corporate and commercial	707,928		613,955		1,321,883
Non-bank financial institutions	24,799		23,300		48,099
Settlement accounts	1,236		338		1,574
Total financial	26,035		23,638		49,673
Gross loans and advances to customers	1,186,870		955,302		2,142,172
Individually assessed impairment allowances	(2,174)		(4,720)		(6,894)
Collectively assessed impairment allowances	(2,254)		(2,153)		(4,407)
Net loans and advances to customers	1,182,442		948,429		2,130,871

16.  Other assets

	At		At
	30 June		31 December
	2012		2011
	HK$m		HK$m
Current taxation recoverable	507		676
Assets held for sale	5,482		8,117
Prepayments and accrued income	4,252		3,135
Accrued interest receivable	14,635		14,524
Acceptances and endorsements	36,077		31,750
Other accounts	42,422		42,002
	103,375		100,204

17. Customer accounts

	At 30 June 2012		At 31 December 2011
	HK$m		HK$m
Current accounts	753,885		696,435
Savings accounts	1,875,638		1,826,893
Other deposit accounts	957,378		1,041,673
	3,586,901		3,565,001

Customer accounts increased by HK$22bn during the first half of 2012.

In Hong Kong, customer accounts increased by HK$30bn and in the Rest of Asia-Pacific, customer accounts decreased by HK$8bn compared with 31 December 2011. 

The group's advances-to-deposits ratio increased to 61.9% at 30 June 2012, from 59.8% at 31 December 2011, as more of the commercial surplus was deployed to customer lending.

18.  Other liabilities and provisions

	At		At
	30 June		31 December
	2012		2011
	HK$m		HK$m
Accruals and deferred income	19,489		23,286
Liabilities held for sale	9,572		21,970
Provisions for liabilities and charges	2,439		1,686
Acceptances and endorsements	36,077		31,750
Share based payment liability to HSBC Holdings plc	2,522		2,729
Other liabilities	41,078		26,893
	111,177		108,314

19. Contingent liabilities and commitments

	At  30 June 2012		At 31 December 2011
	HK$m		HK$m
Contract amount:
Contingent liabilities	213,447		192,787
Commitments	1,545,687		1,472,638
	1,759,134		1,665,425

 20. Fair value of financial instruments

The following table provides an analysis of the basis for the valuation of financial assets and financial liabilities measured at fair value in the consolidated financial statements:

			Valuation techniques
	Quoted market price Level 1		using observable inputs Level 2		with significant non- observable inputs Level 3		Third party total		Amounts with HSBC entities		Total
At 30 June 2012	HK$m		HK$m		HK$m		HK$m		HK$m		HK$m
Assets
Trading assets	274,812		169,439		734		444,985		-		444,985
Financial assets designated at fair value	40,196		18,828		2,969		61,993		-		61,993
Derivatives	4,580		291,079		1,355		297,014		88,552		385,566
Available-for-sale investments	610,831		407,120		14,999		1,032,950		-		1,032,950
Liabilities
Trading liabilities	70,420		114,396		12,315		197,131		-		197,131
Financial liabilities designated at fair value	-		41,171		-		41,171		-		41,171
Derivatives	6,585		283,821		1,037		291,443		94,189		385,632
At 31 December 2011
Assets
Trading assets	306,444		140,294		1,230		447,968		-		447,968
Financial assets designated at fair value	33,552		20,637		3,481		57,670		-		57,670
Derivatives	3,146		286,765		1,408		291,319		85,977		377,296
Available-for-sale investments	544,954		459,528		17,085		1,021,567		-		1,021,567
Liabilities
Trading liabilities	53,214		103,703		14,514		171,431		-		171,431
Financial liabilities designated at fair value	-		40,392		-		40,392		-		40,392
Derivatives	6,117		285,427		1,045		292,589		90,663		383,252

During the first half of 2012, the amounts of financial assets transferred in and out of Level 3 in the fair value hierarchy were HK$433m and HK$2,860m respectively (Second half 2011: HK$1,174m and HK$2,842m). The amounts of financial liabilities transferred in and out of Level 3 were HK$315m and HK$3,563m respectively (Second half 2011: HK$399m and HK$5,293m). There were no significant transfers between Level 1 and Level 2 in the period.

 21. Accounting policies

The accounting policies and methods of computation adopted by the group for this news release are consistent with those described on pages 36 to 57 of the 2011 Annual Report and Accounts. A number of new and revised Hong Kong Financial Reporting Standards have become effective in 2012. None has a material impact on the group.

Following the amendment to HKAS 12 issued by the Hong Kong Institute of Certified Public Accountants in December 2010, deferred taxes on investment property, carried under the fair value model in HKAS 40, will be measured on the presumption that an investment property is recovered entirely through sale. The presumption is rebutted if the investment property is held within a business whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. This amendment is effective in 2012.

The application of the amendment to HKAS 12 does not have a material effect on the group's consolidated financial statements and, consequently, has been applied prospectively. Accordingly, the tax expense for the six months ended 30 June 2012 has been reduced by a write back of HK$667m and the share of profit in associates and joint ventures has been increased by a write back of HK$220m, both in respect of prior periods.

22. Additional information

Additional financial information, including the group's capital ratios, relating to the period ended 30 June 2012, prepared in accordance with the Banking (Disclosure) Rules made under section 60A of the Banking Ordinance, will be made available on our website: www.hsbc.com.hk . A further press release will be issued to announce the availability of this information.

23. Statutory accounts

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

Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2011 which have been delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 27 February 2012. The Annual Report and Accounts for the year ended 31 December 2011, which include the statutory accounts, can be obtained on request from Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong, and may be viewed on our website: www.hsbc.com.hk .

24.Ultimate holding company

The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc.

25. Post balance sheet events

Further to the announcement of 7 March 2012, Hang Seng Bank Limited completed, on 9 July 2012, the sale of its wholly owned subsidiary, Hang Seng General Insurance (Hong Kong) Company Limited. The disposal gain of about HK$350m will be recognised in the second half of 2012.

On 26 July 2012, The Hongkong and Shanghai Banking Corporation Limited announced that it had entered into an agreement to sell its 44% shareholding in Global Payments Asia-Pacific Limited (GPAP), a card processing joint venture, to partner Global Payments Inc., for a consideration of US$242m in cash. The transaction, which is subject to regulatory approvals and the agreement of the terms of ancillary commercial contracts, is expected to complete during the second half of 2012.

26. Statement of compliance

The information in this news release for the half-year ended 30 June 2012 complies with HKAS 34, Interim Financial Reporting.

Media enquiries to:      Gareth Hewett                    Telephone no: + 852 2822 4929

                                       Helen Lam                          Telephone no: + 852 2822 4992

                                       Margrit Chang                    Telephone no: + 852 2822 4983

 

END

 

 

IR UKSBRUNABUAR