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 March, 2007
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 RESULTS - HIGHLIGHTS
- Operating profit up 13.6 per cent to HK$12,576 million (HK$11,068 million
in 2005).
- Operating profit excluding loan impairment charges and other credit risk
provisions up 9.9 per cent to HK$12,840 million (HK$11,686 million in 2005).
- Profit before tax up 7.8 per cent to HK$14,395 million (HK$13,358 million
in 2005).
- Attributable profit up 6.1 per cent to HK$12,038 million (HK$11,342 million
in 2005).
- Return on average shareholders' funds of 27.4 per cent (27.5 per cent in
2005).
- Assets up 15.2 per cent to HK$669.1 billion (HK$580.8 billion at 31 December
2005).
- Earnings per share up 6.2 per cent to HK$6.30 per share (HK$5.93 per
share in 2005).
- Fourth interim dividend of HK$1.90 per share; total dividends of HK$5.20
per share for 2006 (HK$5.20 per share in 2005).
- Total capital ratio of 13.6 per cent (12.8 per cent at 31 December 2005);
tier 1 capital ratio of 10.7 per cent (10.4 per cent at 31 December 2005).
- Cost efficiency ratio of 29.0 per cent (28.0 per cent in 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
For the full year 2006, Hang Seng's results were supported by a strong economy
in Hong Kong, distinguished by a buoyant stock market, ample liquidity and a
benign credit environment.
Attributable profit increased by 6.1 per cent compared with 2005, to reach a
record HK$12,038 million. Earnings per share were up 6.2 per cent at HK$6.30.
The Directors have announced a fourth interim dividend of HK$1.90 per share. In
light of capital requirements for future business expansion, particularly in
mainland China, total distribution is HK$5.20 per share for 2006, the same as in
2005.
Net operating income before loan impairment charges and other credit provisions
increased 11.4 per cent to HK$18,081 million. Successful efforts to expand and
diversify lending and attract new deposits drove an 8.3 per cent rise in net
interest income to HK$11,694 million.
Our personal wealth management business achieved good growth in investment
services, insurance and private banking. Commercial Banking performed strongly,
underpinned by increases in customer advances and the development of corporate
wealth management services. Investments in our mainland business produced
positive results, with encouraging growth in customer base, advances and
deposits, and profit contribution.
Operating profit excluding loan impairment charges was up 9.9 per cent at
HK$12,840 million. Operating profit rose by 13.6 per cent, reflecting a
substantial drop in loan impairment charges.
Operating expenses increased by 15.3 per cent to HK$5,241 million with
investments in human resources, IT, marketing and branding to support business
growth on the Mainland and in Hong Kong.
Personal Financial Services' operating profit excluding loan impairment charges
grew by 5.4 per cent to HK$7,840 million. Wealth management income was up 22.7
per cent at HK$4,281 million, reflecting record investment product sales,
a high level of stock market activity and a 17.5 per cent rise in life
insurance income. We also benefited from high levels of consumer confidence,
recording significant increases in cardholder spending and personal lending.
Commercial Banking's operating profit excluding loan impairment charges rose
21.5 per cent to HK$2,001 million. Customer advances grew by 22.2 per cent with
trade finance gaining market share. Lending to middle market customers in the
manufacturing, property, and wholesale and retail sectors grew as a result of
refined segmentation and deepened relationships. Intensified marketing saw new
SME accounts acquired in the second half of 2006 outpace the first half by 34.7
per cent. Corporate wealth management business and card acquiring business
contributed to 13.5 per cent growth in net fees and commissions and an 11.9 per
cent rise in trading income.
With strong liquidity in the banking system continuing to squeeze corporate loan
margins, Corporate Banking focused on asset yield rather than increased lending.
The strong 32.5 per cent growth in customer deposits and the further development
of corporate treasury services helped to compensate for a decline in lending to
large corporates. Net operating income increased by 11.8 per cent. Operating
profit excluding loan impairment charges was HK$543 million, down 2.0 per cent
compared with 2005.
Treasury's operating profit excluding loan impairment charges declined 25.0 per
cent to HK$887 million. Efforts to expand proprietary trading and
customer-driven business saw trading income grow by 66.1 per cent to HK$628
million. However, net interest income fell by HK$514 million, or 51.7 per cent,
as the balance sheet management portfolio continued to be challenged by rising
funding costs and flattened yield curves.
Operating profit excluding loan impairment charges at our mainland branches rose
by 211.9 per cent. We upgraded a representative office to a branch in Dongguan
and opened three new sub-branches in 2006, bringing our total number of mainland
outlets to 15. We were also granted permission to begin the necessary
preparations to establish our mainland subsidiary, which will be headquartered
in Shanghai.
Including our share of profit from Industrial Bank Co., Ltd. ('Industrial
Bank'), our mainland business contributed 6.1 per cent of total profit before
tax, compared with 4.5 per cent in 2005, bringing us closer to our target of 10
per cent by 2010.
Hong Kong is likely to experience above-trend growth in 2007. Economic
uncertainty in the US generated by weaknesses in the housing market may result
in a slowing of export and re-export trade activity. However, sustained economic
momentum, the stabilisation of interest rates and the improving labour market
should continue to drive domestic demand. The positive economic outlook for the
Mainland should also have a beneficial influence.
We will take advantage of the favourable economic conditions to further expand
commercial lending and SME services. We will also focus on developing our wealth
management business by stepping up cross-selling efforts and launching new
products to meet a wider variety of investment and insurance needs.
We will further diversify our Treasury income by growing our customer-driven
business and proprietary trading services, supported by closer collaboration
with other customer groups. Given the competitive corporate lending conditions,
Corporate Banking will target asset yield, increase cross-selling and work to
grow deposits by acquiring new customers.
On the Mainland, we will continue with our two-pronged approach of organic
growth and close collaboration with Industrial Bank.
Further financial sector liberalisation at the end of 2006 marked the start of a
new phase of financial services business opportunities on the Mainland. We will
establish our local subsidiary in the second quarter of 2007, which will enable
us to benefit from the opening up of the retail renminbi ('RMB') market and
increase our RMB deposits base to support lending growth.
We will expand our customer base on the Mainland through setting up new outlets
in the high-growth Yangtze River Delta and Pearl River Delta regions, increased
marketing and more promotion of our strong brand, including leveraging our role
as the compiler of the Hang Seng Index series.
We will capitalise on our growing capabilities in southern China by offering a
greater range of services to commercial banking customers with operations in
Hong Kong and on the Mainland. Our closer partnerships with SME customers will
help us grow our mainland trade finance and corporate wealth management
business.
We aim to grow our mainland business to more than 2,000 staff and over 50
outlets by 2010.
Results summary
Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the
group') reported an audited profit attributable to shareholders of HK$12,038
million for 2006, a rise of 6.1 per cent over 2005. Earnings per share were
HK$6.30, up 6.2 per cent from 2005.
Operating profit after loan impairment charges and other credit risk provisions
rose 13.6 per cent, reflecting encouraging growth in total operating income and
a substantial reduction in loan impairment charges. The results, as highlighted
below, benefited from sustained economic growth, a buoyant stock market and good
investment sentiment supported by ample liquidity and a benign credit
environment.
Net interest income^ rose by HK$898 million, or 8.3 per cent, with an increase
of 10.6 per cent in average interest-earning assets. The rise in net interest
income benefited from a 7.2 per cent growth in customer advances, driven by
higher yielding card and personal loans, trade finance and mainland renminbi
advances. A wider BLR/HIBOR gap improved the spread of BLR-based lending.
Interest earned on net free funds and the debt securities portfolio of life
insurance fund investments also rose significantly. The contribution of the
strong 12.8 per cent rise in customer deposits, however, was offset by the
narrowing of deposit spreads on HK dollar savings and structured deposits. The
treasury balance sheet management portfolio continued to be challenged by the
rise in funding costs and flattened yield curves. Net interest margin fell
slightly by four basis points to 2.02 per cent.
Net fees and commissions rose by HK$541 million, or 18.3 per cent. The
investment business took advantage of the buoyant stock market, ample liquidity
and favourable investment sentiment to expand its product range and customer
base. Income from stockbroking and related services and private banking
investment services rose 63.3 per cent and 93.1 per cent respectively. Sales
turnover of retail investment funds rose significantly by 40.6 per cent. Card
services income increased by 22.0 per cent, supported by a rise of 10.5 per cent
in the number of cards issued as well as an 11.7 per cent increase in cardholder
spending.
Trading income^ rose by 50.3 per cent to HK$1,330 million. Foreign exchange
income rose by 50.1 per cent, attributable to more active position taking,
increased customer flows and spreads earned on foreign exchange option-linked
structured products. Securities, derivatives and other trading also increased
with improved trading results and strong growth in sales volume and profit
earned on equity-linked investment products provided to customers.
^ With effect from 2006 reporting, interest income and expense from trading
assets and liabilities and from financial instruments designated at fair value
are reported under 'Net interest income' instead of 'Net trading income' and
'Net income from financial instruments designated at fair value' respectively as
in the previous year. Details of the change in accounting presentation are set
out on page 56. For HSBC Group reporting, the reporting of such interest income
and expense remains unchanged.
Income from insurance business grew by HK$217 million, or 14.0 per cent:
- net earned insurance premiums rose by HK$63 million;
- life insurance fund investments reported a net gain of HK$910 million
(compared with a loss of HK$25 million in 2005) under net income from
financial instruments designated at fair value;
- net interest income mainly from the debt securities portfolio of life
insurance fund investments increased by HK$264 million. Net fee income
related to insurance business fell by HK$29 million, mainly in general
insurance agency commissions;
- net insurance claims incurred and movement in policyholders' liabilities
rose by HK$1,063 million, reflecting the growth in investment gains and
interest income which are attributable to policyholders; and
- the present value of in-force long-term insurance business under other
operating income rose by HK$47 million.
Net operating income before loan impairment charges and other credit risk
provisions recorded growth of HK$1,849 million, or 11.4 per cent, to HK$18,081
million.
Operating expenses rose by HK$695 million, or 15.3 per cent, to HK$5,241
million, as the bank continued to expand its Hong Kong and mainland operations,
with the number of full-time equivalent staff up 619 at year-end compared with
the previous year. Employee compensation and benefits rose by 18.1 per cent.
Equipment-related costs increased with the development and enhancement of IT
systems for business expansion and regulatory-related projects. Marketing
expenditure rose due to the launch of the bank's new brand image and to support
new investment and insurance products and credit card promotion campaigns. The
bank's mainland operation, which expanded its network from 12 to 15 outlets and
increased its number of staff from 377 to 661 during 2006, also accounted for
the bank's rise in operating expenses.
Operating profit before loan impairment charges and other credit risk provisions
was up by 9.9 per cent. Loan impairment charges and other credit provisions
recorded a substantial reduction of 57.3 per cent under a benign credit
environment.
Profit before tax was up 7.8 per cent to HK$14,395 million after taking into
account:
- an increase of 76.7 per cent in profit on disposal of fixed assets and
financial investments, mainly from the disposal of properties;
- a decrease of 75.6 per cent in net surplus on property revaluation; and
- an increase of 31.0 per cent in share of profits from associates, mainly
contributed by Industrial Bank Co., Ltd.
Balance sheet and key ratios
Total assets rose by HK$88.2 billion, or 15.2 per cent, to HK$669.1 billion.
Customer advances rose by 7.2 per cent with encouraging growth in card and
personal loans, trade finance, commercial banking lending and mainland lending.
Residential mortgages grew satisfactorily in an intensely competitive market.
Interbank placing and money market instruments also increased, driven by the
12.8 per cent growth in customer deposits. At 31 December 2006, the
advances-to-deposits ratio was 51.7 per cent, compared with 54.4 per cent at the
end of 2005.
Shareholders' funds (excluding proposed dividends) increased by HK$4,410
million, or 11.3 per cent, to HK$43,348 million at 31 December 2006. Retained
profits rose by HK$2,992 million, reflecting the growth in attributable profit
and the realisation of the property revaluation reserve on the disposal of
properties during the year. The available-for-sale investments reserve also
rose.
The return on average total assets was 1.9 per cent, compared with 2.0 per cent
for 2005. The return on average shareholders' funds was 27.4 per cent (27.5 per
cent in 2005).
The total capital ratio strengthened to 13.6 per cent at 31 December 2006, up
from 12.8 per cent at the end of 2005. The tier 1 ratio rose from 10.4 per cent
to 10.7 per cent. The capital base rose by HK$6,684 million in retained profits
and as a result of the issue of US$450 million subordinated notes. The growth in
capital base supported the 11.1 per cent growth in risk-weighted assets.
The bank maintained a strong liquidity position. The average liquidity ratio for
2006 was 51.9 per cent (calculated in accordance with the Fourth Schedule of the
Hong Kong Banking Ordinance), compared with an average liquidity ratio of 45.1
per cent for 2005.
The cost efficiency ratio for 2006 was 29.0 per cent, compared with 28.0 per
cent for 2005.
Dividends
The Directors have declared a fourth interim dividend of HK$1.90 per share,
which will be payable on 30 March 2007 to shareholders on the register of
shareholders as of 20 March 2007. Together with the interim dividends for the
first three quarters, the total distribution for 2006 will amount to HK$5.20 per
share, the same as in 2005.
Customer group performance
Personal Inter-
Financial Commercial Corporate segment
Figures in HK$m Services Banking Banking Treasury Other elimination Total
Year ended 31Dec06
Net interest income 7,428 2,036 623 481 1,126 _ 11,694
Net fee income/(expense) 2,576 809 86 (24) 50 _ 3,497
Trading income 517 150 7 628 28 _ 1,330
Net income/(expense) from
financial instruments
designated at
fair value 910 _ _ (11) _ _ 899
Dividend income 8 5 _ _ 34 _ 47
Net earned insurance
premiums 7,671 174 1 _ _ _ 7,846
Other operating income 542 26 _ (4) 281 _ 845
Inter-segment income _ _ _ _ 378 (378) _
Total operating income 19,652 3,200 717 1,070 1,897 (378) 26,158
Net insurance claims
incurred and movement
in policyholders'
liabilities (8,014) (63) _ _ _ _ (8,077)
Net operating income
before loan impairment
(charges)/releases and
other credit risk
provisions 11,638 3,137 717 1,070 1,897 (378) 18,081
Loan impairment
(charges)/releases and
other credit risk
provisions (165) (101) 14 _ (12) _ (264)
Net operating income 11,473 3,036 731 1,070 1,885 (378) 17,817
Total operating expenses^ (3,472) (1,098) (168) (175) (328) _ (5,241)
Inter-segment expenses (326) (38) (6) (8) _ 378 _
Operating profit 7,675 1,900 557 887 1,557 _ 12,576
Profit on disposal of
fixed assets and
financial investments 26 _ _ _ 817 _ 843
Net surplus on property
revaluation _ _ _ _ 321 _ 321
Share of profits from
associates 29 362 _ 164 100 _ 655
Profit before tax 7,730 2,262 557 1,051 2,795 _ 14,395
Share of profit
before tax^ ^ 52.9% 16.4% 3.8% 7.6% 19.3% _ 100.0%
Operating profit
excluding inter-segment
transactions 8,001 1,938 563 895 1,179 _ 12,576
Operating profit
excluding loan
impairment (charges)/
releases and other
credit risk provisions 7,840 2,001 543 887 1,569 _ 12,840
^ Depreciation
/amortisation
included in
operating expenses (106) (11) (4) (2) (210) _ (333)
^ ^ Share of profits from associates is adjusted to pre-tax basis for the purpose of calculating the Customer
Groups' share of profit before tax.
At 31Dec06
Total assets 167,241 69,633 76,619 326,181 29,390 _ 669,064
Total liabilities 429,667 82,340 41,959 38,609 27,791 _ 620,366
Investments in associates 141 1,775 _ 801 771 _ 3,488
Capital expenditure
incurred during the
year 159 44 11 8 157 _ 379
Personal Inter-
Financial Commercial Corporate segment
Figures in HK$m Services Banking Banking Treasury Other elimination Total
Year ended 31Dec05 (restated)
Net interest income 7,092 1,587 612 995 510 _ 10,796
Net fee income/(expense) 2,136 713 79 (21) 49 _ 2,956
Trading income 367 134 6 378 _ _ 885
Net income/(expense) from
financial instruments
designated at fair value (25) _ _ (7) _ _ (32)
Dividend income 5 5 _ _ 50 _ 60
Net earned insurance
premiums 7,607 176 _ _ _ _ 7,783
Other operating income 562 25 4 _ 207 _ 798
Inter-segment income _ _ _ _ 308 (308) _
Total operating income 17,744 2,640 701 1,345 1,124 (308) 23,246
Net insurance claims
incurred and movement
in policyholders'
liabilities (6,964) (50) _ _ _ _ (7,014)
Net operating income before
loan impairment
(charges)/releases and
other credit risk
provisions 10,780 2,590 701 1,345 1,124 (308) 16,232
Loan impairment
(charges)/releases
and other credit risk
provisions 232 (803) (47) _ _ _ (618)
Net operating income 11,012 1,787 654 1,345 1,124 (308) 15,614
Total operating expenses^ (3,086) (903) (142) (157) (258) _ (4,546)
Inter-segment expenses (258) (40) (5) (5) _ 308 _
Operating profit 7,668 844 507 1,183 866 _ 11,068
Profit on disposal of
fixed assets and
financial investments _ _ _ (217) 694 _ 477
Net surplus on property
revaluation _ _ _ _ 1,313 _ 1,313
Share of profits from
associates 18 234 _ 106 142 _ 500
Profit before tax 7,686 1,078 507 1,072 3,015 _ 13,358
Share of profit
before tax^ ^ 56.8% 8.8% 3.7% 8.3% 22.4% _ 100.0%
Operating profit
excluding
inter-segment
transactions 7,926 884 512 1,188 558 _ 11,068
Operating profit
excluding loan
impairment
(charges)/releases
and other credit risk
provisions 7,436 1,647 554 1,183 866 _ 11,686
^ Depreciation
/amortisation
included in
operating expenses (103) (13) (3) (2) (168) _ (289)
^ ^ Share of profits from associates is adjusted to pre-tax basis for the purpose of calculating the
Customer Groups' share of profit before tax.
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
year 107 20 7 2 95 _ 231
Personal Financial Services ('PFS') reported a growth of 5.4 per cent in
operating profit excluding loan impairment charges to HK$7,840 million. Profit
before tax was up by 0.6 per cent to HK$7,730 million. There was a net charge of
HK$165 million in loan impairment provisions compared with a substantial net
release of HK$232 million in 2005 (mainly from mortgages and personal loans).
New and additional loan impairment charges were stable as the credit quality of
the PFS loan portfolio remained benign.
Net interest income rose 4.7 per cent, driven by the growth in customer advances
and improvement in spreads on BLR-based lending. The positive impact of
encouraging growth of 13.6 per cent in customer deposits was, however, offset by
the narrowing of deposit spreads on HK dollar savings and structured deposits.
The PFS loan portfolio grew 5.4 per cent, or HK$7,115 million, notwithstanding
the fall in Government Home Ownership Scheme mortgages and the disposal of a
part of the taxi loan portfolio to balance the overall loan portfolio structure.
(Excluding such factors, PFS achieved a growth of 10.7 per cent in customer
advances.) Residential mortgages, PFS's core loan product, reported encouraging
growth of 5.9 per cent and gained market share amid intense market competition.
Our marketing efforts have proved successful in improving credit card spending
as well as consumer borrowing such that our personal loans and card advances
rose 46.4 per cent and 22.1 per cent respectively. Advances for investment and
IPO subscriptions, mainly to Private Banking and Prestige Banking customers,
also reported significant growth. Non-interest income reported encouraging
growth of 14.2 per cent with wealth management income rising 22.7 per cent.
High levels of stock market and IPO activities, underpinned by ample liquidity
and bullish investment sentiment, helped investment services achieve impressive
growth:
- Our stockbroking business out-performed the market with the growth of
86.6 per cent in turnover. Together with a 20.0 per cent increase in
customer base, our securities services income rose 63.3 per cent. This
reflected the popularity of our efficient e-banking and phone trading
channels, the competitive pricing of broker commissions, IPO subscription
package offers and successful promotion campaigns.
- Our endeavours to maintain a broad range of quality funds from
high-growth China and emerging markets equity funds to more conservative
capital-guaranteed and fixed income bond funds resulted in much success and
recognition. Retail investment fund sales grew by 40.6 per cent over 2005.
Three funds managed by Hang Seng Investment Management Limited were named
top-performing funds at the Lipper Fund Awards Hong Kong 2007.
To capture the vast growth potential of the China equity market, Hang Seng
continued to be active in launching and promoting China funds. The bank's
flagship China funds, the Hang Seng China H-Share Index Leveraged 150 Fund
and Hang Seng China Equity Fund, reported returns of 161.1 per cent and
107.6 per cent respectively in 2006.
- Structured deposits and instruments continued to grow with the launch of
more sophisticated structures linked to equities, indices, foreign exchange
and bullion. Spreads earned on structured products rose by 48.1 per cent.
Private banking maintained its growth momentum and delivered an outstanding
result by continuing to focus on providing tailor-made financial planning
services. Total operating income rose 51.1 per cent to HK$731 million and profit
before tax rose by 46.3 per cent to HK$556 million.
Hang Seng's life insurance business maintained its leading market position for
new annualised premiums business with the launch of new annuities and medical
insurance products tailored for the needs of pre-retirees and retirees. As a
result, life insurance reported a rise of 17.5 per cent in operating income,
driven by growth of 18.5 per cent in the number of policies in force.
Card spending grew 11.7 per cent, boosted by promotions in joint effort with
merchants and the continued improvement in consumer sentiment. Card services
income rose by 22.0 per cent. The number of cards in force increased by 10.5 per
cent to 1.4 million. New cards launched during 2006 include the alpha card, a
debit card to tap the youth market, and VISA Infinite, which targets top-tier
affluent customers.
Commercial Banking ('CMB') achieved an encouraging increase of 21.5 per cent in
operating profit excluding loan impairment charges, driven by strong growth in
customer advances and corporate wealth management business. Taking into account
the reduction in loan impairment provisions, profit before tax rose 109.8 per
cent.
Net interest income reported strong growth of 28.3 per cent. Customer advances
rose 22.2 per cent, highlighting significant growth in trade finance and
factoring loans with good gains in market share, and advances to the property,
manufacturing, and wholesale and retail sectors. The opening of a branch in
Dongguan, together with the existing branches in Guangzhou, Shenzhen and Macau,
further strengthened the bank's competitive edge in providing seamless, one-stop
commercial banking services to Hong Kong customers within the Pearl River Delta
region.
The bank further enhanced its position as the preferred SME bank through various
initiatives, such as the SME 'testimonial' TV commercial (part of the bank's
brand revitalisation campaign), the launch of the Business Partner Direct
24-hour manned telephone service hotline and the extended opening hours of MTR
branches. New SME accounts acquired in the second half of 2006 outpaced the
first half by 34.7 per cent, as a result of intensified marketing.
The heightened focus upon CMB under the bank's Roadmap for Growth has resulted
in growth of 13.5 per cent in net fees and commissions and 11.9 per cent in
trading income.
The bank has continued to launch customer-centric propositions for specific
industries. For retailers, the bank is the only financial institution to have
introduced Octopus Merchant services, which complement other retailer solutions
such as credit card merchant services, renminbi deposits, retailer insurance
protection and bulk cash deposit services. Net fee income from card acquiring
business achieved a strong growth of 45.1 per cent in 2006.
CMB identified great opportunities in developing corporate wealth management
services. A dedicated wealth management team was established in early 2006 to
better serve the investment, treasury and risk management needs of commercial
customers. Furthermore, keyperson insurance was launched in early 2006. With
these initiatives, corporate wealth management grew strongly and accounted for
22.5 per cent of CMB's non-interest income. An increasing trend in corporate
wealth management is expected to further dilute the reliance on trade fee
income.
The pace of online business banking has accelerated. At 31 December 2006, over
38,000 customers had registered for Business e-banking services, an increase of
32.1 per cent from the end of 2005. The number of online business banking
transactions also grew by 46.8 per cent.
Corporate Banking's ('CIB') net operating income increased by 11.8 per cent.
Strong liquidity in the banking system continued to squeeze corporate loan
margins, and CIB stayed focused on asset yield rather than loan growth. Customer
deposits registered a healthy growth of 32.5 per cent. CIB also stepped up its
efforts in collaboration with Treasury in providing corporate treasury services
and structured products to grow non-fund income. Operating profit before
impairment charges was down by 2.0 per cent. The strong growth of our targeted
business segments from diversification of customer base in Hong Kong and the
Mainland largely compensated for the fall in lending to large corporates. Profit
before tax increased by 9.9 per cent, benefiting from a release in collectively
assessed impairment allowances.
Treasury's ('TRY') operating profit was down by 25.0 per cent at HK$887 million.
Profit before tax, however, was down only 2.0 per cent, due to the absence of
losses on the disposal of investment securities (a loss of HK$217 million was
recorded in the previous year). TRY continued to pursue its strategy of
enhancing trading capability and providing more sophisticated products for
corporate and individual customers. This led to a substantial 66.1 per cent
increase in trading income, which reached HK$628 million. The balance sheet
management portfolio, however, continued to face the challenge of the rise in
funding costs, particularly for the US dollar portfolio, as well as flattened
yield curves. Net interest income fell by 51.7 per cent. The position, however,
has been improving since the second half of the year with the halt in US dollar
interest rate hikes and subdued HK dollar interest rates due to ample market
liquidity.
Mainland business
The bank expanded its network to 15 outlets in 2006 by upgrading the
representative office in Dongguan to a branch and opening three new sub-branches
in Shanghai and Guangzhou. This is in pursuance of its strategy to focus on the
Yangtze River Delta and Pearl River Delta regions and to develop its Prestige
Banking customer base through its sub-branch network in major cities. Strong
growth was recorded in customer advances, which rose 50.9 per cent to HK$15.9
billion. Customer deposits also rose significantly by 51.1 per cent. Profit
before tax rose 94.2 per cent to HK$134 million, with growth of 94.5 per cent in
net operating income.
By customer group, mainland PFS focused on the Prestige Banking segment,
benefiting from Hang Seng's established strengths, including excellent customer
service, strong wealth management capabilities and experience in mortgage
business. CMB and CIB teams collaborated closely with their Hong Kong
counterparts to serve customers' business needs on the Mainland and in Hong
Kong, and to cultivate new relationships to expand the mainland corporate
customer base. TRY continued to manage the funding positions of the branches and
develop structured investment products to meet customers' needs.
Including our share of profit from Industrial Bank Co., Ltd., our mainland
business contributed 6.1 per cent of total profit before tax, compared with 4.5
per cent in 2005.
Mainland business financial highlights
2006 2005
Figures in HK$m
Profit before tax of mainland branches 134 69
Share of profit from mainland associate on pre-tax basis 763 547
Profit before tax of mainland business 897 616
Share of group's profit before tax^ 6.1% 4.5%
^ Share of profit from associate is adjusted to pre-tax basis for the purpose
of calculating the share of group's profit before tax.
Contents
The financial information in this news release is based on the audited
consolidated financial statements of Hang Seng Bank Limited ('the bank') and
its subsidiaries and associates ('the group') for the year ended 31 December
2006.
...Highlights of Results
...Chairman's Comment
...Results Summary
...Customer Group Performance
...Mainland Business
...Contents
...Consolidated Income Statement
...Consolidated Balance Sheet
...Consolidated Statement of Recognised Income and Expense
...Consolidated Cash Flow Statement
...Economic Profit
...Financial Review
.....Net interest income
.....Net fee income
.....Trading income
.....Net income/(expense) from financial instruments designated at fair value
.....Other operating income
.....Analysis of income from wealth management business
.....Loan impairment charges and other credit risk provisions
.....Operating expenses
.....Profit on disposal of fixed assets and financial investments
.....Tax expense
.....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
.....Amount 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
.....Statutory accounts and accounting policies
.....Comparative figures
.....Property revaluation
.....Market risk
.....Foreign currency positions
.....Non-adjusting post balance sheet event
.....Ultimate holding company
.....Register of shareholders
.....Proposed timetable for 2007 quarterly dividends
.....News release
Consolidated Income Statement
Year ended
31Dec06 31Dec05
Figures in HK$m (restated)
Interest income 29,262 19,713
Interest expense (17,568) (8,917)
Net interest income 11,694 10,796
Fee income 4,074 3,394
Fee expense (577) (438)
Net fee income 3,497 2,956
Trading income 1,330 885
Net income/(expense) from financial
instruments designated at fair value 899 (32)
Dividend income 47 60
Net earned insurance premiums 7,846 7,783
Other operating income 845 798
Total operating income 26,158 23,246
Net insurance claims incurred and
movement in policyholders' liabilities (8,077) (7,014)
Net operating income before loan impairment
charges and other credit risk provisions 18,081 16,232
Loan impairment charges and other credit risk
provisions (264) (618)
Net operating income 17,817 15,614
Employee compensation and benefits (2,694) (2,281)
General and administrative expenses (2,214) (1,976)
Depreciation of premises, plant and equipment (323) (280)
Amortisation of intangible assets (10) (9)
Total operating expenses (5,241) (4,546)
Operating profit 12,576 11,068
Profit on disposal of fixed assets and
financial investments 843 477
Net surplus on property revaluation 321 1,313
Share of profits from associates 655 500
Profit before tax 14,395 13,358
Tax expense (2,049) (1,795)
Profit for the year 12,346 11,563
Profit attributable to shareholders 12,038 11,342
Profit attributable to minority interests 308 221
12,346 11,563
Dividends 9,942 9,942
Earnings per share (in HK$) 6.30 5.93
With effect from 2006 (and as restated for 2005), interest income and interest
expense for all interest-bearing financial instruments are reported in 'Interest
income' and 'Interest expense' respectively in the income statement. The change
from the HSBC Group presentation described below has been made principally to
match the interest expense arising from trading liabilities with the interest
income from non-trading assets. This facilitates the comparison of Hang Seng's
net interest income and net interest margin with peer banks in Hong Kong.
The HSBC Group reports interest income and interest expense arising from
financial assets and financial liabilities held for trading as 'Net trading
income' and arising from financial instruments designated at fair value through
profit and loss as 'Net income from financial instruments designated at fair
value' (other than for debt securities in issue and subordinated liabilities,
together with derivatives managed in conjunction with them).
The table below presents the interest income and interest expense of Hang Seng,
as included within the HSBC Group accounts:
2006 2005
Interest income 28,639 19,029
Interest expense (15,000) (7,983)
Net interest income 13,639 11,046
Net interest income and expense reported as 'Net trading
income' (2,039) (306)
Net interest income and expense reported as 'Net income
from financial instruments designated at fair value' 94 56
Consolidated Balance Sheet
At 31Dec06 At 31Dec05
Figures in HK$m
Assets
Cash and balances with banks and
other financial institutions 9,390 9,201
Placings with and advances to banks and
other financial institutions 99,705 69,286
Trading assets 12,467 12,600
Financial assets designated at fair value 8,280 6,027
Derivative financial instruments 1,887 1,715
Advances to customers 279,353 260,680
Financial investments 227,710 189,904
Investments in associates 3,488 2,929
Investment properties 2,732 4,273
Premises, plant and equipment 6,516 6,750
Interest in leasehold land held for own use
under operating lease 580 594
Intangible assets 2,070 1,636
Other assets 14,886 15,225
669,064 580,820
Liabilities
Current, savings and other deposit
accounts 482,821 430,995
Deposits from banks 17,950 12,043
Trading liabilities 60,093 45,804
Financial liabilities designated at
fair value 1,562 1,528
Derivative financial instruments 1,531 1,792
Certificates of deposit and other
debt securities in issue 7,595 10,023
Other liabilities 16,123 14,138
Liabilities to customers under
insurance contracts 22,975 15,335
Deferred tax and current tax
liabilities 2,716 1,921
Subordinated liabilities 7,000 3,511
620,366 537,090
Capital resources
Minority interests 1,717 1,159
Share capital 9,559 9,559
Retained profits 29,044 26,052
Other reserves 4,745 3,327
Proposed dividends 3,633 3,633
Shareholders' funds 46,981 42,571
48,698 43,730
669,064 580,820
Consolidated Statement of Recognised Income and Expense
Year ended
Figures in HK$m 31Dec06 31Dec05
Unrealised surplus on revaluation of premises,
net of tax 519 863
Tax on realisation of revaluation surplus on disposal
of premises 106 9
Available-for-sale investments reserve, net of tax:
- fair value changes taken to equity 1,232 (1,237)
- fair value changes transferred to income statement
- on impairment 12 _
- on hedged items 21 249
- on disposal (325) (487)
Cash flow hedges reserve, net of tax:
- fair value changes taken to equity (179) (524)
- fair value changes transferred to income statement 442 32
Actuarial gains on defined benefit plans, net of tax 218 158
Exchange differences on translation of financial
statements of overseas branches, subsidiaries and
associates 184 50
Net income/(expense) recognised directly in equity 2,230 (887)
Profit for the year 12,346 11,563
Total recognised income and expense for the year 14,576 10,676
Attributable to shareholders 14,268 10,455
Attributable to minority interests 308 221
14,576 10,676
Consolidated Cash Flow Statement
Year ended
Figures in HK$m 31Dec06 31Dec05
Net cash inflow from operating activities 53,541 26,840
Cash flows from investing activities
Dividends received from associates 33 75
Purchase of available-for-sale investments (101,258) (48,780)
Purchase of held-to-maturity debt securities (351) (190)
Proceeds from sale or redemption of
available-for-sale investments 69,279 21,888
Proceeds from sale or redemption of
held-to-maturity debt securities 38 33
Purchase of fixed assets and intangible assets (379) (167)
Proceeds from sale of fixed assets and
assets held for sale 3,130 186
Interest received from available-for-sale
investments 6,557 4,495
Dividends received from available-for-sale
investments 45 58
Net cash outflow from investing activities (22,906) (22,402)
Cash flows from financing activities
Dividends paid (9,942) (9,942)
Interest paid for subordinated liabilities (332) (58)
Proceeds from subordinated liabilities 3,489 4,478
Net cash outflow from financing activities (6,785) (5,522)
Increase/(decrease) in cash and cash
equivalents 23,850 (1,084)
Cash and cash equivalents at 1 January 65,513 67,051
Effect of foreign exchange rate changes 912 (454)
Cash and cash equivalents at 31 December 90,275 65,513
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 year 2006, economic profit was HK$7,343 million, an increase of HK$1,259
million, or 20.7 per cent, compared with 2005. Post-tax profit, adjusted for the
property revaluation surplus net of deferred tax and depreciation attributable
to the revaluation, rose by HK$1,537 million. Cost of capital rose by HK$278
million, in line with the growth in invested capital with the accumulation of
retained profits.
Year ended
31Dec06 31Dec05
HK$m % HK$m %
Average invested capital 38,962 36,000
Return on invested capital^ 11,840 30.4 10,303 28.6
Cost of capital (4,497) (11.5) (4,219) (11.7)
Economic profit 7,343 18.9 6,084 16.9
^Return on invested capital is based on post-tax profit excluding any surplus/
deficit arising from property revaluation and depreciation attributable to the
revaluation surplus.
Financial Review
Net interest income
2006 2005
Figures in HK$m (restated)
Net interest income/(expense) arising from:
- financial assets and liabilities that are not at fair value
through profit and loss 13,689 11,068
- trading assets and liabilities (2,039) (306)
- financial instruments designated at fair value 44 34
11,694 10,796
Average interest-earning assets 578,588 522,922
Net interest spread 1.66% 1.85%
Net interest margin 2.02% 2.06%
With effect from 2006 (and as restated for 2005), interest income and interest
expense for all interest-bearing financial instruments are reported in 'Interest
income' and 'Interest expense' respectively in the income statement. The change
from the HSBC Group presentation described in page 22 has been made principally
to match the interest expense arising from trading liabilities with the interest
income from non-trading assets. This facilitates the comparison of Hang Seng's
net interest income and net interest margin with peer banks in Hong Kong. The
impact of the change in accounting presentation is set out in note 1 under
'Additional information' on page 56.
Net interest income rose by HK$898 million, or 8.3 per cent, to HK$11,694
million with a 10.6 per cent increase in average interest-earning assets.
Average customer advances rose 4.5 per cent, driven by encouraging growth in
higher yielding card advances, personal loans, trade finance and mainland loans.
BLR-based lending - mainly residential mortgages and certain trade finance,
overdraft and SME loans - benefited from a wider BLR/HIBOR gap. The pricing of
residential mortgages and corporate lending, however, was still under pressure
due to intense market competition. Overall, the total loan portfolio contributed
HK$419 million to the growth in net interest income.
Benefiting from the rise in both interest rate and funds balance, net free funds
added HK$867 million to net interest income. Of this, HK$302 million was
attributable to non-interest-bearing HK dollar current accounts. Net
shareholders' funds increased due to the growth in retained profits and the
proceeds from the disposal of properties, contributing HK$565 million.
The debt securities portfolio of life insurance fund investments grew by 50.9
per cent, adding HK$264 million to net interest income.
Average customer deposits rose by 11.3 per cent, mainly reflecting increases in
time and structured deposits. However, the favourable impact of the growth in
deposits was more than offset by the narrower deposit spread on HK dollar
savings and the change in average deposit mix from savings and current account
deposits to time and structured deposits. Net interest income from deposit
products fell by HK$138 million. For structured deposits, the bank earns a
spread on the derivatives embedded in the structured deposits, which was
reported as trading income. Thus, there was no deposit spread on structured
deposits reported under net interest income.
Yields in treasury balance sheet management portfolios were further compressed
by the rise in funding costs and flattened yield curves, and this resulted in a
fall of HK$514 million in net interest income.
Net interest margin fell by four basis points to 2.02 per cent. Net interest
spread fell 19 basis points to 1.66 per cent, mainly due to the treasury balance
sheet management portfolios and deposit spreads on HK dollar savings and
structured deposits as mentioned above, outweighing the impact of loan growth
and margin enhancement. The fall in net spread was largely offset by the
contribution from net free funds which rose 15 basis points to 0.36 per cent.
The HSBC Group reports interest income and interest expense arising from
financial assets and financial liabilities held for trading as 'Net trading
income' and arising from financial instruments designated at fair value through
profit and loss as 'Net income from financial instruments designated at fair
value' (other than for debt securities in issue and subordinated liabilities,
together with derivatives managed in conjunction with them).
The table below presents the net interest income of Hang Seng, as included
within the HSBC Group accounts:
Figures in HK$m 2006 2005
Net interest income 13,639 11,046
Average interest-earning assets 564,027 505,221
Net interest spread 1.83% 1.94%
Net interest margin 2.42% 2.19%
Net fee income
2006 2005
Figures in HK$m (restated)
- Stockbroking and related services 805 493
- Retail investment products and funds under management 891 916
- Insurance 108 116
- Account services 274 225
- Private banking 336 174
- Remittances 161 141
- Cards 860 705
- Credit facilities 111 117
- Trade services 380 375
- Other 148 132
Fee income 4,074 3,394
Fee expense (577) (438)
3,497 2,956
Net fee income rose by HK$541 million, or 18.3 per cent, compared with 2005.
Stockbroking and related services rose 63.3 per cent, driven by an 86.6 per cent
growth in turnover with a 20.1 per cent growth in customer base. Benefiting from
the favourable investment environment, income from private banking investment
services rose 93.1 per cent. Card services income rose by 22.0 per cent,
supported by a rise of 10.5 per cent in the number of cards in issue and an 11.7
per cent increase in cardholder spending. Deposit services and payment and cash
management business also showed good progress, reporting growth in account
services fees and remittances of 21.8 per cent and 14.2 per cent respectively.
Trading income
2006 2005
Figures in HK$m (restated)
Trading income:
- foreign exchange 1,178 785
- securities, derivatives and other trading activities 152 100
1,330 885
Trading income reached HK$1,330 million, a rise of HK$445 million, or 50.3 per
cent, over 2005. Foreign exchange income increased by HK$393 million, or 50.1
per cent, attributable to active position taking and increased customer
activity. The increase in spreads earned on foreign exchange option-linked
products offered to retail and corporate customers also contributed to foreign
exchange income growth. Securities, derivatives and other trading rose by HK$52
million, attributable to the improvement in trading results and the growth in
trading volume and profit earned on equity-linked products provided to
customers.
With effect from 2006 reporting, interest income and expense from trading assets
and liabilities are reported under 'Net interest income'. Details of the change
in accounting presentation are set out in note 1 under 'Additional information'
on page 56.
Net income/(expense) from financial instruments designated at fair value
2006 2005
Figures in HK$m (restated)
Net income/(expense) on assets designated at fair
value which back insurance and investment contracts 910 (25)
Net change in fair value of other financial instruments
designated at fair value (11) (7)
899 (32)
Financial instruments designated at fair value reported a net income of HK$899
million, compared with a net expense of HK$32 million last year, reflecting the
outstanding investment performance of the life insurance fund portfolios.
With effect from 2006 reporting, interest income and expense from financial
instruments designated at fair value are reported under 'Net interest income'.
Details of the change in accounting presentation are set out in note 1 under
'Additional information' on page 56.
Other operating income
Figures in HK$m 2006 2005
Rental income from investment properties 186 207
Movement in present value of in-force long-term
insurance business 363 316
Other 296 275
845 798
Analysis of income from wealth management business
Figures in HK$m 2006 2005
Investment income:
- retail investment products and funds under management 891 916
- structured investment products in issue 419 283
- private banking^ 345 188
- stockbroking and related services 805 493
- margin trading 59 63
2,519 1,943
Insurance income:
- life insurance 1,476 1,256
- general insurance and others 286 289
1,762 1,545
Total 4,281 3,488
^ Income from private banking includes income reported under net fee income on
the investment services and profit generated from selling of structured
investment products in issue, reported under trading income.
Wealth management income gained strong growth momentum in 2006, reporting a rise
of 22.7 per cent over 2005.
Investment services income rose by 29.6 per cent, benefiting from the buoyant
stock market and positive investment sentiment. Our efficient and convenient
e-banking and phone trading channels played key roles in the expansion of our
securities broking business, which grew its customer base and market share. With
the success of campaigns to acquire new accounts and promote active trading as
well as offers such as special packages for IPO subscriptions, stockbroking
turnover rose 86.6 per cent and income increased by 63.3 per cent. Private
banking continued to expand its customer base and product range. Assets under
management rose 39.6 per cent and private banking income grew 83.5 per cent.
Retail investment fund sales grew by 40.6 per cent over 2005, supported by a
broad range of fund offerings from high-growth China and emerging market equity
funds to capital-guaranteed and fixed-income funds. Equity, foreign exchange
and other market-linked investment and deposit products also reached record
highs in terms of issue volume and income earned, which were up by 68.6 per
cent and 48.1 per cent respectively.
Life insurance recorded satisfactory income growth of 17.5 per cent to reach
HK$1,476 million (as analysed in the table below). During the year, we continued
to launch new products catering for customers' investment and protection needs.
The Monthly Income Retirement Plan was successful in capturing a section of the
lucrative retirement plan market and the MediCash Lifetime Insurance Plan, which
targets mid-market pre-retirees, was also well received.
Figures in HK$m 2006 2005
Net interest income and fee income 665 411
Investment return on life insurance funds 910 (25)
Net earned insurance premiums 7,534 7,483
Net insurance claims incurred and movement in
policyholders' liabilities (7,996) (6,929)
Movement in present value of in-force long-term insurance
business 363 316
1,476 1,256
Income from general insurance and others maintained at the same level as the
previous year.
Loan impairment charges and other credit risk provisions
Figures in HK$m 2006 2005
Loan impairment (charges)/releases:
- individually assessed (107) (309)
- collectively assessed (145) (309)
(252) (618)
of which:
- new and additional (423) (1,070)
- releases 106 351
- recoveries 65 101
(252) (618)
Other provision (12) _
Loan impairment charges and other
credit risk provisions (264) (618)
Loan impairment charges and other credit risk provisions decreased by HK$354
million, or 57.3 per cent, to HK$264 million, reflecting the benign credit
environment. There was a decrease of HK$202 million in individually assessed
provisions, mainly due to a substantial reduction in new and additional charges
for commercial banking customers. Releases from commercial banking accounts
increased but those from mortgages and personal lending were substantially
lower. Of the collectively assessed charges, HK$139 million was made on card and
personal loan portfolios, a rise of 13.9 per cent over last year. A charge of
HK$6 million was made on advances not identified individually as impaired,
compared with a charge of HK$187 million made in 2005. The reduction in
historical loss rates used at the end of 2006 for calculation of this type of
collectively assessed impairment provisions reflects the continued improvement
in credit conditions in recent years.
Operating expenses
Figures in HK$m 2006 2005
Employee compensation and benefits:
- salaries and other costs 2,470 2,074
- retirement benefit costs 124 137
- share-based payments 100 70
2,694 2,281
General and administrative expenses:
- rental expenses 267 207
- other premises and equipment 829 751
- other operating expenses 1,118 1,018
2,214 1,976
Depreciation of business premises
and equipment 323 280
Amortisation of intangible assets 10 9
5,241 4,546
Cost efficiency ratio 29.0% 28.0%
Staff numbers^ by region 2006 2005
Hong Kong 7,748 7,425
Mainland 661 377
Others 55 43
Total 8,464 7,845
^ Full-time equivalent
Operating expenses rose by HK$695 million, or 15.3 per cent, compared with 2005.
Employee compensation and benefits increased by 18.1 per cent, due to the annual
salary increment, the increase in number of staff, and performance-based
incentives and bonuses. General and administrative expenses were up 12.0 per
cent. Rental expenses increased due to increases in rents for branches in Hong
Kong and new branches on the Mainland. Other premises and equipment expenses
increased by 10.4 per cent, attributable to IT systems development and
enhancement for business expansion and regulatory related projects. The rise in
marketing expenditure was attributable mainly to the launch of the bank's new
brand image and increased promotion of investment and insurance products and
credit cards. Depreciation charges rose by 15.4 per cent as a result of the
increase in fair value of business premises. The bank's mainland operations,
which expanded its network from 12 to 15 outlets and increased its staff force
from 377 to 661 during 2006, also accounted for the bank's increase in operating
expenses.
The number of full-time equivalent staff increased by 619 compared with the
previous year-end. New staff in Hong Kong were hired to further expand private
banking's financial advisory team and CMB's relationship management and
corporate wealth management teams, as well as to support IT systems development
and enhancement. The number of staff at mainland branches rose by 75.3 per cent,
mainly to support the network expansion, building up sales and marketing force
for personal banking business, and strengthening of the corporate and commercial
relationship management and trade services teams.
The cost efficiency ratio for 2006 was 29.0 per cent, compared with 28.0 per
cent in 2005.
Profit on disposal of fixed assets and financial investments
Figures in HK$m 2006 2005
Profit on disposal of available-for-sale securities:
- realisation of amounts previously recognised
in reserves at 1 January 137 611
- net gains/(losses) arising in the year 201 (153)
338 458
Profit less loss on disposal of fixed assets 505 19
843 477
Profit on disposal of fixed assets and financial investments amounted to HK$843
million, an increase of 76.7 per cent over last year. Profit on disposal of
fixed assets, mainly properties, rose by HK$486 million to HK$505 million.
During the year, the group sold properties for a total value of HK$3.1 billion,
including the property at 77 Des Voeux Road Central, to rationalise the bank's
property portfolio and enhance shareholders' return. Profit on the disposal of
equity investments fell to HK$338 million.
Tax expense
Taxation in the consolidated income statement represents:
Figures in HK$m 2006 2005
Current tax - provision for Hong Kong profits tax
Tax for the year 2,188 1,501
Current tax - taxation outside Hong Kong
Tax for the year 36 12
Deferred tax
Origination and reversal of
temporary differences (175) 282
Total tax expense 2,049 1,795
The current tax provision is based on the estimated assessable profit for 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 equity, in which case the deferred tax is also
recorded in equity. 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 in 2006 is based on earnings of HK$12,038
million (HK$11,342 million in 2005) and on the weighted average number of
ordinary shares in issue of 1,911,842,736 shares (unchanged from 2005).
Dividends per share
2006 2005
HK$ HK$m HK$ HK$m
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 1.10 2,103
Fourth interim 1.90 3,633 1.90 3,633
5.20 9,942 5.20 9,942
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 costs
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 balance sheet management 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.
Profit before tax contributed by the customer groups in 2006 compared with 2005
is set out in the table below. More customer group analysis and discussions are
set out in the 'Customer group performance' section on page 8.
Personal
Financial Commercial Corporate
Figures in HK$m Services Banking Banking Treasury Other Total
Year ended 31Dec06
Profit before tax 7,730 2,262 557 1,051 2,795 14,395
Share of profit before tax^ 52.9% 16.4% 3.8% 7.6% 19.3% 100.0%
Year ended 31Dec05
Profit before tax 7,686 1,078 507 1,072 3,015 13,358
Share of profit before tax^ 56.8% 8.8% 3.7% 8.3% 22.4% 100.0%
^ Share of profits from associates is adjusted to pre-tax basis for the purpose
of calculating the Customer Groups' share of profit before tax.
(b) By geographical region
The geographical regions in this analysis are classified by the location of the
principal operations of the subsidiary companies or, in the case of the bank
itself, by the location of the branches responsible for reporting the results or
advancing the funds.
Figures in HK$m Hong Kong Americas Mainland and Total
other
Year ended 31Dec06
Income and expense
Total operating income 24,449 1,295 414 26,158
Profit before tax 12,380 1,262 753 14,395
Capital expenditure
incurred during the year 335 _ 44 379
At 31Dec06
Total assets 573,067 65,997 30,000 669,064
Total liabilities 603,636 4,180 12,550 620,366
Contingent liabilities
and commitments 165,541 _ 8,701 174,242
Year ended 31Dec05
Income and expense
Total operating income 21,377 1,644 225 23,246
Profit before tax 11,253 1,614 491 13,358
Capital expenditure
incurred during the year 206 _ 25 231
At 31Dec05
Total assets 497,406 60,845 22,569 580,820
Total liabilities 520,260 9,395 7,435 537,090
Contingent liabilities
and commitments 137,536 _ 3,973 141,509
Analysis of assets and liabilities by remaining maturity
The maturity analysis is based on the remaining period at the balance sheet date
to the contractual maturity date in accordance with the guideline issued by the
Hong Kong Monetary Authority.
Three
months Three One
Repayable or less months year Over No
on but not to to five contractual
Figures in HK$m demand on demand one year five years years Trading maturity Total
Assets
Cash and balances
with banks and
other financial
institutions 9,390 _ _ _ _ _ _ 9,390
Placings with and
advances to
banks and other
financial
institutions 16,529 82,200 976 _ _ _ _ 99,705
Trading assets _ _ _ _ _ 12,467 _ 12,467
Financial assets
designated
at fair value _ 136 400 1,256 2,557 _ 3,931 8,280
Derivative
financial
instruments _ 166 146 153 48 1,374 _ 1,887
Advances to
customers 17,087 34,868 39,736 87,768 99,894 _ _ 279,353
Financial
investments _ 22,703 51,385 134,981 16,601 _ 2,040 227,710
Investments in
associates _ _ _ _ _ _ 3,488 3,488
Investment
properties _ _ _ _ _ _ 2,732 2,732
Premises, plant and
equipment _ _ _ _ _ _ 6,516 6,516
Interest in leasehold
land held for own
use under operating _ _ _ _ _ _ 580 580
lease
Intangible assets _ _ _ _ _ _ 2,070 2,070
Other assets 6,304 5,694 1,500 262 10 _ 1,116 14,886
At 31Dec06 49,310 145,767 94,143 224,420 119,110 13,841 22,473 669,064
At 31Dec05 43,944 97,970 74,642 220,161 110,087 13,861 20,155 580,820
Three
months Three One
Repayable or less months year Over No
on but not to to five contractual
Figures in HK$m demand on demand one year five years years Trading maturity Total
Liabilities
Current, savings
and other
deposit
accounts 290,463 182,885 8,497 976 _ _ _ 482,821
Deposits
from banks 2,797 14,032 1,121 _ _ _ _ 17,950
Trading
liabilities _ _ _ _ _ 60,093 _ 60,093
Financial
liabilities
designated at
fair value 81 _ _ 996 _ _ 485 1,562
Derivative
financial
instruments _ 7 101 98 11 1,314 _ 1,531
Certificates of
deposit and
other debt
securities
in issue _ 74 866 6,655 _ _ _ 7,595
Other
liabilities 6,486 8,577 468 120 143 _ 329 16,123
Liabilities
to customers
under insurance
contracts _ _ _ _ _ _ 22,975 22,975
Deferred tax
and current
tax liabilities _ 481 747 _ _ _ 1,488 2,716
Subordinated
liabilities _ _ _ 7,000 _ _ _ 7,000
At 31Dec06 299,827 206,056 11,800 15,845 154 61,407 25,277 620,366
At 31Dec05 242,673 207,494 8,478 9,120 4,690 47,139 17,496 537,090
Cash and balances with banks and other financial institutions
Figures in HK$m At 31Dec06 At 31Dec05
Cash in hand 4,920 4,772
Balances with central banks 357 303
Balances with banks and other
financial institutions 4,113 4,126
9,390 9,201
Placings with and advances to banks and other financial institutions
Figures in HK$m At 31Dec06 At 31Dec05
Placings with and advances to banks and
other financial institutions maturing
within one month 75,722 54,338
Placings with and advances to banks and
other financial institutions maturing
after one month 23,983 14,948
99,705 69,286
Trading assets
Figures in HK$m At 31Dec06 At 31Dec05
Treasury bills 6,071 2,594
Certificates of deposit 212 538
Other debt securities 6,109 9,440
Debt securities 12,392 12,572
Equity shares 16 28
Total trading securities 12,408 12,600
Loans and advances to customers^ 59 _
Total trading assets 12,467 12,600
Debt securities:
- listed in Hong Kong 2,839 767
- listed outside Hong Kong 269 _
3,108 767
- unlisted 9,284 11,805
12,392 12,572
Equity shares:
- listed in Hong Kong 16 17
- unlisted _ 11
16 28
Total trading securities 12,408 12,600
Debt securities:
Issued by public bodies:
- central governments and central
banks 8,969 5,625
- other public sector entities 926 1,489
9,895 7,114
Issued by other bodies:
- banks and other financial
institutions 1,555 2,836
- corporate entities 942 2,622
2,497 5,458
12,392 12,572
Equity shares:
Issued by corporate entities 16 28
Total trading securities 12,408 12,600
^These represent amounts receivable from counterparties on trading
transactions not yet settled.
Financial assets designated at fair value
Figures in HK$m At 31Dec06 At 31Dec05
Certificates of deposit 232 194
Other debt securities 4,587 4,075
Debt securities 4,819 4,269
Equity shares 3,461 1,758
8,280 6,027
Debt securities:
- listed in Hong Kong 359 100
- listed outside Hong Kong 31 22
390 122
- unlisted 4,429 4,147
4,819 4,269
Equity shares:
- listed in Hong Kong 1,202 732
- listed outside Hong Kong 1,300 979
2,502 1,711
- unlisted 959 47
3,461 1,758
8,280 6,027
Debt securities:
Issued by public bodies:
- central governments and central
banks 870 865
- other public sector entities 285 295
1,155 1,160
Issued by other bodies:
- banks and other financial
institutions 3,535 2,937
- corporate entities 129 172
3,664 3,109
4,819 4,269
Equity shares:
Issued by corporate entities 3,461 1,758
8,280 6,027
Financial assets are designated at fair value, usually together with the related
liabilities or derivative financial instruments, primarily for the purpose of
eliminating or significantly reducing the accounting mismatch. The figures also
include those financial assets of life insurance funds designated at fair value
for backing policyholders' liabilities.
Advances to customers
Figures in HK$m At 31Dec06 At 31Dec05
Gross advances to customers 280,277 261,714
Less:
Loan impairment allowances:
- individually assessed (406) (524)
- collectively assessed (518) (510)
279,353 260,680
Included in advances to customers are:
- trade bills 3,907 3,024
- loan impairment allowances (16) (14)
3,891 3,010
Loan impairment allowances against advances to customers
Individually Collectively
Figures in HK$m assessed assessed Total
At 1 January 2006 524 510 1,034
Amounts written off (224) (177) (401)
Recoveries of advances
written off in previous years 25 40 65
New impairment allowances
charged to income statement 238 185 423
Impairment allowances
released to income statement (131) (40) (171)
Unwind of discount of loan
impairment allowances
recognised as 'interest income' (26) - (26)
At 31 December 2006 406 518 924
Total loan impairment allowances as a percentage of gross advances to customers
are as follows:
At 31Dec06 At 31Dec05
% %
Loan impairment allowances:
- individually assessed 0.15 0.20
- collectively assessed 0.18 0.19
Total loan impairment allowances 0.33 0.39
Total loan impairment allowances as a percentage of gross advances to customers
was 0.33 per cent at 31 December 2006, compared with 0.39 per cent at the
previous year-end. Individually assessed allowances as a percentage of gross
advances fell by 0.05 percentage points to 0.15 per cent, reflecting recoveries
from doubtful accounts and writing off of irrecoverable balances against
impairment allowances. The percentage of collectively assessed allowances was
slightly lowered to 0.18 per cent from 0.19 per cent at the previous year-end.
Impaired advances and allowances
Figures in HK$m At 31Dec06 At 31Dec05
Gross impaired advances 1,387 1,433
Individually assessed allowances (406) (524)
Net impaired advances 981 909
Individually assessed allowances
as a percentage of
gross impaired advances 29.3% 36.6%
Gross impaired advances
as a percentage of
gross advances to customers 0.5% 0.5%
Impaired advances are those advances with objective evidence of impairment as
assessed on an individual basis. 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 fell by 3.2 per cent to HK$1,387 million, reflecting the
recovery and upgrading of certain commercial banking accounts. Gross impaired
advances as a percentage of gross advances to customers stood at 0.5 per cent,
the same level as last year.
Overdue advances
Advances to customers that are more than three months overdue and their
expression as a percentage of gross advances to customers are as follows:
At 31Dec06 At 31Dec05
HK$m % HK$m %
Gross advances to customers
which have been overdue
with respect to either principal
or interest for periods of:
- six months or less but over three
months 504 0.2 482 0.2
- one year or less but over six
months 263 0.1 211 0.1
- over one year 173 _ 169 _
940 0.3 862 0.3
Advances with a specific repayment date are classified as overdue when the
principal or interest is overdue and remains unpaid at year-end. Advances
repayable by regular instalments are treated as overdue when an instalment
payment is overdue and remains unpaid at year-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 9.0 per cent to HK$940 million at 31 December
2006, representing 0.3 per cent (same level as the previous year-end) of gross
advances to customers, mainly attributable to commercial banking accounts.
Rescheduled advances
Rescheduled advances and their expression as a percentage of gross advances to
customers are as follows:
At 31Dec06 At 31Dec05
HK$m % HK$m %
Rescheduled advances to customers 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 38).
Rescheduled advances decreased by HK$4 million, or 1.1 per cent, to HK$357
million at 31 December 2006, representing 0.1 per cent (same level as the
previous year-end) of gross advances to customers.
Segmental analysis of advances to customers by geographical area
Advances to customers by geographical area are classified according to the
location of the counterparties after taking into account the transfer of risk.
In general, risk transfer applies when an advance is guaranteed by a party
located in an area which is different from that of the counterparty. At 31
December 2006, over 90 per cent of the group's advances to customers, including
related impaired advances and overdue advances, were classified under Hong Kong
(a position unchanged from that at 31 December 2005).
Gross advances to customers by industry sector
The analysis of gross advances to customers by industry sector based on
categories and definitions used by the Hong Kong Monetary Authority ('HKMA') is
as follows:
At 31Dec06 At 31Dec05
Figures in HK$m (restated)
Gross advances to customers for
use in Hong Kong
Industrial, commercial and
financial sectors
Property development 18,051 16,446
Property investment 48,096 45,964
Financial concerns 2,103 968
Stockbrokers 234 221
Wholesale and retail trade 6,360 5,562
Manufacturing 7,670 6,477
Transport and transport equipment 11,145 11,919
Other 22,787 22,912
116,446 110,469
Individuals
Advances for the purchase of flats under
the Government Home Ownership
Scheme, Private Sector Participation
Scheme and Tenants Purchase Scheme 20,078 22,879
Advances for the purchase of other
residential properties 83,616 81,318
Credit card advances 9,448 7,735
Other 8,813 7,563
121,955 119,495
Total gross advances for use in Hong Kong 238,401 229,964
Trade finance 19,684 15,874
Gross advances for use outside Hong Kong 22,192 15,876
Gross advances to customers 280,277 261,714
Gross advances to customers rose by 7.1 per cent compared with the previous
year-end.
Lending to the property development sector rose 9.8 per cent, reflecting the
increase in financing of development projects by CIB and CMB. The 4.6 per cent
rise in property investment was largely residential mortgages to property
holding vehicles controlled by individuals. Lending to investment companies
grouped under the financial concerns sector rose significantly, driven by the
active investment market. The encouraging growth of the CMB loan portfolio was
reflected in rises of 14.3 per cent and 18.4 per cent in lending to the
wholesale and retail trade and manufacturing sector respectively. Lending to the
transport and transport equipment sector recorded a fall of 6.5 per cent,
attributable to the disposal of a part of the taxi portfolio to balance the
overall loan portfolio structure. Excluding such effect, lending to this sector
rose 5.5 per cent.
Trade finance recorded strong growth of 24.0 per cent and gained substantial
market share in 2006, reflecting CMB's achievement in strengthening customer
relationships and enhancing trade finance service efficiency.
Lending to individuals recorded a rise of 2.1 per cent. Excluding the fall in
Government Home Ownership Scheme mortgages, lending to individuals grew by 5.4
per cent. Residential mortgages to individuals rose by 2.8 per cent and the bank
gained market share amid intense market competition. Including mortgages held in
the name of investment holding vehicles, which were grouped under the property
investment sector as mentioned above, the growth rate reached 5.2 per cent.
With the improved economic environment and positive consumer sentiment, personal
loans and card advances rose 46.4 per cent and 22.1 per cent respectively. PFS
further expanded its consumer finance business by stepping up marketing
initiatives and improving process efficiency.
Loans for use outside Hong Kong increased by HK$6,316 million, or 39.8 per cent,
over the previous year-end. This was due largely to the 50.9 per cent expansion
of lending by mainland branches, which had reached HK$15,851 million at 31
December 2006. Strong growth was recorded in corporate lending, driven by
renminbi loans which can be priced at a higher margin. Trade finance rose
significantly, reflecting good collaboration between the Hong Kong and mainland
trade services teams. Mainland branches continued to grow residential mortgage
business, leveraging the bank's strong capabilities and experience in Hong Kong.
Financial investments
Figures in HK$m At 31Dec06 At 31Dec05
Available-for-sale at fair value:
- debt securities 209,463 177,813
- equity shares 2,110 1,360
Held-to-maturity debt securities at
amortised cost 16,137 10,731
227,710 189,904
Fair value of held-to-maturity debt
securities 16,551 10,778
Treasury bills 1,088 4,816
Certificates of deposit 25,020 27,048
Other debt securities 199,492 156,680
Debt securities 225,600 188,544
Equity shares 2,110 1,360
227,710 189,904
Debt securities:
- listed in Hong Kong 3,759 3,008
- listed outside Hong Kong 1,914 1,947
5,673 4,955
- unlisted 219,927 183,589
225,600 188,544
Equity shares:
- listed in Hong Kong 1,702 1,049
- listed outside Hong Kong 150 186
1,852 1,235
- unlisted 258 125
2,110 1,360
227,710 189,904
Fair value of listed financial
investments 7,538 6,209
Debt securities:
Issued by public bodies:
- central governments and central banks 8,321 15,981
- other public sector entities 7,044 8,667
15,365 24,648
Issued by other bodies:
- banks and other financial institutions 192,751 149,557
- corporate entities 17,484 14,339
210,235 163,896
225,600 188,544
Equity shares:
Issued by corporate entities 2,110 1,360
227,710 189,904
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 immediate holding company and
fellow subsidiary companies included in the assets and liabilities balances of
the consolidated balance sheet are as follows:
Figures in HK$m At 31Dec06 At 31Dec05
Amounts due from:
Cash and balances with banks and
other financial institutions 1,665 718
Placings with and advances to banks
and other financial institutions 4,573 3,495
Trading assets _ 50
Financial assets designated at fair
value 2,842 2,299
Derivative financial instruments 194 145
Financial investments 1,023 1,135
Other assets 79 29
10,376 7,871
Amounts due to:
Customer accounts 199 167
Deposits from banks 5,724 5,136
Derivative financial instruments 333 488
Subordinated liabilities 2,022 2,016
Other liabilities 473 361
8,751 8,168
Investments in associates
Figures in HK$m At 31Dec06 At 31Dec05
Share of net assets 3,158 2,611
Goodwill 330 318
3,488 2,929
Intangible assets
Figures in HK$m At 31Dec06 At 31Dec05
Present value of in-force long-term
insurance business 1,927 1,565
Internally developed software 129 56
Acquired software 14 15
2,070 1,636
Other assets
Figures in HK$m At 31Dec06 At 31Dec05
Items in the course of collection
from other banks 6,036 8,068
Prepayments and accrued income 3,520 3,016
Deferred tax assets 1 9
Assets held for sale 256 216
Acceptances and endorsements 2,855 2,371
Other accounts 2,218 1,545
14,886 15,225
Current, savings and other deposit accounts
Figures in HK$m At 31Dec06 At 31Dec05
Current, savings and other deposit accounts:
- as stated in consolidated balance sheet 482,821 430,995
- structured deposits reported as
trading liabilities 35,066 24,422
517,887 455,417
By type:
- demand and current accounts 29,594 27,248
- savings accounts 223,255 188,839
- time and other deposits 265,038 239,330
517,887 455,417
Certificates of deposit and other debt securities in issue
Figures in HK$m At 31Dec06 At 31Dec05
Certificates of deposit and other debt securities in issue:
- as stated in consolidated balance sheet 7,595 10,023
- structured certificates of deposit and other debt
securities in issue reported as trading liabilities 14,821 13,616
22,416 23,639
By type:
- certificates of deposit in issue 18,075 22,525
- other debt securities in issue 4,341 1,114
22,416 23,639
Customer deposits and certificates of deposit and other debt securities in issue
rose by 12.8 per cent to HK$540.3 billion. Both HK dollar and US dollar savings
accounts rose, reflecting customers' preference for liquidity in an active
investment market. Structured deposits, structured certificates of deposit and
other debt securities in issue rose 31.2 per cent as the bank continued to
increase the diversity and sophistication of these products for customers to
capture market opportunities.
Deposits at mainland branches grew 51.1 per cent following efforts to increase
the customer base through expansion of the network and the PFS sales force. To
further develop the wealth management business, the mainland branches expanded
the range of investment-linked deposit products to meet the needs of the Prestige
Banking customer segment.
Trading liabilities
Figures in HK$m At 31Dec06 At 31Dec05
Structured certificates of deposit and
other debt securities in issue 14,821 13,616
Structured deposits 35,066 24,422
Short positions in securities and other 10,206 7,766
60,093 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$m At 31Dec06 At 31Dec05
Items in the course of transmission
to other banks 6,469 6,517
Accruals 2,641 1,653
Acceptances and endorsements 2,855 2,371
Other 4,158 3,597
16,123 14,138
Subordinated liabilities
Figures in HK$m At 31Dec06 At 31Dec05
Nominal value Description
Amount owed to third parties
HK$1,500 million Callable floating rate
subordinated notes due June 2015 1,496 1,495
HK$1,000 million 4.125 per cent callable fixed
rate subordinated notes due
June 2015 987 967
US$450 million Callable floating rate
subordinated notes
due July 2016 3,483 _
Amount owed to HSBC Group undertakings
US$260 million Callable floating rate
subordinated loan debt due
December 2015 2,021 2,016
7,987 4,478
Representing:
- measured at amortised cost 7,000 3,511
- designated at fair value 987 967
7,987 4,478
During the year, the bank issued floating-rate subordinated notes amounting to
US$450 million that mature in July 2016 with a one-time call option exercisable
by the bank in July 2011. The notes were issued at the price of 99.869 per cent,
bearing interest at the rate of three-month US dollar LIBOR plus 0.30 per cent,
payable quarterly from the issue date to the call option date. Thereafter, if
the notes are not redeemed on the call option date, the interest rate will be
reset to three-month US dollar LIBOR plus 0.80 per cent payable quarterly. The
notes, which qualify as tier 2 capital, serve to help the bank maintain a more
balanced capital structure and support business growth.
Shareholders' funds
Figures in HK$m At 31Dec06 At 31Dec05
Share capital 9,559 9,559
Retained profits 29,044 26,052
Premises revaluation reserve 3,491 3,543
Cash flow hedges reserve (220) (483)
Available-for-sale investments reserve 923 (17)
Capital redemption reserve 99 99
Other reserves 452 185
Total reserves 33,789 29,379
43,348 38,938
Proposed dividends 3,633 3,633
Shareholders' funds 46,981 42,571
Return on average shareholders' funds 27.4% 27.5%
Shareholders' funds (excluding proposed dividends) increased by HK$4,410
million, or 11.3 per cent, to HK$43,348 million at 31 December 2006. Retained
profits rose by HK$2,992 million, reflecting the growth in attributable profit
and the realisation of property revaluation reserves on the disposal of
properties during the year. The available-for-sale investments reserve also
rose.
The return on average shareholders' funds was 27.4 per cent, compared with 27.5
per cent in 2005.
Save for the US$450 million subordinated notes issue, there was no purchase,
sale or redemption of the group's listed securities by the bank or any of its
subsidiaries during 2006.
Capital resources management
Analysis of capital base and risk-weighted assets
Figures in HK$m At 31Dec06 At 31Dec05
Capital base
Tier 1 capital
- Share capital 9,559 9,559
- Retained profits 25,724 21,439
- Classified as regulatory reserve (518) (510)
- Capital redemption reserve 99 99
- Less: goodwill (330) (318)
- Total 34,534 30,269
Tier 2 capital
- Property revaluation reserve 4,259 5,114
- Available-for-sale investment
and equity revaluation reserve 542 (5)
- Collective impairment allowances 518 510
- Regulatory reserve 518 510
- Term subordinated debt 7,988 4,479
- Total 13,825 10,608
Unconsolidated investments and
other deductions (4,242) (3,444)
Total capital base after deductions 44,117 37,433
Risk-weighted assets
On-balance sheet 308,127 277,617
Off-balance sheet 15,251 14,739
Total risk-weighted assets 323,378 292,356
Total risk-weighted assets adjusted for
market risk 324,007 291,570
Capital adequacy ratios
After adjusting for market risk
- Tier 1^ 10.7% 10.4%
- Total^ 13.6% 12.8%
Before adjusting for market risk
- Tier 1 10.7% 10.4%
- Total 13.6% 12.8%
^ The capital ratios take into account market risks in accordance with the
relevant HKMA guideline in 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 0.8 percentage points to 13.6 per cent at 31
December 2006, compared with 12.8 per cent at 31 December 2005. The tier 1 ratio
increased from 10.4 per cent to 10.7 per cent. The capital base increased by
HK$6,684 million to HK$44,117 million, mainly due to the increase in retained
profits (including the realisation of property revaluation reserves on disposed
properties) and the issue of US$450 million subordinated notes, which qualify as
tier 2 capital. Risk-weighted assets adjusted for market risk grew by 11.1 per
cent, attributable to the increase in advances to customers and financial
investments.
Liquidity ratio
The average liquidity ratio for the year, calculated in accordance with the
Fourth Schedule of the Hong Kong Banking Ordinance, is as follows:
2006 2005
The bank and its major banking subsidiaries 51.9% 45.1%
Reconciliation of cash flow statement
(a) Reconciliation of operating profit to net cash flow from operating
activities
2006 2005
Figures in HK$m (restated)
Operating profit 12,576 11,068
Net interest income (11,694) (10,796)
Dividend income (47) (60)
Loan impairment charges and other
credit risk provisions 264 618
Depreciation 323 280
Amortisation of intangible assets 10 9
Amortisation of available-for-sale investments (532) 12
Amortisation of held-to-maturity debt securities 2 _
Advances written off net of recoveries (336) (575)
Interest received 22,232 14,262
Interest paid (16,693) (8,399)
Operating profit before changes in working capital 6,105 6,419
Change in treasury bills and certificates of
deposit with original maturity more than three
months 5,077 8,113
Change in placings with and advances to banks
maturing after one month (9,035) 2,534
Change in trading assets 4,252 3,983
Change in financial assets designated at fair value (56) 1,060
Change in derivative financial instruments (433) (395)
Change in advances to customers (18,589) (8,857)
Change in other assets (6,427) (11,929)
Change in financial liabilities designated at fair
value 20 _
Change in current, savings and other deposit accounts 51,826 (9,189)
Change in deposits from banks 5,637 110
Change in trading liabilities 14,289 29,263
Change in certificates of deposit and
other debt securities in issue (2,428) (2,589)
Change in other liabilities 8,458 9,423
Elimination of exchange differences
and other non-cash items (3,707) 315
Cash generated from operating activities 54,989 28,261
Taxation paid (1,448) (1,421)
Net cash inflow from operating activities 53,541 26,840
(b) Analysis of the balances of cash and cash equivalents
Figures in HK$m At 31Dec06 At 31Dec05
Cash and balances with banks and
other financial institutions 9,390 9,201
Placings with and advances to banks and
other financial institutions maturing
within one month 74,072 53,294
Treasury bills 5,158 3,018
Certificates of deposit 1,655 _
90,275 65,513
Contingent liabilities, commitments and derivatives
Credit Risk-
Contract equivalent weighted
Figures in HK$m amount amount amount
At 31Dec06
Contingent liabilities:
Guarantees 4,150 3,877 3,679
Commitments:
Documentary credits and short-term
trade-related transactions 8,717 1,745 1,738
Undrawn formal standby facilities,
credit lines and other commitments
to lend:
- under one year 142,463 _ _
- one year and over 18,719 9,360 8,696
Other 193 193 193
170,092 11,298 10,627
Exchange rate contracts:
Spot and forward foreign exchange 267,822 2,715 591
Other exchange rate contracts 64,377 499 110
332,199 3,214 701
Interest rate contracts:
Interest rate swaps 162,969 1,376 295
Other interest rate contracts 2,350 2 _
165,319 1,378 295
Other derivative contracts 5,668 382 90
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 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.
Derivative 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 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 by class
of derivatives.
At 31Dec06 At 31Dec05
Figures in HK$m Trading Hedging Trading Hedging
Contract amounts:
Interest rate contracts 105,001 60,318 102,233 63,105
Exchange rate contracts 332,199 _ 203,264 _
Other derivative contracts 5,668 _ 1,194 _
442,868 60,318 306,691 63,105
Derivative assets:
Interest rate contracts 435 513 481 454
Exchange rate contracts 866 _ 776 _
Other derivative contracts 73 _ 4 _
1,374 513 1,261 454
Derivative liabilities:
Interest rate contracts 573 217 998 457
Exchange rate contracts 722 _ 310 _
Other derivative contracts 19 _ 27 _
1,314 217 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, loans and advances, balances due from
banks, 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 31Dec06
Asia-Pacific excluding
Hong Kong:
- Australia 33,724 - 1,355 35,079
- other 49,686 1,247 9,677 60,610
83,410 1,247 11,032 95,689
The Americas:
- United States 25,998 1,451 9,114 36,563
- other 18,800 3,482 6,837 29,119
44,798 4,933 15,951 65,682
Western Europe:
- United Kingdom 38,203 - 9,619 47,822
- other 101,805 590 4,165 106,560
140,008 590 13,784 154,382
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:
- United States 13,163 1,709 6,575 21,447
- other 16,248 4,727 5,814 26,789
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. Statutory accounts and accounting policies
The information in this news release does not constitute statutory accounts.
Certain financial information in this news release is extracted from the
statutory accounts for the year ended 31 December 2006 ('2006 accounts'), which
will be delivered to the Registrar of Companies and the HKMA. The statutory
accounts comply with the module on 'Financial Disclosure by Locally Incorporated
Authorised Institutions' under the Supervisory Policy Manual issued by the HKMA.
The auditors expressed an unqualified opinion on those statutory accounts in
their report dated 5 March 2007.
The 2006 accounts and this news release have been prepared on a basis consistent
with the accounting policies adopted in the 2005 accounts except for the
following:
Change in presentation - Hong Kong Accounting Standard 1 'Presentation of
Financial Statements'
With effect from 2006 reporting, interest income and expense from trading
financial assets and liabilities and financial instruments designated at fair
value are reported under 'Net interest income' instead of 'Net trading income'
and 'Net income from financial instruments designated at fair value'
respectively as in the previous year. The change has been made principally to
match the interest expense arising from trading liabilities with the interest
income from non-trading assets. This also facilitates the comparison of the
group's net interest income and net interest margin with peer banks in Hong Kong.
Comparative figures have been reclassified to conform with the current year's
presentation as follows:
2005 2005
(as previously Effect of (as
Figures in HK$m reported) change^ restated)
Interest income 19,029 684 19,713
Interest expense (7,961) (956) (8,917)
Net interest income 11,068 (272) 10,796
Net trading income 579 306 885
Net income/(expense) from
financial instruments
designated at fair value 2 (34) (32)
^ Increase/(decrease) in the profit for the year.
For HSBC Group reporting, interest income and interest expense arising from
financial assets and financial liabilities held for trading are reported as 'Net
trading income' and arising from financial instruments designated at fair value
through profit and loss as 'Net income from financial instruments designated at
fair value' (other than for debt securities in issue and subordinated
liabilities, together with the derivatives managed in conjunction with them).
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 31 December 2006
amounted to HK$4 million. No restatement of comparative figures was made as the
amounts were immaterial.
Hong Kong Financial Reporting Standard 7 ('HKFRS 7') 'Financial Instruments:
Disclosures'
The group has adopted HKFRS 7 prior to its required application date of 1
January 2007. The adoption of HKFRS 7 impacted the type and amount of
disclosures made in the financial statements, but had no impact on the reported
profits or financial position of the group. In accordance with the transitional
requirements of HKFRS 7, the group has provided full comparative information.
2. Comparative figures
Certain comparative figures have been reclassified to conform with the current
year's presentation.
3. Property revaluation
On 30 September 2006, the group's premises and investment properties were
revalued by DTZ Debenham Tie Leung Limited who confirmed that there had been no
material change in valuation as at 31 December 2006. The valuation was 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$646
million of which HK$17 million was a reversal of revaluation deficits previously
charged to the income statement. The balance of HK$629 million was credited to
the premises revaluation reserve. Revaluation gains on investment properties of
HK$304 million were recognised through the income statement. The related
deferred tax provisions for group premises and investment properties were HK$113
million and HK$53 million respectively.
4. Market risk
Market risk is the risk that foreign exchange rates, interest rates or equity
and commodity prices will move and result in profits or losses 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.
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 which estimates the potential losses that could occur on risk
positions taken due to movements in market rates and prices over a specified
time horizon and to a given level of confidence. In line with the HSBC Group,
Hang Seng has changed its VAR calculation from a variance/co-variance ('VCV')
basis to historical simulation ('HS') basis with effect from 3 May 2005. 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 with a 99 per cent level of confidence, 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 has obtained approval from the HKMA to use HS for calculating market
risk in capital adequacy reporting.
The group's VAR for all interest rate risk and foreign exchange risk positions
and on individual risk portfolios during 2006 and 2005 are shown in the tables
below. The VAR figures for 2005 are based on four months' VCV and eight months'
HS.
VAR
Minimum Maximum Average
during during for
the the the
Figures in HK$m At 31Dec06 year year year
VAR for all interest rate risk
and foreign exchange risk 42 29 119 64
VAR for foreign exchange risk
(trading) 2 1 16 5
VAR for interest rate risk
- trading 4 3 16 8
- non-trading 45 35 123 68
Minimum Maximum Average
during during for
the the the
Figures in HK$m At 31Dec05 year year year
VAR for all interest rate risk
and foreign exchange risk 113 111 264 181
VAR for foreign exchange risk
(trading) 3 _ 6 2
VAR for interest rate risk
- trading 3 1 21 4
- non-trading 118 117 260 180
The average daily revenue earned from market risk-related treasury activities in
2006, including non-trading book net interest income and funding related to
trading positions, was HK$5 million (HK$5 million for 2005). The standard
deviation of these daily revenues was HK$3 million (HK$8 million for 2005).
Interest rate risk arises in both the treasury trading and non-trading
portfolios, 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 2006 was HK$2 million (HK$3 million for 2005).
The group's foreign exchange exposures mainly comprise foreign exchange trading
by treasury and currency exposures originated by its banking business. The
latter are transferred to treasury where they are centrally managed within
foreign exchange position limits approved by the Board of Directors. The average
one-day foreign exchange profit for 2006 was HK$3 million (HK$2 million for
2005).
Structural foreign exchange positions arising from capital investment in
subsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi
('RMB') as set out in Note 5, are managed by the Asset and Liability Management
Committee.
5. Foreign currency positions
Foreign currency exposures include those arising from trading, non-trading and
structural positions. At 31 December 2006, the US dollar (US$) 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$m At 31Dec06 At 31Dec05
US$ RMB US$ RMB
Non-structural position
Spot assets 205,544 14,422 193,149 5,955
Spot liabilities (189,232) (12,670) (168,513) (6,008)
Forward purchases 128,102 353 84,026 439
Forward sales (141,544) (1,904) (104,960) (300)
Net options position 120 _ (77) _
Net long
non-structural
position 2,990 201 3,625 86
At 31 December 2006, the group's major structural foreign currency positions
were US dollar and RMB.
At 31Dec06 At 31Dec05
(restated)
% of % of
total net total net
structural structural
HK$m position HK$m position
Structural positions
US dollar 1,430 26.8 1,035 28.9
RMB 3,760 70.5 2,439 68.1
6. Non-adjusting post balance sheet event
On 5 February 2007, Industrial Bank Co., Ltd. ('Industrial Bank'), an associate
of the bank, issued 1,001 million new shares for a total consideration of
RMB15,996 million. The bank did not subscribe for any additional shares and,
as a result, its interest in the equity of Industrial Bank decreased from 15.98
per cent to 12.78 per cent. While the bank's interest has reduced, the assets of
Industrial Bank have substantially increased as a result of this issue.
Consequently, it is expected that this transaction would result in an increase
of about RMB1.5 billion in the group's share of the underlying net assets of
Industrial Bank.
The decrease of the bank's interest in the equity of Industrial Bank does not
affect the influence that the bank has over this associate, as there has been no
change in the composition of major shareholders in Industrial Bank or in the
bank's representation in the Industrial Bank's Board of Directors or Executive
Committee. The bank will continue to have the power to participate in the
financial and operating policy decisions of Industrial Bank, and its investment
will continue to be accounted for using the equity method.
7. Ultimate holding company
Hang Seng Bank is an indirectly held, 62.14 per cent-owned subsidiary of HSBC
Holdings plc.
8. Register of shareholders
The register of shareholders of Hang Seng Bank will be closed on Tuesday, 20
March 2007, during which no transfer of shares can be registered. In order to
qualify for the fourth 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 no
later than 4:30 pm on Monday, 19 March 2007. The fourth interim dividend will be
payable on 30 March 2007 to shareholders on the register of shareholders of the
bank on 20 March 2007.
9. Proposed timetable for 2007 quarterly dividends
First Second Third Fourth
interim interim interim interim
dividend dividend dividend dividend
Announcement 3 May 2007 30 July 2007 5 November 2007 3 March 2008
Book close date 22 May 2007 21 August 2007 27 November 2007 18 March 2008
Payment date 5 June 2007 30 August 2007 11 December 2007 28 March 2008
10. News release
Copies of this news release may be obtained from 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 Annual Report and Accounts are available from the same website on
Monday, 5 March 2007 and will also be published on the website of The Stock
Exchange of Hong Kong Limited in due course. Printed copies of the 2006 Annual
Report will be sent to shareholders by early-April 2007.
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: 05 March 2007