FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of July 2006
HSBC Holdings plc
42nd Floor, 8 Canada
Square, London E14 5HQ, England
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F).
Form 20-F X Form 40-F ......
(Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934).
Yes....... No X
(If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82- ..............)
HANG SENG BANK LIMITED
2006 INTERIM RESULTS - HIGHLIGHTS
-Operating profit excluding loan impairment charges and other credit risk
provisions up 7.6 per cent to HK$6,387 million (HK$5,934 million for the
first half of 2005).
-Operating profit up 12.8 per cent to HK$6,353 million (HK$5,632 million
for the first half of 2005).
-Pre-tax profit up 6.4 per cent to HK$7,513 million (HK$7,062 million for
the first half of 2005).
-Attributable profit up 2.4 per cent to HK$6,190 million (HK$6,045
million for the first half of 2005).
-Return on average shareholders' funds of 29.0 per cent (29.7 per cent
for the first half of 2005).
-Assets up 8.2 per cent to HK$628.3 billion (HK$580.8 billion at 31
December 2005).
-Earnings per share up 2.5 per cent to HK$3.24 (HK$3.16 per share for the
first half of 2005).
-Second interim dividend of HK$1.10 per share; total dividends of HK$2.20
per share for the first half of 2006 (HK$2.20 per share for the first half
of 2005).
-Total capital ratio of 14.2 per cent (12.8 per cent at 31 December
2005); tier 1 capital ratio of 11.0 per cent (10.4 per cent at 31 December
2005).
-Cost efficiency ratio of 26.8 per cent (26.7 per cent for the first half
of 2005).
Within this document, the Hong Kong Special Administrative Region of the
People's Republic of China has been referred to as 'Hong Kong'.
Comment by Michael Smith, Chairman
"Hang Seng made solid progress in the first half of 2006, supported by a buoyant
local economy. Steps to expand and diversify our customer base led to increases
in total deposits and loan balances. Together with the effects of rising
interest rates, these increases underpinned growth in net interest income.
"We expanded our wealth management and commercial banking businesses, with good
growth in investment services and insurance, trading profit and trade finance.
"Operating profit excluding loan impairment charges and other credit risk
provisions was HK$6,387 million, an increase of HK$453 million, or 7.6 per cent,
compared with the first half of 2005. Operating profit was up 12.8 per cent at
HK$6,353 million, reflecting the 18.1 per cent growth in total operating income
and the 88.7 per cent reduction in loan impairment charges. Investment in
business expansion saw operating expenses rise by 8.4 per cent to HK$2,338
million.
"Attributable profit after taxation and minority interests was HK$6,190 million,
an increase of 2.4 per cent compared with the same period last year, which
benefited from a large property revaluation surplus.
"Personal Financial Services' operating profit excluding loan impairment charges
rose by 7.0 per cent to HK$3,960 million, reflecting a 23.9 per cent increase in
wealth management income to HK$2,211 million, which was driven by strong growth
in our securities, life insurance and private banking businesses.
"Further efforts to deepen relationships with customers saw Commercial Banking's
operating profit excluding loan impairment charges increase by 21.8 per cent to
HK$933 million. Total loans were up 9.9 per cent compared with the end of 2005,
supported by good growth in commercial loans and trade finance. Net fees and
commissions were up 21.2 per cent.
"Corporate Banking's operating profit excluding loan impairment charges fell by
8.2 per cent to HK$257 million as high levels of liquidity and market
competition among lenders continued to exert downward pressure on pricing.
"Rising interest rates further compressed spreads on treasury balance sheet
management portfolios. This outweighed the encouraging 201.6 per cent growth in
net trading income with Treasury recording a 39.0 per cent decline in operating
profit excluding loan impairment charges to HK$444 million.
"We moved forward with our strategy to grow our mainland China business. We
invested in our customer services by hiring around 100 new staff. We also opened
a new Shanghai sub-branch, bringing our total number of outlets to 13. Mainland
lending and deposits rose by 21.7 per cent and 11.2 per cent respectively.
Profit from our investment in Industrial Bank was up 10.0 per cent at HK$209
million.
"The outlook for the rest of the year remains broadly positive with interest
rate trends likely to have the greatest influence on economic performance.
Sustained strong growth on the Mainland should continue to benefit Hong Kong's
exports and re-exports, although a slight decline in trade activity is likely.
Higher interest rates may restrain domestic demand slightly, particularly in the
property sector, but consumption will be supported by improvement in the labour
market.
"Competition in the banking sector will remain keen. We will further build our
capabilities in areas such as wealth management, small and medium-sized
enterprise services and consumer lending that offer good growth prospects. We
will continue to expand our mainland business and invest in our staff, brand and
delivery channels."
Results summary
Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the
group') reported an unaudited profit attributable to shareholders of HK$6,190
million for the first half of 2006, an increase of 2.4 per cent over the first
half of 2005. Earnings per share were up 2.5 per cent to HK$3.24. Compared with
the second half of 2005, attributable profit rose by 16.9 per cent.
Operating income
Total operating income rose by HK$1,897 million, or 18.1 per cent, to HK$12,396
million. This reflects encouraging growth in net interest income, trading profit
and investment services and insurance income, underpinned by the good economic
environment and the buoyant investment market.
Net interest income rose by HK$1,111 million, or 21.1 per cent, over the first
half of 2005, excluding HK$847 million in net interest expenses on the trading
and fair value portfolios. Including these portfolios, net interest income rose
by HK$196 million, or 3.7 per cent. The spreads on Best Lending Rate ('BLR')
-based loans improved, benefiting from a wider BLR/HIBOR gap. The rise in market
interest rates enhanced the deposit spreads and the contribution from net free
funds. These outweighed the further compression of treasury balance sheet
management portfolio yields and the continuing pressure on mortgage pricing and
corporate loan margins. Average interest earning assets (excluding the trading
and fair value portfolios) grew by 8.7 per cent and net interest margin improved
by 24 basis points to 2.37 per cent.
Securities broking and related services and private banking investment services
benefited from the buoyant equities market, reporting growth in fees and
commissions of 88.4 per cent and 68.4 per cent respectively. These increases,
together with the growth in card services income, contributed significantly to
the rise of HK$205 million, or 13.0 per cent, in net fees and commissions.
Net trading income comprises trading profits of HK$659 million, which rose by
69.4 per cent over the same period last year. Foreign exchange income rose by
120.2 per cent, attributable to improvement in trading results, increased
customer flows and spreads earned on foreign exchange linked structured
products. After deducting HK$879 million in net interest expenses, which rose
significantly due to the growth in structured deposits classified as trading
liabilities, a net trading loss of HK$220 million was reported.
Net earned insurance premiums increased by HK$1,226 million, or 44.9 per cent,
compared with the first half of 2005, reflecting strong growth in life insurance
business. Riding on the successful launch of the Monthly Income Retirement Plan,
Hang Seng Life Limited continued to gain market share in terms of new annualised
premiums. The investment return on the life insurance funds, reported under net
income from financial instruments designated at fair value, also improved under
the favourable investment environment.
Net operating income before loan impairment charges and other credit provisions
increased by HK$635 million, or 7.8 per cent.
Operating expenses rose by HK$182 million, or 8.4 per cent, to HK$2,338 million,
mainly due to salary increases and costs associated with hiring new staff for
business expansion.
Operating profit
Operating profit excluding loan impairment charges rose by HK$453 million, or
7.6 per cent, compared with the first half of 2005. Taking into account the
substantial reduction of 88.7 per cent in loan impairment charges to HK$34
million, operating profit recorded strong growth of HK$721 million, or 12.8 per
cent, to reach HK$6,353 million. Compared with the second half of 2005,
operating profit excluding loan impairment charges rose by 11.0 per cent and
operating profit increased by 16.9 per cent.
Attributable profit
Pre-tax profit was HK$7,513 million, an increase of 6.4 per cent over the same
period last year. This figure takes into account profit on disposal of fixed
assets and financial investments (up 64.9 per cent), net surplus on property
revaluation (down 63.7 per cent) and share of profits from associates (up 30.7
per cent). Attributable profit after taxation and minority interests rose by
HK$145 million, or 2.4 per cent, to HK$6,190 million. Compared with the second
half of 2005, pre-tax profit and attributable profit rose by 19.3 per cent and
16.9 per cent respectively.
Balance sheet and key ratios
Total assets grew by HK$47.5 billion, or 8.2 per cent, during the first half of
2006 to HK$628.3 billion. This was driven by the encouraging growth of 5.4 per
cent in customer deposits and certificates of deposit and other instruments in
issue and a 22.2 per cent rise in life insurance funds. Customer advances rose
by 2.2 per cent. In line with the bank's strategy to diversify its loan
portfolio, good growth was recorded in trade finance, commercial banking
advances, mortgages and personal loans, outweighing declines in mortgages under
the suspended Government Home Ownership Scheme ('GHOS') and lending to large
corporations. The increase in customer deposits also funded the growth in
interbank placing and money market instruments. At 30 June 2006, the
advances-to-deposits ratio was 52.8 per cent, compared with 54.4 per cent at the
end of 2005.
Shareholders' funds (excluding proposed dividends) rose by HK$2,677 million, or
6.9 per cent, to HK$41,615 million at 30 June 2006. This reflects the HK$2,575
million growth in retained profits, including the realisation of property
revaluation reserves on properties disposed of during the first half of this
year.
The return on average total assets was 2.1 per cent, compared with 2.2 per cent
in the first half of 2005. The return on average shareholders' funds was 29.0
per cent (29.7 per cent in the first half of 2005).
The total capital ratio strengthened to 14.2 per cent at 30 June 2006, up from
12.8 per cent at the end of 2005. The tier 1 ratio rose from 10.4 per cent to
11.0 per cent. The growth in capital base reflects the increase in retained
profits, which included the realisation of property revaluation reserves on
properties disposed of during the period, and a US$450 million subordinated
notes issue.
The bank maintained a strong liquidity position. The average liquidity ratio for
the first half of 2006 was 50.9 per cent (calculated in accordance with the
Fourth Schedule of the Hong Kong Banking Ordinance), compared with an average
liquidity ratio of 43.6 per cent for the same period last year.
The cost efficiency ratio for the first half of 2006 was 26.8 per cent, compared
with 26.7 per cent for the same period in 2005.
Dividends
The Directors have declared a second interim dividend of HK$1.10 per share,
which will be payable on 31 August 2006 to shareholders on the register of
shareholders as of 23 August 2006. Together with the first interim dividend of
HK$1.10 per share, the total distribution for the first half of 2006 will amount
to HK$2.20 per share, the same as that in the first half of 2005.
Customer group performance
Personal Inter-
Financial Commercial Corporate segment
Figures in HK$m Services Banking Banking Treasury Other elimination Total
Half-year ended
30Jun06
Net interest income 3,543 920 293 175 563 881 6,375
Net fee income 1,334 394 40 (13) 27 - 1,782
Net trading income 252 70 4 368 - (914) (220)
Net income from
financial instruments
designated at fair
value 50 - - (1) - 33 82
Dividend income 3 - - - 28 - 31
Net earned insurance
premiums 3,872 81 1 - - - 3,954
Other operating income 273 15 - - 104 - 392
Inter-segment income - - - - 191 (191) -
Total operating income 9,327 1,480 338 529 913 (191) 12,396
Net insurance claims
incurred and
movement in
policyholder
liabilities (3,641) (30) - - - - (3,671)
Net operating income
before loan
impairment (charges)/
releases and other
credit risk
provisions 5,686 1,450 338 529 913 (191) 8,725
Loan impairment
(charges)/ releases
and other credit
risk provisions (74) 26 14 - - - (34)
Net operating income 5,612 1,476 352 529 913 (191) 8,691
Total operating
expenses^ (1,561) (498) (78) (81) (120) - (2,338)
Inter-segment expenses (165) (19) (3) (4) - 191 -
Operating profit 3,886 959 271 444 793 - 6,353
Profit on disposal of
fixed assets and
financial investments - - - - 574 - 574
Net surplus on property
revaluation - - - - 318 - 318
Share of profits from
associates 11 137 - 62 58 - 268
Profit before tax 3,897 1,096 271 506 1,743 - 7,513
Share of pre-tax
profit 51.9% 14.6% 3.6% 6.7% 23.2% - 100.0%
Operating profit
excluding inter-
segment
transactions 4,051 978 274 448 602 - 6,353
Operating profit
excluding loan
impairment (charges)
/releases and other
credit risk
provisions 3,960 933 257 444 793 - 6,387
^ Depreciation/
amortisation
included in total
operating expenses (51) (4) (2) (1) (96) - (154)
At 30Jun06
Total assets 160,551 59,758 72,230 305,126 30,624 - 628,289
Total liabilities 399,620 71,670 39,398 48,950 23,653 - 583,291
Investments in
associates 131 1,649 - 745 742 - 3,267
Capital expenditure
incurred during
the period 69 10 3 3 57 - 142
Personal Inter-
Financial Commercial Corporate segment
Figures in HK$m Services Banking Banking Treasury Other elimination Total
Half-year ended
30Jun05
Net interest income 3,363 734 302 686 257 (78) 5,264
Net fee income 1,196 325 39 (11) 28 - 1,577
Net trading income 173 60 3 122 - 75 433
Net income from
financial
instruments
designated at
fair value 31 - - 14 2 3 50
Dividend income 3 1 - - 33 - 37
Net earned insurance
premiums 2,619 109 - - - - 2,728
Other operating
income 293 13 2 - 102 - 410
Inter-segment income - - - - 154 (154) -
Total operating
income 7,678 1,242 346 811 576 (154) 10,499
Net insurance claims
incurred and
movement in
policyholder
liabilities (2,387) (22) - - - - (2,409)
Net operating income
before loan
impairment (charges)/
releases and other
credit risk
provisions 5,291 1,220 346 811 576 (154) 8,090
Loan impairment
(charges)/ releases
and other credit
risk provisions 260 (453) (109) - - - (302)
Net operating income 5,551 767 237 811 576 (154) 7,788
Total operating
expenses^ (1,468) (429) (63) (80) (116) - (2,156)
Inter-segment
expenses (123) (25) (3) (3) - 154 -
Operating profit 3,960 313 171 728 460 - 5,632
Profit on disposal
of fixed assets
and financial
investments - - - - 348 - 348
Net surplus on
property
revaluation - - - - 877 - 877
Share of profits
from
associates 10 124 - 56 15 - 205
Profit before tax 3,970 437 171 784 1,700 - 7,062
Share of pre-tax
profit 56.2% 6.2% 2.4% 11.1% 24.1% - 100.0%
Operating profit
excluding inter-
segment
transactions 4,083 338 174 731 306 - 5,632
Operating profit
excluding loan
impairment (charges)/
releases and other
credit risk
provisions 3,700 766 280 728 460 - 5,934
^ Depreciation/
amortisation
included in
total operating
expenses (50) (9) (1) (1) (78) - (139)
At 30Jun05
Total assets 146,398 54,865 80,182 267,687 23,101 - 572,233
Total liabilities 353,402 75,517 29,628 61,214 10,041 - 529,802
Investments in
associates 96 1,210 - 546 597 - 2,449
Capital expenditure
incurred during
the period 63 13 5 1 15 - 97
Personal Inter-
Financial Commercial Corporate segment
Figures in HK$m Services Banking Banking Treasury Other elimination Total
Half-year ended
31Dec05
Net interest income 3,737 853 310 172 257 475 5,804
Net fee income 905 341 40 (10) 21 - 1,297
Net trading income 194 74 3 381 - (506) 146
Net income from
financial
instruments
designated at fair
value (64) - - (9) (6) 31 (48)
Dividend income 2 4 - - 17 - 23
Net earned insurance
premiums 5,023 114 - - - - 5,137
Other operating
income 269 12 2 - 105 - 388
Inter-segment income - - - - 154 (154) -
Total operating
income 10,066 1,398 355 534 548 (154) 12,747
Net insurance claims
incurred and
movement in
policyholder
liabilities (4,577) (28) - - - - (4,605)
Net operating income
before loan
impairment (charges)/
releases and other
credit risk
provisions 5,489 1,370 355 534 548 (154) 8,142
Loan impairment
(charges)/ releases
and other credit
risk provisions (28) (350) 62 - - - (316)
Net operating income 5,461 1,020 417 534 548 (154) 7,826
Total operating
expenses^ (1,618) (474) (79) (77) (142) - (2,390)
Inter-segment
expenses (135) (15) (2) (2) - 154 -
Operating profit 3,708 531 336 455 406 - 5,436
Profit on disposal
of fixed assets
and financial
investments - - - (217) 346 - 129
Net surplus on
property
revaluation - - - - 436 - 436
Share of profits from
associates 8 110 - 50 127 - 295
Profit before tax 3,716 641 336 288 1,315 - 6,296
Share of pre-tax
profit 59.0% 10.2% 5.3% 4.6% 20.9% - 100.0%
Operating profit
excluding inter-
segment
transactions 3,843 546 338 457 252 - 5,436
Operating profit
excluding loan
impairment (charges)/
releases and other
credit risk
provisions 3,736 881 274 455 406 - 5,752
^ Depreciation/
amortisation
included in
total operating
expenses (53) (4) (2) (1) (90) - (150)
At 31Dec05
Total assets 152,086 54,319 77,514 266,645 30,256 - 580,820
Total liabilities 372,941 77,249 31,672 33,541 21,687 - 537,090
Investments in
associates 116 1,454 - 657 702 - 2,929
Capital expenditure
incurred during
the period 44 7 2 1 80 - 134
Personal Financial Services ('PFS') reported an operating profit excluding loan
impairment charges of HK$3,960 million, an increase of 7.0 per cent over the
first half of 2005, driven by the encouraging growth of investment services and
insurance businesses. Net interest income rose by 5.4 per cent. The spread of
BLR-based lending benefited from a wider BLR/HIBOR spread despite continued
pressure on mortgage pricing. While average customer deposits recorded
encouraging growth of 9.1 per cent over the same period last year, there has
been a significant shift of Hong Kong dollar savings to time deposits, thus
lifting the overall funding cost for PFS. Fees and commissions recorded strong
growth of 11.5 per cent, contributed by securities broking and related services,
private banking and card services. The launch of more diversified structured
investment and deposit products boosted net trading income, which grew by 45.7
per cent. Life insurance maintained its strong growth momentum and reported a
28.4 per cent rise in income. At the pre-tax profit level, PFS recorded a fall
of 1.8 per cent compared with the same period last year which benefited from
large releases in loan impairment allowances for mortgages and personal loans.
Wealth management remained the growth driver of PFS's performance. PFS offers a
highly diversified range of investment services and products through a wide
distribution network and an efficient and convenient e-banking platform. PFS's
Investment Supermart offers over 400 investment funds. Benefiting from the
buoyant stock market, income from securities broking and related services rose
by 83.5 per cent and trading volume grew 101.3 per cent. Securities broking
expanded its customer base and gained market share through promotional campaigns
and special offers to acquire new customers and encourage active trading. Equity
funds and high-yield fixed income funds built on the previous success of capital
guaranteed funds and achieved record sales. Various structured investment and
deposit products were developed to capture movements in the equity, foreign
exchange and commodity markets to enhance investment returns for customers.
Private banking further strengthened its relationship management and advisory
team, and continued to deliver outstanding performance, with 42.1 per cent
growth in total operating income.
PFS achieved 4.1 per cent growth in customer advances and further diversified
its loan portfolio. During the first half of 2006, residential property prices
remained stable but market activity slowed down. With the widening of the BLR/
HIBOR gap, major market players started to launch price promotion campaigns to
compete for market share. The bank achieved growth of 1.8 per cent in loan
balances and gained market share by offering a diverse range of products,
adopting a flexible pricing strategy and launching joint offers with developers.
Personal loans grew by 16.8 per cent following the introduction of new loan
products and the streamlining of credit approval procedures. Credit card
advances fell by 1.9 per cent over the previous year-end due to the repayment of
tax bill payment balances, but recorded a growth of 15.2 per cent year-on-year.
Cards in issue reached 1.32 million, a rise of 3.6 per cent over the end of
2005, the result of continuous acquisition efforts and the launch of VISA
Infinite, an invitation-only credit card for prestigious customers, and alpha
card, a debit card for young people. Boosted by the Cash Dollar Reward loyalty
scheme and joint campaigns with selected merchants, card spending rose by 9.2
per cent, compared with the same period last year.
PFS's strategy in mainland China is to focus on providing wealth management
services to the higher end segment. Initiatives in the first half of 2006
include the launch of a series of market-linked structured deposit products,
which were well received by customers. The bank's mainland business strategy is
being implemented through a growing branch and sub-branch network in major
cities in the Pearl River Delta and the Yangtze River Delta.
Commercial Banking ('CMB') achieved an encouraging rise of 21.8 per cent in
operating profit excluding loan impairment charges, driven by strong growth in
trade finance and other advances and the development of corporate wealth
management business. Taking into account the release in loan impairment
allowances, pre-tax profit reported an increase of 150.8 per cent over the first
half of 2005.
Net interest income reported strong growth of 25.3 per cent, attributable to a
9.9 per cent increase in customer advances, with strong growth of 17.8 per cent
recorded for trade finance. The widening of the BLR/HIBOR gap also enhanced the
interest spread of BLR-based lending, including mortgages, trade advances and
SME loans. The spread on current account deposits also benefited from the rise
in Hong Kong dollar interest rates. As a key initiative to expand non-fund
income, CMB established a corporate wealth management team to look after the
investment and treasury needs of commercial banking customers. Payment and cash
management also saw solid growth. These resulted in 21.2 per cent growth in net
fees and commissions and an increase of 16.7 per cent in net trading income.
CMB also continued to strengthen its relationships with middle-market
enterprises ('MME'). Later this year, the bank will become the first foreign
bank to establish a branch in Dongguan, China, putting CMB in a good position to
serve the Hong Kong and mainland financing needs of the large number of MME
customers that have business operations in this region.
To further enhance SME services, customer-focused solutions for specific
industries were developed. During the first half of 2006, two new business
banking centres were opened and the Business Partner Direct 24-hour manned
hotline service was launched.
Following further expansion of the bank's mainland network to a total of 13
outlets, CMB business on the Mainland reported strong growth of 53.2 per cent in
customer advances and expanded its trade services operations.
Corporate Banking ('CIB') reported an operating profit excluding loan impairment
charges of HK$257 million, a fall of 8.2 per cent compared with the first half
of 2005. Pre-tax profit, however, rose by 58.5 per cent to HK$271 million, with
a HK$14 million release in loan impairment allowances in the current period,
compared with a charge of HK$109 million in the same period last year.
Ample market liquidity and intense competition further drove down corporate
lending margins. In line with CIB's strategy to diversify away from low margin
lending, large corporate loans recorded a decline of 6.6 per cent for the first
half of 2006. Total operating income was on par with the same period in 2005, as
the small decline in net interest income was offset by an increase in net fee
income.
CIB has been active in financing the mainland China projects of Hong Kong-based
corporate customers and continued to expand its corporate customer base on the
Mainland.
Treasury's ('TRY') pre-tax profit was down by HK$278 million, or 35.5 per cent,
to HK$506 million. TRY made substantial efforts to grow its net trading income,
resulting in an increase of HK$246 million, or 201.6 per cent. This was achieved
by enhancing proprietary trading capabilities, expanding corporate treasury
services and further developing structured products for PFS and CMB customers.
This partially made up for the HK$511 million, or 74.5 per cent, fall in balance
sheet management and money market revenues as the portfolio yields were further
compressed by the continued rise in interest rates. With the lack of yield
enhancement opportunities under the flat yield curves environment, TRY is taking
a defensive balance sheet management position.
TRY expanded its operations on the Mainland using Shanghai as a hub to manage
the funding needs of all mainland branches and to structure investment products
for the mainland market.
Contents
The financial information in this news release is based on the unaudited
consolidated financial statements of Hang Seng Bank Limited ('the bank') and its
subsidiaries and associates ('the group') for the six months ended 30 June 2006.
......Highlights of Results
......Chairman's Comment
......Results Summary
......Customer Group Performance
......Contents
......Consolidated Income Statement
......Consolidated Balance Sheet
......Consolidated Statement of Changes in Equity
......Economic Profit
......Consolidated Cash Flow Statement
......Financial Review
...........Net interest income
...........Net fee income
...........Net trading income
...........Net income from financial instruments designated at fair value
...........Other operating income
...........Analysis of income from wealth management businesses
...........Loan impairment charges and other credit risk provisions
...........Operating expenses
...........Profit on disposal of fixed assets and financial investments
...........Tax expenses
...........Earnings per share
...........Dividends per share
...........Segmental analysis
...........Analysis of assets and liabilities by remaining maturity
...........Cash and balances with banks and other financial institutions
...........Placings with and advances to banks and other financial institutions
...........Trading assets
...........Financial assets designated at fair value
...........Advances to customers
...........Loan impairment allowances against advances to customers
...........Impaired advances and allowances
...........Overdue advances
...........Rescheduled advances
...........Segmental analysis of advances to customers by geographical area
...........Gross advances to customers by industry sector
...........Financial investments
...........Amounts due from/to immediate holding company and fellow subsidiary companies
...........Investments in associates
...........Intangible assets
...........Other assets
...........Current, savings and other deposit accounts
...........Certificates of deposit and other debt securities in issue
...........Trading liabilities
...........Other liabilities
...........Subordinated liabilities
...........Shareholders' funds
...........Capital resources management
...........Liquidity ratio
...........Reconciliation of cash flow statement
...........Contingent liabilities, commitments and derivatives
...........Cross-border claims
...........Accounting policies
...........Statement of compliance
...........Statutory accounts
...........Comparative figures
...........Property revaluation
...........Market risk
...........Foreign currency positions
...........Ultimate holding company
...........Register of shareholders
...........Proposed timetable for the remaining 2006 quarterly dividends
...........News release
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Interest income 13,334 7,900 11,129
Interest expense (6,959) (2,636) (5,325)
Net interest income 6,375 5,264 5,804
Fee income 2,078 1,792 1,602
Fee expense (296) (215) (305)
Net fee income 1,782 1,577 1,297
Trading income excluding net
interest expense 659 389 496
Net interest (expense)/income
on trading activities (879) 44 (350)
Net trading income (220) 433 146
Net income from financial
instruments designated at
fair value 82 50 (48)
Dividend income 31 37 23
Net earned insurance premiums 3,954 2,728 5,137
Other operating income 392 410 388
Total operating income 12,396 10,499 12,747
Net insurance claims incurred
and movement in policyholder
liabilities (3,671) (2,409) (4,605)
Net operating income before
loan impairment charges and
other credit risk provisions 8,725 8,090 8,142
Loan impairment charges and
other credit risk provisions (34) (302) (316)
Net operating income 8,691 7,788 7,826
Employee compensation and
benefits (1,277) (1,125) (1,156)
General and administrative
expenses (907) (892) (1,084)
Depreciation of premises,
plant and equipment (150) (135) (145)
Amortisation of intangible
assets (4) (4) (5)
Total operating expenses (2,338) (2,156) (2,390)
Operating profit 6,353 5,632 5,436
Profit on disposal of fixed
assets and financial investments 574 348 129
Net surplus on property
revaluation 318 877 436
Share of profits from
associates 268 205 295
Profit before tax 7,513 7,062 6,296
Tax expenses (1,202) (924) (871)
Profit for the period 6,311 6,138 5,425
Profit attributable to
minority interests (121) (93) (128)
Profit attributable to
shareholders 6,190 6,045 5,297
Dividends 4,206 4,206 5,736
Figures in HK$
Earnings per share 3.24 3.16 2.77
Dividends per share 2.20 2.20 3.00
At At At
Figures in HK$m 30Jun06 30Jun05 31Dec05
Assets
Cash and balances with banks and
other financial institutions 13,763 7,816 9,201
Placings with and advances to banks
and other financial institutions 82,563 65,982 69,286
Trading assets 14,543 13,812 12,600
Financial assets designated at fair
value 6,429 3,743 6,027
Derivative financial instruments 2,161 1,552 1,715
Advances to customers 266,505 260,512 260,680
Financial investments 211,955 192,951 189,904
Investments in associates 3,267 2,449 2,929
Investment properties 3,161 3,913 4,273
Premises, plant and equipment 6,553 6,559 6,750
Interest in leasehold land held for
own use under operating lease 587 601 594
Intangible assets 1,857 1,426 1,636
Other assets 14,945 10,917 15,225
628,289 572,233 580,820
Liabilities
Current, savings and other deposit
accounts 448,097 430,395 430,995
Deposits from banks 22,131 34,753 12,043
Trading liabilities 61,630 24,358 45,804
Financial liabilities designated at
fair value 950 995 967
Derivative financial instruments 2,256 1,857 1,792
Certificates of deposit and other
debt securities in issue 8,312 11,158 10,023
Other liabilities 10,821 10,380 14,138
Liabilities to customers under
investment contracts 544 542 561
Liabilities to customers under
insurance contracts 18,877 11,558 15,335
Deferred tax and current tax
liabilities 2,668 2,310 1,921
Subordinated liabilities 7,005 1,496 3,511
583,291 529,802 537,090
Capital resources
Minority interests 1,280 931 1,159
Share capital 9,559 9,559 9,559
Retained profits 28,627 26,222 26,052
Other reserves 3,429 3,616 3,327
Proposed dividends 2,103 2,103 3,633
Shareholders' funds 43,718 41,500 42,571
44,998 42,431 43,730
628,289 572,233 580,820
Attributable to shareholders
Share Other Retained Proposed Total Minority Total
Figures in HK$m capital reserves profits dividends interests equity
Balance at 01Jan06 9,559 3,327 26,052 3,633 42,571 1,159 43,730
Premises revaluation
reserve, net of tax - (21) 587 - 566 - 566
- Unrealised surplus on revaluation - 469 - - 469 - 469
- Depreciation charge on revaluation - (36) 36 - - - -
- Realisation of revaluation surplus
on disposal of premises - (454) 551 - 97 - 97
Available-for-sale investments,
net of tax - 54 - - 54 - 54
- Revaluation gains taken to equity - 175 - - 175 - 175
- Transfer to income statement on
disposal - (121) - - (121) - (121)
Cash flow hedges, net of tax - (49) - - (49) - (49)
- Revaluation losses taken to equity - (51) - - (51) - (51)
- Transfer to income statement - 2 - - 2 - 2
Exchange and other movements - 118 2 - 120 - 120
Actuarial gains on defined
benefit plans - - 2 - 2 - 2
Profit for the period - - 6,190 - 6,190 121 6,311
Dividends proposed during the period - - (4,206) 4,206 - - -
Dividends approved and declared
during the period - - - (5,736) (5,736) - (5,736)
Balance at 30Jun06 9,559 3,429 28,627 2,103 43,718 1,280 44,998
Attributable to shareholders
Share Other Retained Proposed Total Minority Total
Figures in HK$m capital reserves profits dividends interests equity
Balance at 01Jul05 9,559 3,616 26,222 2,103 41,500 931 42,431
Premises revaluation reserve, net
of tax - 156 81 - 237 - 237
- Unrealised surplus
on revaluation - 228 - - 228 - 228
- Depreciation charge
revaluation - (32) 32 - - - -
- Realisation of revaluation
surplus on disposal of premises - (40) 49 - 9 - 9
Available-for-sale investments,
net of tax - (310) - - (310) - (310)
- Revaluation losses taken to equity - (146) - - (146) - (146)
- Transfer to income statement on
disposal - (164) - - (164) - (164)
Cash flow hedges, net of tax - (227) - - (227) - (227)
- Revaluation losses taken to equity - (227) - - (227) - (227)
Exchange and other movements - 92 21 - 113 - 113
Actuarial gains on
defined benefit plans - - 167 - 167 - 167
Increase in subsidiary's
capital - - - - - 100 100
Profit for the period - - 5,297 - 5,297 128 5,425
Dividends proposed
during the period - - (5,736) 5,736 - - -
Dividends approved and declared
during the period - - - (4,206) (4,206) - (4,206)
Balance at 31Dec05 9,559 3,327 26,052 3,633 42,571 1,159 43,730
Attributable to shareholders
Share Other Retained Proposed Total Minority Total
Figures in HK$m capital reserves profits dividends interests equity
Balance at 01Jan05 9,559 4,413 24,389 3,633 41,994 838 42,832
Premises revaluation reserve,
net of tax - 609 26 - 635 - 635
- Unrealised surplus on
revaluation - 635 - - 635 - 635
- Depreciation charge on
revaluation - (26) 26 - - - -
Available-for-sale
investments, net of tax - (1,165) - - (1,165) - (1,165)
- Revaluation losses
taken to equity - (842) - - (842) - (842)
- Transfer to
income statement on disposal - (323) - - (323) - (323)
Cash flow hedges, net of tax - (265) - - (265) - (265)
- Revaluation
losses taken to equity - (265) - - (265) - (265)
Exchange and other movements - 24 (23) - 1 - 1
Actuarial losses on
defined benefit plans - - (9) - (9) - (9)
Profit for the period - - 6,045 - 6,045 93 6,138
Dividends proposed during the period - - (4,206) 4,206 - - -
Dividends approved and
declared during the period - - - (5,736) (5,736) - (5,736)
Balance at 30Jun05 9,559 3,616 26,222 2,103 41,500 931 42,431
Economic Profit
Economic profit is calculated from post-tax profit, adjusted for any surplus/
deficit arising from property revaluation and depreciation attributable to the
revaluation surplus, and takes into account the cost of capital invested by the
bank's shareholders. For the first half of 2006, economic profit was HK$3,825
million, an increase of HK$557 million, or 17.0 per cent, compared with the same
period last year. Post-tax profit, adjusted for the property revaluation surplus
(net of deferred tax) and depreciation attributable to the revaluation, rose by
HK$623 million. The cost of capital rose by HK$66 million, in line with growth
in invested capital. The economic profit figure demonstrates that the bank
continues to create value for its shareholders.
Half-year ended Half-year ended Half-year ended
30Jun06 30Jun05 31Dec05
HK$m % HK$m % HK$m %
Average invested capital 37,485 35,708 36,287
Return on invested capital^ 5,963 32.1 5,340 30.1 4,963 27.1
Cost of capital (2,138) (11.5) (2,072) (11.7) (2,147) (11.7)
Economic profit 3,825 20.6 3,268 18.4 2,816 15.4
^Return on invested capital is based on post-tax profit excluding any surplus/
deficit arising from property revaluation and depreciation attributable to the
revaluation surplus.
Consolidated Cash Flow Statement (unaudited)
Half-year Half-year
ended ended
Figures in HK$m 30Jun06 30Jun05
Net cash inflow from operating activities 38,080 10,716
Cash flows from investing activities
Dividends received from associates 20 55
Purchase of available-for-sale investments (60,007) (37,760)
Purchase of held-to-maturity
debt securities (216) (184)
Proceeds from sale or redemption of
available-for-sale investments 34,844 11,816
Proceeds from sale or redemption of
held-to-maturity debt securities 28 28
Purchase of fixed assets (143) (97)
Proceeds from sale of fixed assets 2,599 94
Interest received from
available-for-sale investments 2,408 2,190
Dividends received from
available-for-sale investments 31 35
Net cash outflow from
investing activities (20,436) (23,823)
Cash flows from financing activities
Dividends paid (5,736) (5,736)
Interest paid for subordinated
liabilities (108) __
Proceeds from subordinated liabilities,
including financial liabilities
designated at fair value 3,495 2,492
Net cash outflow from financing activities (2,349) (3,244)
Increase/(decrease) in cash
and cash equivalents 15,295 (16,351)
Cash and cash equivalents at 01Jan 65,513 67,051
Effect of foreign exchange rate changes 54 (235)
Cash and cash equivalents at 30Jun 80,862 50,465
Financial Review
Net interest income
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Net interest income 6,375 5,264 5,804
Average interest-earning assets 541,337 497,987 512,337
Net interest spread 1.82% 1.99% 1.87%
Net interest margin 2.37% 2.13% 2.25%
Net interest income was HK$6,375 million, an increase of HK$1,111 million, or
21.1 per cent, compared with the first half of 2005, on the basis of excluding
net interest expenses of HK$847 million on the trading and fair value
portfolios. Average interest-earning assets (excluding the trading and fair
value portfolios) grew by 8.7 per cent and net interest margin increased by 24
basis points to 2.37 per cent. Net interest spread fell by 17 basis points to
1.82 per cent, while contribution from net free funds rose by 41 basis points to
0.55 per cent.
The non-treasury portfolios performed well due to improvement in spreads on
BLR-based loans, which benefited from a wider BLR/HIBOR gap, and the widening of
deposit spreads, despite continued pressure on mortgage pricing and corporate
loan margins. However, the treasury balance sheet management portfolio yields
were further compressed under an environment of persistently rising interest
rates and flat yield curves.
Contribution from net free funds, including shareholders' funds and
non-interest-bearing deposits, increased significantly following the rise in
market interest rates. The exclusion of net interest expenses in the trading and
fair value portfolios also contributed to the increase in contribution of net
free funds.
Compared with the second half of 2005, net interest income rose by HK$571
million, or 9.8 per cent, on the basis of excluding net interest expenses in the
trading and fair value portfolios for both periods (HK$847 million in the first
half of this year and HK$340 million in the second half of last year). This was
mainly due to the 5.7 per cent increase in average interest-earning assets and
the increase in contribution from net free funds. The net interest margin rose
from 2.25 per cent to 2.37 per cent.
The average yield on the residential mortgage portfolio (excluding GHOS
mortgages and staff loans) was 230 basis points below BLR for the first half of
2006, compared with 223 basis points and 227 basis points below BLR for the
first and second halves of 2005 respectively. Mortgage incentive payments
totalled HK$44 million for the first half of 2006, compared with HK$55 million
and HK$42 million for the first and second halves of 2005 respectively.
Net interest income, including net interest expenses of the trading and fair
value portfolios, amounted to HK$5,528 million, a rise of HK$196 million, or 3.7
per cent, over the same period last year. Compared with the second half of 2005,
net interest income on this basis rose by HK$64 million, or 1.2 per cent.
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Net interest income as per
income statement 6,375 5,264 5,804
Interest income less expense
from:
- trading financial instruments (879) 44 (350)
- fair value financial instruments 32 24 10
Total net interest income 5,528 5,332 5,464
Net fee income
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
- Stockbroking and related services 439 233 260
- Retail investment products and
funds under management 521 575 341
- Insurance 59 77 39
- Account services 121 110 115
- Private banking 160 95 79
- Remittances 75 67 74
- Cards 403 334 371
- Credit facilities 52 51 66
- Trade services 176 180 195
- Other 72 70 62
Fee income 2,078 1,792 1,602
Fee expense (296) (215) (305)
1,782 1,577 1,297
Net fee income rose by HK$205 million, or 13.0 per cent. This reflects the
strong growth of 88.4 per cent in securities broking and related services
income, the 68.4 per cent increase in private banking investment service income
and advisory fees, and the 20.7 per cent rise in card services income. Payment
and cash management business also showed good progress, reporting growth in
remittances and account services income of 11.9 per cent and 10.0 per cent
respectively.
Compared with the second half of 2005, net fees and commissions rose by HK$485
million, or 37.4 per cent, with strong growth in income from securities broking
and related services, private banking and retail investment products.
Net trading income
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Trading profits:
- Foreign exchange 610 277 508
- Securities, derivatives and
other trading activities 49 112 (12)
659 389 496
Net interest (expense)/income on
trading assets and liabilities (879) 44 (350)
(220) 433 146
Trading profits reached HK$659 million, a rise of HK$270 million, or 69.4 per
cent, over the first half of 2005. Foreign exchange income increased by HK$333
million, or 120.2 per cent, attributable to improved trading results and
increased customer activity. The increase in spreads earned on foreign exchange
option-linked deposits and other instruments offered to retail and corporate
customers also contributed to trading profit growth. Securities, derivatives and
other trading fell by HK$63 million, due mainly to the decrease in turnover of
interest rate option-linked products as customers became more focused on equity
and foreign exchange-related activities. Compared with the second half of 2005,
trading profits rose by HK$163 million, or 32.9 per cent, with improvements in
both foreign exchange and securities, derivatives and other trading results.
Net interest expense on trading assets and liabilities for the first half of
2006 was HK$879 million, compared with net interest income of HK$44 million for
the first half of 2005, due to the significant increase in structured deposits
and other instruments issued in the trading portfolio.
Net income from financial instruments designated at fair value
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Net income/(expense)on
assets designated at fair value
which back insurance and
investment contracts 57 31 (56)
Net change in fair value of
other financial assets and
liabilities designated
at fair value (7) (5) (2)
Net interest income on financial
assets and liabilities
designated at fair value 32 24 10
82 50 (48)
Net income from financial instruments designated at fair value amounted to HK$82
million, compared with HK$50 million for the same period last year, mainly
reflecting the improvement in investment returns on life insurance portfolios.
Other operating income
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Rental income from
investment properties 104 100 107
Value of in-force long-term
assurance business 185 160 156
Other 103 150 125
392 410 388
Analysis of income from wealth management businesses
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Investment income:
- retail investment products
and funds under management ^ 724 711 488
- private banking 165 103 85
- securities broking and related
services 439 233 260
- margin trading 30 33 30
1,358 1,080 863
Insurance income:
- life insurance
-- underwriting including
embedded value 350 334 535
-- investment income ^^ 347 209 197
- general insurance and others 156 161 109
853 704 841
Total 2,211 1,784 1,704
^Income from retail investment products and funds under management includes
income reported under net fee income on the sale of unit trust funds and third
party investment products. It also includes profits generated from the issue of
structured investment products, reported under net trading income.
^^Investment income from insurance funds includes income reported as net
interest income and net income from financial instruments designated at fair
value.
Wealth management income gained strong growth momentum in the first half of
2006, reporting rises of 23.9 per cent over the first half of 2005 and 29.8 per
cent over the second half of 2005.
Investment services income rose by 25.7 per cent, benefiting from the buoyant
equities market and good investment sentiment. Securities broking business grew
in turnover and market share, riding on the active stock market and the success
of marketing programmes and special offers to promote active trading, IPO
subscriptions and the opening of securities accounts. Private banking continued
to grow in customer base and business volume. Retail investment products
achieved record sales, with equity, high-yield fixed income funds and
market-linked instruments building on the success generated by
capital-guaranteed funds in the past few years. The bank also launched new
equity, foreign exchange and other market-linked investment and deposit products
that were designed to capture market growth trends and meet the diverse wealth
management needs of customers.
Insurance income rose by 21.2 per cent to HK$853 million. Life insurance
business continued on an encouraging growth trend, reporting a 37.1 per cent
increase in annualised new premiums, gaining market share and raising its market
share ranking in Hong Kong to second place. The Monthly Income Retirement Plan,
which provides guaranteed income after retirement with flexible premium payment
term options and choice of retirement age, has been very successful in capturing
a share of the large and lucrative retirement plan market.
Loan impairment charges and other credit risk provisions
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Loan impairment (charges)/
releases
- individually assessed 29 (95) (214)
- collectively assessed (63) (207) (102)
(34) (302) (316)
Of which:
- new and additional (165) (666) (404)
- releases 97 314 37
- recoveries 34 50 51
(34) (302) (316)
Loan impairment charges and other credit risk provisions decreased by HK$268
million, or 88.7 per cent, to HK$34 million, reflecting benign credit
conditions. There was a net release of HK$29 million on individually assessed
provisions, mainly due to recoveries from certain commercial banking customers.
Of the collectively assessed charges, HK$59 million was made on card and
personal loan portfolios, a rise of 7.3 per cent over the same period last year.
A charge of HK$4 million was made on advances not identified individually as
impaired compared with a charge of HK$152 million made in the first half of
2005.
Operating expenses
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Employee compensation
and benefits:
- salaries and
other costs 1,218 1,059 1,085
- retirement
benefit costs 59 66 71
1,277 1,125 1,156
General and administrative
expenses:
- rental expenses 117 98 109
- other premises
and equipment 350 343 408
- other operating
expenses 440 451 567
907 892 1,084
Depreciation of business
premises and
equipment 150 135 145
Amortisation of
intangible assets 4 4 5
2,338 2,156 2,390
Cost efficiency ratio 26.8% 26.7% 29.4%
Staff numbers by region^
At 30Jun06 At 30Jun05 At 31Dec05
Hong Kong 7,524 7,148 7,425
Mainland and others 521 377 420
Total 8,045 7,525 7,845
^ Full-time equivalent
Operating expenses rose by HK$182 million, or 8.4 per cent, compared with the
same period last year. Employee compensation and benefits increased by 13.5 per
cent, due to the annual salary increment and the increase in number of staff.
General and administrative expenses were up 1.7 per cent and depreciation
charges rose by 11.1 per cent as a result of the increase in fair value of
business premises.
The number of full-time equivalent staff increased by 200 compared with the
previous year-end, with new staff hired to further strengthen the PFS and CMB
relationship management teams and to support the expansion of the mainland China
network and IT system development and enhancement.
The cost efficiency ratio for the first half of 2006 was 26.8 per cent, compared
with 26.7 per cent and 29.4 per cent for the first and second halves of 2005
respectively.
Profit on disposal of fixed assets and financial investments
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Profit on disposal of
available-for-sale
securities 126 328 130
Profit less loss on
disposal of fixed
assets 448 20 (1)
574 348 129
The profit on disposal of fixed assets and financial investments amounted to
HK$574 million, an increase of 64.9 per cent over the same period last year.
There was a HK$202 million reduction in profit from disposal of long-term equity
securities. Profit on disposal of fixed assets, however, rose by HK$428 million
to HK$448 million, mainly from the disposal of a commercial building situated in
Central in Hong Kong.
Tax expenses
Taxation in the consolidated income statement represents:
Half-year Half-year Half-year
ended ended ended
Figures in HK$m 30Jun06 30Jun05 31Dec05
Current tax
Tax for the period 1,378 789 724
Deferred tax
Origination and reversal
of temporary differences (176) 135 147
Total tax expenses 1,202 924 871
The current tax provision is based on the estimated assessable profit for the
first half of 2006, and is determined for the bank and its subsidiaries
operating in Hong Kong by using the Hong Kong profits tax rate of 17.5 per cent
(the same rate as in 2005). For subsidiaries and branches operating in other
jurisdictions, the appropriate tax rates prevailing in the relevant countries
are used.
Deferred tax is calculated at the tax rates that are expected to apply in the
year when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement except when it relates to items
charged or credited directly to reserves, in which case the deferred tax is also
recorded within reserves. The carrying amount of deferred tax assets/liabilities
is reviewed at each balance sheet date and is reduced to the extent that it is
no longer probable that sufficient taxable profit will be available to allow the
related tax benefit to be utilised.
Earnings per share
The calculation of earnings per share for the first half of 2006 is based on
earnings of HK$6,190 million (HK$6,045 million for the first half of 2005) and
on the weighted average number of ordinary shares in issue of 1,911,842,736
shares (unchanged from the first half of 2005).
Dividends per share
Half-year ended Half-year ended Half-year ended
30Jun06 30Jun05 31Dec05
HK$ HK$m HK$ HK$m HK$ HK$m
per share per share per share
First interim 1.10 2,103 1.10 2,103 - -
Second interim 1.10 2,103 1.10 2,103 - -
Third interim - - - - 1.10 2,103
Fourth interim - - - - 1.90 3,633
2.20 4,206 2.20 4,206 3.00 5,736
Segmental analysis
Segmental information is presented in respect of business and geographical
segments. Business by customer group information, which is more relevant to the
group 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 customer groups
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 customer groups and apportionment of management
overheads. Rental charges at market rate for usage of premises are reflected as
inter-segment income for the 'Other' customer group and inter-segment expenses
for the respective customer groups.
(a) By customer group
The group's business comprises five customer groups. Personal Financial Services
provides banking (including deposits, credit cards, mortgages and other retail
lending) and wealth management services (including private banking, investment
and insurance) to personal customers. Commercial Banking manages middle market
and smaller corporate relationships and specialises in trade-related financial
services. Corporate 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 group and other market risk positions arising from
banking activities. 'Other' mainly represents management of shareholders' funds
and investments in premises, investment properties and equity shares.
Pre-tax profit contributed by the customer groups for the periods as indicated
is set out in the table below. More customer group analysis and discussions are
set out in the 'Customer group performance' section on pages 7 to 12.
Personal Inter-
Financial Commercial Corporate segment
Figures in HK$m Services Banking Banking Treasury Other elimination Total
Half-year ended 30Jun06
Profit before tax 3,897 1,096 271 506 1,743 - 7,513
Share of pre-tax
profit 51.9% 14.6% 3.6% 6.7% 23.2% - 100.0%
Half-year ended 30Jun05
Profit before tax 3,970 437 171 784 1,700 - 7,062
Share of pre-tax
profit 56.2% 6.2% 2.4% 11.1% 24.1% - 100.0%
Half-year ended 31Dec05
Profit before tax 3,716 641 336 288 1,315 - 6,296
Share of pre-tax
profit 59.0% 10.2% 5.3% 4.6% 20.9% - 100.0%
(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.
Mainland
Figures in HK$m Hong Kong Americas and other Total
Half-year ended 30Jun06
Total operating income 11,666 573 157 12,396
Profit before tax 6,668 558 287 7,513
Capital expenditure incurred 130 - 12 142
At 30Jun06
Total assets 539,776 63,216 25,297 628,289
Total liabilities 567,193 6,782 9,316 583,291
Contingent liabilities and
commitments 146,988 - 9,197 156,185
Half-year ended 30Jun05
Total operating income 9,441 962 96 10,499
Profit before tax 5,877 947 238 7,062
Capital expenditure incurred 81 - 16 97
At 30Jun05
Total assets 487,581 64,811 19,841 572,233
Total liabilities 512,998 10,095 6,709 529,802
Contingent liabilities
and commitments 138,219 - 3,429 141,648
Mainland
Figures in HK$m Hong Kong Americas and other Total
Half-year ended 31Dec05
Total operating income 11,936 682 129 12,747
Profit before tax 5,376 667 253 6,296
Capital expenditure incurred 125 - 9 134
At 31Dec05
Total assets 497,406 60,845 22,569 580,820
Total liabilities 520,260 9,395 7,435 537,090
Contingent liabilities
and commitments 137,536 - 3,973 141,509
Analysis of assets and liabilities by remaining maturity
The maturity analysis is based on the remaining period at the balance sheet date
to the contractual maturity date, with the exception of the trading portfolio
that may be sold before maturity and is accordingly recorded as 'Repayable on
demand'.
Three
months Three One
Repayable or less months year Over
on but not to to five
Figures in HK$m on demand on demand one year five year years Undated Total
Assets
Cash and balances
with banks and
other financial
institutions 13,763 - - - - - 13,763
Placings with
and advances to
banks and other
financial
institutions 9,146 69,689 3,628 100 - - 82,563
Trading assets 14,543 - - - - - 14,543
Financial assets
designated at
fair value - 41 298 1,460 2,679 1,951 6,429
Derivative
financial
instruments 1,631 30 71 277 152 - 2,161
Advances to
customers 14,922 29,248 38,550 88,183 95,602 - 266,505
Financial
investments 58 22,001 36,506 138,026 14,013 1,351 211,955
Investments
in associates - - - - - 3,267 3,267
Investment
properties - - - - - 3,161 3,161
Premises, plant
and equipment - - - - - 6,553 6,553
Interest in
leasehold land
held for own
use under
operating lease - - - - - 587 587
Intangible assets - - - - - 1,857 1,857
Other assets 5,180 7,398 1,001 418 4 944 14,945
At 30Jun06 59,243 128,407 80,054 228,464 112,450 19,671 628,289
At 30Jun05 40,599 111,720 76,324 222,444 102,633 18,513 572,233
At 31Dec05 57,790 97,970 74,642 220,176 110,087 20,155 580,820
Three
months Three One
Repayable or less months year Over
on but not to to five
Figures in HK$m on demand on demand one year five year years Undated Total
Liabilities
Current, savings
and other
deposit accounts 250,973 188,149 8,042 933 - - 448,097
Deposits from banks 9,999 11,764 368 - - - 22,131
Trading liabilities 61,630 - - - - - 61,630
Financial
liabilities
designated at
fair value - - - - 995 (45) 950
Derivative
financial
instruments 1,733 21 197 303 2 - 2,256
Certificates
of deposit and
other debt
securities in
issue - 79 755 7,478 - - 8,312
Other liabilities 5,231 4,554 571 42 106 317 10,821
Liabilities to
customers under
investment
contracts - - - - - 544 544
Liabilities to
customers under
insurance
contracts - - - - - 18,877 18,877
Deferred tax
and current tax
liabilities 1 8 1,411 - - 1,248 2,668
Subordinated
liabilities - - - - 7,005 - 7,005
At 30Jun06 329,567 204,575 11,344 8,756 8,108 20,941 583,291
At 30Jun05 273,285 213,445 13,321 12,571 3,518 13,662 529,802
At 31Dec05 289,758 207,494 8,478 9,148 4,690 17,522 537,090
Cash and balances with banks and other financial institutions
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Cash in hand 5,229 4,172 4,772
Balances with central
banks 323 405 303
Balances with banks
and other financial
institutions 8,211 3,239 4,126
13,763 7,816 9,201
Placings with and advances to banks and other financial institutions
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Placings with and advances
to banks and other
financial institutions
maturing within one month 61,425 43,150 54,338
Placings with and advances
to banks and other
financial institutions
maturing after one month 21,138 22,832 14,948
82,563 65,982 69,286
Trading assets
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Treasury bills 7,966 1,843 2,594
Certificates of deposit 294 1,017 538
Other debt securities 6,269 10,920 9,440
Debt securities 14,529 13,780 12,572
Equity shares 14 32 28
14,543 13,812 12,600
Debt securities:
- listed in Hong Kong 874 908 767
- listed outside Hong Kong 164 - -
1,038 908 767
- unlisted 13,491 12,872 11,805
14,529 13,780 12,572
Equity shares:
- listed in Hong Kong 14 14 17
- unlisted - 18 11
14 32 28
14,543 13,812 12,600
Debt securities:
Issued by public bodies:
- central governments and
central banks 10,188 4,679 5,625
- other public sector entities 1,163 1,491 1,489
11,351 6,170 7,114
Issued by other bodies:
- banks and other financial
institutions 1,945 4,281 2,836
- corporate entities 1,233 3,329 2,622
3,178 7,610 5,458
Equity shares:
Issued by corporate entities 14 32 28
14,543 13,812 12,600
Financial assets designated at fair value
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Certificates of deposit 234 190 194
Other debt securities 3,906 2,392 4,075
Debt securities 4,140 2,582 4,269
Equity shares 2,289 1,161 1,758
6,429 3,743 6,027
Debt securities:
- listed in Hong Kong 101 106 100
- listed outside Hong Kong 30 20 22
131 126 122
- unlisted 4,009 2,456 4,147
4,140 2,582 4,269
Equity shares:
- listed in Hong Kong 918 576 732
- listed outside Hong Kong 1,069 538 979
1,987 1,114 1,711
- unlisted 302 47 47
2,289 1,161 1,758
6,429 3,743 6,027
Debt securities:
Issued by public bodies:
- central governments and
central banks 846 875 865
- other public sector
entities 287 420 295
1,133 1,295 1,160
Issued by other bodies:
- banks and other
financial institutions 2,888 1,140 2,937
- corporate entities 119 147 172
3,007 1,287 3,109
Equity shares:
Issued by corporate
entities 2,289 1,161 1,758
6,429 3,743 6,027
Financial assets are designated at fair value, usually together with the related
liabilities or derivative financial instruments, primarily for the purpose of
eliminating or significantly reducing the accounting mismatch. The figures also
include those financial assets of the life insurance funds designated at fair
value for backing policyholder liabilities.
Advances to customers
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Gross advances to customers 267,393 261,713 261,714
Loan impairment allowances:
- individually assessed (377) (733) (524)
- collectively assessed (511) (468) (510)
266,505 260,512 260,680
Included in advances to
customers are:
- trade bills 3,577 3,015 3,024
- loan impairment allowances (15) (12) (14)
3,562 3,003 3,010
Loan impairment allowances against advances to customers
Individually Collectively
Figures in HK$m assessed assessed Total
At 01Jan06 524 510 1,034
Amounts written off (119) (81) (200)
Recoveries of advances
written off in
previous years 15 19 34
New impairment allowances
charged to income
statement 83 82 165
Impairment allowances
released to
income statement (112) (19) (131)
Unwind of discount of
loan impairment
allowances (14) - (14)
At30Jun06 377 511 888
Total loan impairment allowances as a percentage of gross advances to customers
are as follows:
At 30Jun06 At 30Jun05 At 31Dec05
% % %
Loan impairment
allowances
- individually assessed 0.14 0.28 0.20
- collectively assessed 0.19 0.18 0.19
Total loan impairment 0.33 0.46 0.39
allowances
Total loan impairment allowances as a percentage of gross advances to customers
stood at 0.33 per cent at 30 June 2006, compared with 0.39 per cent at the
previous year-end. Individually assessed allowances as a percentage of gross
advances fell to 0.14 per cent, reflecting recoveries from doubtful accounts and
writing off of irrecoverable balances against impairment allowances.
Impaired advances and allowances
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Gross impaired advances 1,209 1,946 1,433
Individually assessed allowances (377) (760) (558)
Net impaired advances 832 1,186 875
Individually assessed allowances
as a percentage of
gross impaired advances 31.2% 39.1% 38.9%
Gross impaired advances as a
percentage of gross advances
to customers 0.4% 0.7% 0.5%
Impaired advances are those advances where objective evidence exists that full
repayment of principal or interest is considered unlikely. Impairment allowances
are made to write down the carrying value of the advances to the discounted
value of future recoverable amounts, including the realisation of collateral.
Gross impaired advances as a percentage of gross advances to customers stood at
0.4 per cent and 0.5 per cent at 30 June 2006 and 31 December 2005 respectively.
Gross impaired advances were HK$1,209 million, 15.6 per cent lower than at the
last year-end, mainly due to the recovery and upgrading of certain commercial
banking accounts.
Overdue advances
Advances to customers that are more than three months overdue and their
expression as a percentage of gross advances to customers are as follows:
At 30Jun06 At 30Jun05 At 31Dec05
HK$m % HK$m % HK$m %
Gross advances to
customers that have
been overdue with
respect to either
principal or interest
for periods of:
- six months or less
but over three months 538 0.2 500 0.2 482 0.2
- one year or less
but over six months 337 0.1 224 0.1 211 0.1
- over one year 149 0.1 423 0.1 169 -
1,024 0.4 1,147 0.4 862 0.3
Advances with a specific repayment date are classified as overdue when the
principal or interest is overdue and remains unpaid at period-end. Advances
repayable by regular instalments are treated as overdue when an instalment
payment is overdue and remains unpaid at period-end. Advances repayable on
demand are classified as overdue either when a demand for repayment has been
served on the borrower but repayment has not been made in accordance with the
demand notice, or when the advances have remained continuously outside the
approved limit advised to the borrower for more than the overdue period in
question.
Overdue advances increased by HK$162 million to HK$1,024 million at 30 June
2006, representing 0.4 per cent of gross advances to customers. The increase was
attributable to residential mortgage and commercial banking accounts.
Rescheduled advances
Rescheduled advances and their expression as a percentage of gross advances to
customers are as follows:
At 30Jun06 At 30Jun05 At 31Dec05
HK$m % HK$m % HK$m %
Rescheduled advances
to customers 349 0.1 357 0.1 361 0.1
Rescheduled advances are those that have been rescheduled or renegotiated for
reasons related to the borrower's financial difficulties. This will normally
involve the granting of concessionary terms and resetting the overdue account to
non-overdue status. A rescheduled advance will continue to be disclosed as such
unless the debt has been performing in accordance with the rescheduled terms for
a period of six to twelve months. Rescheduled advances that have been overdue
for more than three months under the rescheduled terms are reported as overdue
advances to customers (page 43).
Rescheduled advances fell by HK$12 million, or 3.3 per cent, to HK$349 million
at 30 June 2006, representing only 0.1 per cent of gross advances to customers.
Segmental analysis of advances to customers by geographical area
Advances to customers by geographical area are classified according to the
location of the counterparties after taking into account the transfer of risk.
In general, risk transfer applies when an advance is guaranteed by a party
located in an area that is different from that of the counterparty. At 30 June
2006, over 90 per cent of the group's advances to customers, including related
impaired advances and overdue advances, were classified under Hong Kong
(unchanged from the positions at 30 June 2005 and 31 December 2005).
Gross advances to customers by industry sector
The analysis of gross advances to customers by industry sector based on
categories and definitions used by the Hong Kong Monetary Authority ('HKMA') is
as follows:
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Gross advances to customers
for use in Hong Kong
Industrial, commercial and
financial sectors
Property development 15,728 15,048 16,446
Property investment 47,617 41,986 45,964
Financial concerns 2,108 4,399 968
Stockbrokers 288 298 221
Wholesale and retail trade 5,972 5,244 5,562
Manufacturing 6,894 6,305 6,429
Transport and transport equipment 11,578 12,080 11,919
Other 20,615 25,000 22,960
110,800 110,360 110,469
Individuals
Advances for the purchase of
flats under the Government
Home Ownership Scheme, Private
Sector Participation Scheme and
Tenants Purchase Scheme 21,377 24,713 22,879
Advances for the purchase of
other residential properties 82,778 81,545 81,318
Credit card advances 7,585 6,583 7,735
Other 8,058 7,385 7,563
119,798 120,226 119,495
Total gross advances for
use in Hong Kong 230,598 230,586 229,964
Trade finance 18,968 16,910 15,874
Gross advances for use
outside Hong Kong 17,827 14,217 15,876
Gross advances to customers 267,393 261,713 261,714
Gross advances to customers rose by 2.2 per cent, compared with the previous
year-end.
During the first half of 2006, lending to the property investment sector,
financial concerns sector (including investment companies) and stockbrokers
recorded satisfactory growth, benefiting from the buoyant investment market. The
encouraging 9.9 per cent loan growth recorded by CMB was the result of 19.5 per
cent rise in trade finance, a 7.4 per cent increase in lending to the wholesale
and retail trade, and 7.2 per cent growth in manufacturing sector loans. Falls
in lending to the property development and 'Other' sectors, which include
conglomerate enterprises, reflect repayments by large corporate customers, and
are in line with the bank's strategy to diversify its loan portfolio.
Excluding the fall in mortgages under the suspended Government Home Ownership
Scheme, lending to individuals grew by HK$1,805 million, or 1.9 per cent.
Residential mortgages rose by 1.8 per cent and gained market share amid
intensely competitive conditions. Personal loans (reported under the 'Other'
category) rose by 16.8 per cent, reflecting PFS's continued efforts to expand
its consumer finance business. Card advances fell by 1.9 per cent, due to the
repayment of tax bill payment balances at the previous year-end. Year on year,
card advances rose by 15.2 per cent.
Loans for use outside Hong Kong increased by HK$1,951 million, or 12.3 per cent,
over the previous year-end, reflecting the 21.7 per cent expansion of lending by
mainland China branches to reach HK$12,783 million at 30 June 2006. Encouraging
growth was recorded for both foreign currency and renminbi lending to CIB and
CMB customers and residential mortgages.
Financial investments
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Available-for-sale at fair value
- debt securities 197,934 183,030 177,813
- equity shares 1,656 1,560 1,360
Held-to-maturity debt securities
at amortised cost 12,365 8,361 10,731
211,955 192,951 189,904
Fair value of held-to-maturity
debt securities 11,853 8,818 10,778
Treasury bills 78 4,604 4,816
Certificates of deposit 25,572 31,738 27,048
Other debt securities 184,649 155,049 156,680
Debt securities 210,299 191,391 188,544
Equity shares 1,656 1,560 1,360
211,955 192,951 189,904
Debt securities:
- listed in Hong Kong 2,999 5,147 3,008
- listed outside Hong Kong 1,898 1,676 1,947
4,897 6,823 4,955
- unlisted 205,402 184,568 183,589
210,299 191,391 188,544
Equity shares:
- listed in Hong Kong 1,214 678 1,049
- listed outside Hong Kong 220 132 186
1,434 810 1,235
- unlisted 222 750 125
1,656 1,560 1,360
211,955 192,951 189,904
Fair value of listed financial
investments 6,305 7,675 6,209
Debt securities:
Issued by public bodies:
- central governments and central
banks 10,306 19,603 15,981
- other public sector entities 7,892 10,753 8,667
18,198 30,356 24,648
Issued by other bodies:
- banks and other financial
institutions 176,785 145,843 149,557
- corporate entities 15,316 15,192 14,339
192,101 161,035 163,896
Equity shares:
Issued by corporate entities 1,656 1,560 1,360
211,955 192,951 189,904
Available-for-sale investments include treasury bills, certificates of deposit,
other debt securities and equity shares intended to be held for an indefinite
period of time, but which may be sold in response to needs for liquidity or
changes in the market environment. Available-for-sale investments are carried at
fair value with the gains and losses from change in fair value recognised
through equity reserves.
Held-to-maturity debt securities are stated at amortised cost. Where debt
securities have been purchased at a premium or discount, the carrying value of
the security is adjusted to reflect the effective interest rate of the debt
security taking into account such premium or discount.
Amounts due from/to immediate holding company and fellow subsidiary companies
At balance sheet dates, the amounts due from/to the bank's immediate holding
company and fellow subsidiary companies, included in the assets and liabilities
balances of the consolidated balance sheet, are analysed as follows:
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Amounts due from:
Cash and balances with banks
and other financial
institutions 5,036 1,013 718
Placings with and advances to
banks and other financial
institutions 2,067 4,619 3,495
Trading assets - 50 50
Financial assets designated
at fair value 2,202 155 2,299
Derivative financial instruments 231 193 145
Financial investments 1,036 1,236 1,135
Other assets 45 35 29
10,617 7,301 7,871
Amounts due to:
Customer accounts 157 136 167
Deposits from banks 2,780 9,946 5,136
Derivative financial instruments 663 468 488
Subordinated liabilities 2,019 - 2,016
Other liabilities 294 302 361
5,913 10,852 8,168
Investments in associates
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Share of net assets 2,945 2,138 2,611
Goodwill 322 311 318
3,267 2,449 2,929
Intangible assets
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Value of in-force long-term
assurance business 1,750 1,409 1,565
Internal developed software 93 - 56
Other intangible assets 14 17 15
1,857 1,426 1,636
Other assets
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Items in the course of
collection from other banks 4,652 3,858 8,068
Prepayments and accrued income 4,045 2,727 3,016
Deferred tax assets 1 7 9
Non current assets held for sale 232 237 216
Acceptances and endorsements^ 2,701 2,514 2,371
Other accounts 3,314 1,574 1,545
14,945 10,917 15,225
^In accordance with Hong Kong Accounting Standard 39: 'Financial Instruments:
Recognition and Measurement' ('HKAS 39'), acceptances and endorsements are
recognised on the balance sheet in 'Other assets' and 'Other liabilities'.
Current, savings and other deposit accounts
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Current, savings and other
deposit accounts:
- as per consolidated balance
sheet 448,097 430,395 430,995
- structured deposits reported
as trading liabilities 33,414 7,475 24,422
481,511 437,870 455,417
By type:
- demand and current accounts 26,579 29,583 27,248
- savings accounts 195,488 212,344 188,839
- time and other deposits 259,444 195,943 239,330
481,511 437,870 455,417
Certificates of deposit and other debt securities in issue
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Certificates of deposit and
other debt securities in
issue:
- as per consolidated balance
sheet 8,312 11,158 10,023
- structured certificates of
deposit and other debt
securities in issue reported
as trading liabilities 15,056 9,836 13,616
23,368 20,994 23,639
By type:
- certificates of deposit in
issue 19,893 20,839 22,525
- other debt securities in issue 3,475 155 1,114
23,368 20,994 23,639
Customer deposits and certificates and other debt securities in issue rose by
5.4 per cent to HK$504.9 billion. This included 27.4 per cent growth in
structured deposits, structured certificates of deposit and other debt
securities in issue, reflecting strong customer demand for yield enhancement
investment and deposit products. Deposits of mainland China branches grew by
11.2 per cent during the first half of 2006.
Trading liabilities
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Structured certificates of
deposit and other debt
securities in issue 15,056 9,836 13,616
Structured deposits 33,414 7,475 24,422
Short positions in securities 13,160 7,047 7,766
61,630 24,358 45,804
Trading liabilities include customer deposits and certificates of deposit with
embedded options or other derivatives, the market risk of which was managed in
the trading book.
Other liabilities
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Items in the course of
transmission to other banks 5,022 5,629 6,517
Accruals 1,864 1,124 1,653
Acceptances and endorsements^ 2,701 2,514 2,371
Other 1,234 1,113 3,597
10,821 10,380 14,138
^In accordance with HKAS 39, acceptances and endorsements are recognised on the
balance sheet in 'Other assets' and 'Other liabilities'.
Subordinated liabilities
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Nominal value Description
Amount owed to third parties
HK$1,500 million Callable floating rate
subordinated notes
due June 2015 1,491 1,496 1,495
HK$1,000 million 4.125 per cent callable
fixed rate subordinated
notes due June 2015 950 995 967
US$450 million Callable floating rate
subordinated notes
due July 2016 3,495 - -
Amount owed to HSBC Group undertakings
US$260 million Callable floating rate
subordinated loan debt
due December 2015 2,019 - 2,016
7,955 2,491 4,478
Representing:
- measured at amortised cost 7,005 1,496 3,511
- designated at fair value 950 995 967
7,955 2,491 4,478
In June 2006, the bank contracted to issue floating-rate subordinated notes
amounting to US$450 million that mature in July 2016 with a one-time call option
exercisable by the bank in July 2011. The notes were issued at the price of
99.869 per cent, bearing interest at the rate of three-month dollar LIBOR plus
0.30 per cent, payable quarterly from the issue date to the call option date.
Thereafter, if the notes are not redeemed on the call option date, the interest
rate will be reset to three-month dollar LIBOR plus 0.80 per cent payable
quarterly. The notes, which qualify as tier 2 capital, serve to maintain a more
balanced capital structure and support business growth.
Shareholders' funds
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Share capital 9,559 9,559 9,559
Retained profits 28,627 26,222 26,052
Premises revaluation reserve 3,522 3,387 3,543
Cash flow hedges reserve (532) (256) (483)
Available-for-sale investment
reserve 37 294 (17)
Capital redemption reserve 99 99 99
Other reserves 303 92 185
Total reserves 32,056 29,838 29,379
41,615 39,397 38,938
Proposed dividends 2,103 2,103 3,633
Shareholders' funds 43,718 41,500 42,571
Return on average
shareholders' funds 29.0% 29.7% 25.2%
Save for the contracted issuance of subordinated notes of US$450 million, there
was no purchase, sale or redemption of the group's listed securities by the bank
or any of its subsidiaries during the six months ended 30 June 2006.
Shareholders' funds (excluding proposed dividends) rose by HK$2,677 million, or
6.9 per cent, to HK$41,615 million at 30 June 2006, mainly due to the growth in
retained profits, which include the realisation of property revaluation reserves
on properties disposed of during the first half of 2006, and surplus on property
revaluation.
The return on average shareholders' funds was 29.0 per cent, compared with 29.7
per cent and 25.2 per cent for the first and second halves of 2005 respectively.
Capital resources management
Analysis of capital base and risk-weighted assets
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
Capital base
Tier 1 capital
- Share capital 9,559 9,559 9,559
- Retained profits 25,002 21,829 21,439
- Classified as regulatory
reserve (511) (468) (510)
- Capital redemption reserve 99 99 99
- Less: goodwill (322) (311) (318)
- Total 33,827 30,708 30,269
Tier 2 capital
- Property revaluation reserve 4,443 4,710 5,114
- Available-for-sale investment
and equity revaluation reserve 24 350 (5)
- Collective impairment allowances 511 468 510
- Regulatory reserve 511 468 510
- Term subordinated debt 7,955 2,491 4,479
- Total 13,444 8,487 10,608
Unconsolidated investments and
other deductions (3,779) (2,871) (3,444)
Total capital base after
deductions 43,492 36,324 37,433
Risk-weighted assets
On-balance sheet 290,447 276,339 277,617
Off-balance sheet 14,962 17,698 14,739
Total risk-weighted assets 305,409 294,037 292,356
Total risk-weighted assets
adjusted for market risk 306,668 292,331 291,570
Capital adequacy ratios
After adjusting for market risk
- Tier 1^ 11.0% 10.5% 10.4%
- Total^ 14.2% 12.4% 12.8%
Before adjusting for market risk
- Tier 1 11.1% 10.4% 10.4%
- Total 14.2% 12.4% 12.8%
^The capital ratios take into account market risks in accordance with the
relevant HKMA guideline under the Supervisory Policy Manual.
In accordance with the HKMA guideline 'Impact of the New Hong Kong Accounting
Standards on Authorised Institutions' Capital Base and Regulatory Reporting',
the group has earmarked a 'regulatory reserve' from retained profits. This
regulatory reserve is included as tier 2 capital together with the group's
collective impairment allowances.
The total capital ratio rose by 1.4 percentage points to 14.2 per cent at 30
June 2006, compared with 12.8 per cent at 31 December 2005. The tier 1 ratio
increased from 10.4 per cent to 11.0 per cent. The capital base increased by
HK$6,059 million to HK$43,492 million, mainly due to the increase in retained
profits (including the realisation of property revaluation reserves on disposed
properties) and the issue of US$450 million subordinated notes, which qualify as
tier 2 capital. Risk-weighted assets adjusted for market risk grew by 5.2 per
cent, attributable to the increase in advances to customers and financial
investments.
Liquidity ratio
The average liquidity ratio for the period, calculated in accordance with the
Fourth Schedule of the Hong Kong Banking Ordinance, is as follows:
Half-year ended Half-year ended Half-year ended
30Jun06 30Jun05 31Dec05
The bank and its major
banking subsidiaries 50.9% 43.6% 46.6%
Reconciliation of cash flow statement
(a) Reconciliation of operating profit to net cash flow from operating activities
Half-year Half-year
ended ended
Figures in HK$m 30Jun06 30Jun05
Operating profit 6,353 5,632
Net interest income (6,375) (5,264)
Dividend income (31) (37)
Loan impairment charges and other
credit risk provisions 34 302
Depreciation 150 135
Amortisation of intangible assets 4 4
Amortisation of available-for-sale investments (222) 7
Amortisation of held-to-maturity debt securities - 1
Advances written off net of recoveries (166) (112)
Interest received 10,530 5,091
Interest paid (6,609) (2,537)
Operating profit before changes in
working capital 3,668 3,222
Change in treasury bills and certificates of
deposit with original maturity more than three
months 4,505 1,277
Change in placings with and advances to banks
maturing after one month (6,190) (5,350)
Change in trading assets 4,831 3,132
Change in financial assets designated at
fair value 78 299
Change in derivative financial instruments 18 (167)
Change in advances to customers (5,693) (8,856)
Change in other assets (2,271) (171)
Change in current, savings and other
deposit accounts 17,102 (9,789)
Change in deposits from banks 10,080 22,804
Change in trading liabilities 15,826 7,817
Change in certificates of deposit and
other debt securities in issue (1,711) (1,454)
Change in other liabilities (600) (731)
Change in liabilities to customers under
insurance contract 10 -
Change in financial liabilities designated
at fair value (17) (1)
Elimination of exchange differences
and other non-cash items (1,149) (1,094)
Cash generated from operating activities 38,487 10,938
Taxation paid (407) (222)
Net cash inflow from operating activities 38,080 10,716
(b) Analysis of the balances of cash and cash equivalents
Figures in HK$m At 30Jun06 At 30Jun05
Cash and balances with banks and
other financial institutions 13,763 7,816
Placings with and advances to banks and
other financial institutions maturing
within one month 59,056 41,614
Treasury bills 6,852 1,033
Certificates of deposit 1,191 2
80,862 50,465
Contingent liabilities, commitments and derivatives
Credit Risk-
Contract equivalent weighted
Figures in HK$m amount amount amount
At 30Jun06
Contingent liabilities:
Guarantees 3,604 3,364 3,172
Commitments:
Documentary credits and short-term
trade-related transactions 8,820 1,770 1,755
Undrawn formal standby facilities,
credit lines and other commitments
to lend:
- under one year 124,080 - -
- one year and over 19,454 9,727 8,953
Other 227 227 227
152,581 11,724 10,935
Exchange rate contracts:
Spot and forward foreign exchange 253,985 2,404 526
Other exchange rate contracts 49,693 414 97
303,678 2,818 623
Interest rate contracts:
Interest rate swaps 155,362 1,627 340
Other interest rate contracts 4,220 10 2
159,582 1,637 342
Other derivative contracts 4,916 267 65
Credit Risk-
Contract equivalent weighted
Figures in HK$m amount amount amount
At 30Jun05
Contingent liabilities:
Guarantees 6,266 6,035 3,336
Commitments:
Documentary credits and short-term
trade-related transactions 8,845 1,782 1,764
Undrawn formal standby facilities,
credit lines and other commitments
to lend:
- under one year 100,918 - -
- one year and over 25,593 12,796 11,770
Other 26 26 26
135,382 14,604 13,560
Exchange rate contracts:
Spot and forward foreign exchange 131,827 1,346 341
Other exchange rate contracts 31,916 382 118
163,743 1,728 459
Interest rate contracts:
Interest rate swaps 169,762 1,476 406
Other interest rate contracts 1,669 8 3
171,431 1,484 409
Other derivative contracts 311 17 9
Credit Risk-
Contract equivalent weighted
Figures in HK$m amount amount amount
At 31Dec05
Contingent liabilities:
Guarantees 4,133 3,907 3,131
Commitments:
Documentary credits and short-term
trade-related transactions 7,402 1,480 1,480
Undrawn formal standby facilities,
credit lines and other commitments
to lend:
- under one year 109,369 - -
- one year and over 20,385 10,193 9,158
Other 220 220 220
137,376 11,893 10,858
Exchange rate contracts:
Spot and forward foreign exchange 188,088 1,426 333
Other exchange rate contracts 15,176 193 48
203,264 1,619 381
Interest rate contracts:
Interest rate swaps 161,083 1,472 308
Other interest rate contracts 4,255 20 4
165,338 1,492 312
Other derivative contracts 1,194 86 17
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 ('the Third Schedule') 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.
In accordance with the Third Schedule, contingent liabilities and commitments
are credit-related instruments that include acceptances and endorsements,
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.
In accordance with HKAS 39, acceptances and endorsements are recognised on the
balance sheet in 'Other assets' and 'Other liabilities'. These acceptances and
endorsements are included in the capital adequacy calculation as contingencies
in accordance with the Third Schedule.
Off-balance sheet financial instruments arise from futures, forward, swap and
option transactions undertaken in the foreign exchange, interest rate and equity
markets.
The contract amounts of these instruments indicate the volume of transactions
outstanding at the balance sheet date and do not represent amounts at risk. The
credit equivalent amount of these instruments is measured as the sum of positive
marked-to-market values and the potential future credit exposure in accordance
with the Third Schedule.
Derivative financial instruments are held for trading, as financial instruments
designated at fair value, or designated as either fair value hedge or cash flow
hedges. The following table shows the nominal contract amounts and
marked-to-market value of assets and liabilities of each class of derivatives.
At 30Jun06 At 30Jun05 At 31Dec05
Trading/ Trading/ Trading/
designated designated designated
Figures in HK$m at fair value Hedging at fair value Hedging at fair value Hedging
Contract amounts:
Interest rate
contracts 107,608 51,974 103,968 67,463 102,233 63,105
Exchange rate
contracts 303,678 - 163,743 - 203,264 -
Other derivative
contracts 4,916 - 311 - 1,194 -
416,202 51,974 268,002 67,463 306,691 63,105
Derivative assets:
Interest rate
contracts 688 480 675 223 481 454
Exchange rate
contracts 983 - 647 - 776 -
Other derivative
contracts 10 - 7 - 4 -
1,681 480 1,329 223 1,261 454
Derivative liabilities:
Interest rate
contracts 999 507 847 591 998 457
Exchange rate
contracts 578 - 412 - 310 -
Other derivative
contracts 172 - 7 - 27 -
1,749 507 1,266 591 1,335 457
The above derivative assets and liabilities, being the positive or negative
marked-to-market value of the respective derivative contracts, represent gross
replacement costs, as none of these contracts are subject to any bilateral
netting arrangements.
Cross-border claims
Cross-border claims include receivables and loans and advances, and balances due
from banks and holdings of certificates of deposit, bills, promissory notes,
commercial paper and other negotiable debt instruments, as well as accrued
interest and overdue interest on these assets. Claims are classified according
to the location of the counterparties after taking into account the transfer of
risk. For a claim guaranteed by a party situated in a country different from the
counterparty, the risk will be transferred to the country of the guarantor. For
a claim on the branch of a bank or other financial institution, the risk will be
transferred to the country where its head office is situated. Claims on
individual countries or areas, after risk transfer, amounting to 10 per cent or
more of the aggregate cross-border claims are shown as follows:
Banks Sovereign
& other & public
financial sector
Figures in HK$m institutions entities Other Total
At 30Jun06
Asia-Pacific excluding Hong
Kong:
- Australia 31,760 146 526 32,432
- Other 42,580 1,402 7,144 51,126
74,340 1,548 7,670 83,558
The Americas:
- Canada 18,902 3,628 2,775 25,305
- Other 21,351 2,602 9,029 32,982
40,253 6,230 11,804 58,287
Western Europe:
- United Kingdom 31,828 - 9,356 41,184
- Other 89,253 450 5,555 95,258
121,081 450 14,911 136,442
At 30Jun05
Asia-Pacific excluding Hong
Kong:
- Australia 25,194 61 954 26,209
- Other 27,760 1,600 6,197 35,557
52,954 1,661 7,151 61,766
The Americas:
- Canada 19,011 4,599 1,571 25,181
- Other 13,396 2,601 10,882 26,879
32,407 7,200 12,453 52,060
Western Europe:
- United Kingdom 25,206 15 6,897 32,118
- Other 79,498 2,577 6,757 88,832
104,704 2,592 13,654 120,950
Banks Sovereign
& other & public
financial sector
Figures in HK$m institutions entities Other Total
At 31Dec05
Asia-Pacific excluding Hong
Kong:
- Australia 23,961 144 712 24,817
- Other 38,140 1,447 6,882 46,469
62,101 1,591 7,594 71,286
The Americas:
- Canada 16,229 3,976 1,677 21,882
- Other 13,182 2,460 10,712 26,354
29,411 6,436 12,389 48,236
Western Europe:
- United Kingdom 23,008 - 7,842 30,850
- Other 81,089 1,430 6,207 88,726
104,097 1,430 14,049 119,576
Additional information
1. Accounting policies
The accounting policies applied in preparing this news release are the same as
those applied in preparing the financial statements for the year ended 31
December 2005, as disclosed in the Annual Report and Financial Statements for
2005 except for the following:
Amendments to Hong Kong Accounting Standard 39 ('HKAS 39') and Hong Kong
Financial Reporting Standard 4 'Financial Instruments: Recognition and
Measurement and Insurance Contracts - Financial Guarantee Contracts'
In prior years, financial guarantee contracts were accounted for under HKAS 37
'Provisions, Contingent Liabilities and Contingent Assets' as contingent
liabilities and were disclosed as off-balance sheet items.
With effect from 1 January 2006 and in accordance with the above amendments,
financial guarantee contracts issued are recognised as financial liabilities and
reported under 'Other liabilities'. Financial guarantees are recognised
initially at fair value and subsequently measured as the higher of (a) the
amount as provisions determined in accordance with HKAS 37; and (b) the amount
initially recognised less cumulative amortisation.
Financial liabilities recorded under 'Other liabilities' at 30 June 2006
amounted to HK$4 million. No restatement of comparative figures was made as the
amounts were immaterial.
2. Statement of compliance
This news release has been prepared in accordance with Hong Kong Accounting
Standard ('HKAS') 34 'Interim Financial Reporting'. It also complies with the
module on 'Interim Financial Disclosure by Locally Incorporated Authorised
Institutions' under the Supervisory Policy Manual issued by the Hong Kong
Monetary Authority ('HKMA').
3. 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 2005, which have been
delivered to the Registrar of Companies and the HKMA. The auditors expressed an
unqualified opinion on those statutory accounts in their report dated 6 March
2006.
4. Comparative figures
Certain comparative figures have been reclassified to conform with the current
period's presentation.
5. Property revaluation
A revaluation of Hang Seng's premises and investment properties in Hong Kong was
performed in June 2006 to reflect property market movements in the first half of
2006. The group's premises and investment properties were revalued by DTZ
Debenham Tie Leung Limited, an independent professional valuer, and carried out
by qualified persons who are members of the Hong Kong Institute of Surveyors.
The basis of the valuation of premises was open market value for existing use
and the basis of valuation for investment properties was open market value. The
revaluation surplus for group premises amounted to HK$582 million, of which
HK$13 million was a reversal of revaluation deficits previously charged to the
income statement. The balance of HK$569 million was credited to the property
revaluation reserve. Revaluation gains on investment properties of HK$305
million were recognised through the income statement in accordance with HKAS 40.
The related deferred tax provisions for group premises and investment properties
were HK$102 million and HK$53 million respectively.
6. Market risk
Market risk is the risk that foreign exchange rates, interest rates or equity
and commodity prices will move and result in profits or losses for the group.
The group's market risk arises from customer-related business and from position
taking.
Market risk is managed within risk limits approved by the Board of Directors and
delegated to the Treasurer who will allocate the limits to the individual
traders. Risk limits are set by product and risk type with market liquidity
being a principal factor in determining the level of limits set. Limits are set
using a combination of risk measurement techniques, including position limits,
sensitivity limits, as well as value at risk ('VAR') limits at a portfolio
level.
The group adopts the risk management policies and risk measurement techniques
developed by the HSBC Group. The daily risk monitoring process measures actual
risk exposures against approved limits and triggers specific action to ensure
the overall market risk is managed within an acceptable level.
VAR is a technique that estimates the potential losses that could occur on risk
positions taken due to movements in market rates and prices over a specified
time horizon and to a given level of confidence. In line with the HSBC Group,
Hang Seng's VAR calculation is predominantly based on historical simulation
('HS') effective 3 May 2005. Prior to May 2005, VAR calculation was
predominantly based on variance/co-variance ('VCV'). HS uses scenarios derived
from historical market rates, and takes account of the relationships between
different markets and rates, for example, interest rates and foreign exchange
rates. Movements in market prices are calculated by reference to market data
from the last two years. The assumed holding period is a one-day period,
reflecting the way the risk positions are managed. Aggregation of VAR from
different risk types is based upon the assumption of independence between risk
types. In recognition of the inherent limitations of VAR methodology, stress
testing is performed to assess the impact of extreme events on market risk
exposures.
The group's VAR for all interest rate risk and foreign exchange risk positions
and on individual risk portfolios during the first halves of 2006 and 2005 are
shown in the tables below. The VAR figures for the first half of 2005 are based
on four months' VCV and two months' HS.
VAR
Minimum Maximum Average
during during for
the the the
Figures in HK$m At 30Jun06 period period period
VAR for all interest rate
risk and foreign exchange
risk 47 47 119 86
VAR for foreign exchange risk
(trading) 5 3 16 6
VAR for interest rate risk
- trading 15 3 15 7
- non-trading 51 51 123 91
Minimum Maximum Average
during during for
the the the
Figures in HK$m At 30Jun05 period period period
VAR for all interest rate
risk and foreign exchange
risk 194 123 264 205
VAR for foreign exchange risk
(trading) 2 - 3 1
VAR for interest rate risk
- trading 1 1 21 6
- non-trading 194 122 261 201
The average daily revenue earned from market risk-related treasury activities
for the first half of 2006, including non-trading book net interest income and
funding related to trading positions, was HK$5 million (HK$7 million for the
first half of 2005). The standard deviation of these daily revenues was HK$3
million (HK$5 million for the first half of 2005).
Interest rate risk arises in both the treasury trading and non-trading portfolio
s, 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 the first half of 2006 was HK$1 million (HK$5 million for the
first half of 2005).
The group's foreign exchange exposures mainly comprise foreign exchange trading
by treasury and currency exposures originated from 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 the first half of 2006 was HK$4 million
(HK$2 million for the first half of 2005).
Structural foreign exchange positions arising from capital investment in
subsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi as
set out in Note 7, are managed by the Asset and Liability Management Committee.
7. Foreign currency positions
Foreign currency exposures include those arising from trading, non-trading and
structural positions. At 30 June 2006, the US dollar (US$) was the only currency
in which the group had a non-structural foreign currency position that exceeded
10 per cent of the total net position in all foreign currencies.
Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05
US$ RMB US$ RMB US$ RMB
Non-structural position
Spot assets 202,537 8,960 188,701 4,665 193,149 5,955
Spot liabilities (189,227) (8,582) (177,851) (4,526) (168,513) (6,008)
Forward purchases 124,061 570 61,568 384 84,026 439
Forward sales (129,724) (827) (71,173) (380) (104,960) (300)
Net options position 25 - (4) - (77) -
Net long non-structural
position 7,672 121 1,241 143 3,625 86
At 30 June 2006, the group's major structural foreign currency positions were US
dollar and renminbi.
At 30Jun06 At 30Jun05 At 31Dec05
% of % of % of
total net total net total net
structural structural structural
HK$m position HK$m position HK$m position
Structural positions
US dollar 1,133 33.0 1,037 33.0 1,035 32.5
Renminbi 2,194 63.9 1,997 63.6 2,043 64.1
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, 23
August 2006, during which no transfer of shares can be registered. In order to
qualify for the second interim dividend, all transfers, accompanied by the
relevant share certificates, must be lodged with the bank's registrars,
Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor,
Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration not
later than 4 pm on Tuesday, 22 August 2006. The second interim dividend will be
payable on Thursday, 31 August 2006 to shareholders on the register of
shareholders of the bank on Wednesday, 23 August 2006.
10. Proposed timetable for the remaining 2006 quarterly dividends
Third Fourth
interim dividend interim dividend
Announcement 6 November 2006 5 March 2007
Book close date 20 December 2006 20 March 2007
Payment date 3 January 2007 30 March 2007
11. News release
Copies of this news release may be obtained from the Legal and Company
Secretarial Services Department, Level 10, 83 Des Voeux Road Central, Hong Kong;
or from Hang Seng's website http://www.hangseng.com.
The 2006 Interim Report and Financial Statements will be available from the same
website on Monday, 31 July 2006 and will also be published on the website of The
Stock Exchange of Hong Kong Limited in due course. Printed copies of the 2006
Interim Report and Financial Statements will be sent to shareholders in late
August 2006 in accordance with the requirements under the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited.
Media enquiries to:
Walter Cheung Telephone: (852) 2198 4020
Cecilia Ko Telephone: (852) 2198 4227
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HSBC Holdings plc
By:
Name: P A Stafford
Title: Assistant Group Secretary
Date: 31 July 2006