FORM 6

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 August

 

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
2009 INTERIM RESULTS - HIGHLIGHTS




 
^
    
The capital adequacy and core capital ratios at 30 June 2009 were calculated in accordance with Basel II - advanced internal ratings-based approach which became effective on 1 January 2009, while those at 31 December 2008 were calculated in accordance with Basel II - foundation internal ratings-based approach.
 
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 Raymond Ch'ien, Chairman 

Against the backdrop of the global economic crisis, Hang Seng's key financial indicators for the first half of 2009 are generally down compared with the same period last year, but have improved substantially against the second half of 2008. This highlights the success of our actions to maintain broad-based business momentum in these challenging economic times. 

We have been well-served by our continued emphasis on the long-held values behind Hang Seng's trusted brand - including financial prudence, long-term partnerships and professionalism. These operating principles have helped us deepen existing customer relationships and establish new ones. Customers continue to rely on Hang Seng to help them manage their financial needs, rewarding us with their loyalty and trust.

With strong roots in our local communities, we are working hard with customers to tackle today's economic challenges, to capitalise on opportunities for sustainable growth and to support economic recovery.

We are an active player in the 
Hong Kong
 government's efforts to aid the business sector and promote economic activity. In the tight credit environment, we are assisting customers by extending loans under government-backed schemes aimed at small and medium-sized enterprises. 

We continue to work to join up our Commercial Banking teams in Hong Kong and mainland 
China
 as well as to introduce new initiatives such as our cross-border renminbi settlement services. In doing so, we are contributing to the infrastructure that facilitates trade activity and enhances 
Hong Kong
's status as a leading international centre for finance and commerce.  

We remain focused on increasing value for shareholders through careful risk management and cost control while investing in our business for future growth.

Financial Performance

Operating profit excluding loan impairment charges and other credit risk provisions was HK$7,361 million, down 20.8 per cent on the first half of 2008 but up 2.2 per cent on the second half. At HK$
6,740 million
, operating profit fell by
 
26.0 per cent compared with a year earlier, but increased by 46.1 per cent compared with the second half of last year, reflecting the improvement in loan impairment charges and other credit risk provisions. 

Profit before tax recorded a decline of 27.7 per cent compared with a year earlier to HK$7,618 million, but was up 42.4 per cent on the second half of last year.

Profit attributable to shareholders was HK$6,451 million - a 28.8 per cent decline on the first half of 2008 but a 28.1 per cent increase on the second half. At HK$3.37, earnings per share were down HK$1.37, or 28.9 per cent, on the same time last year.

Net operating income before loan impairment charges and other credit risk provisions fell by 16.2 per cent to HK$10,576 million. Further emphasis on cost control saw us achieve a 3.2 
per cent reduction in operating expenses to HK$3,215 million. Our cost efficiency ratio was 30.4 per cent.
 
Return on average shareholders' funds was 25.1 per cent, compared with 32.8 per cent and 18.7 per cent for the first and second halves of 2008 respectively. Return on average total assets was 1.7 per cent - down 0.7 percentage points compared with the first half of last year but up 0.4 percentage points on the second half.

On 30 June 2009, our capital adequacy ratio and core capital ratio were 16.6 per cent and 13.1 per cent respectively, as calculated using the 'advanced internal ratings-based approach' under Basel II, compared with 12.5 per cent and 9.5 per cent as calculated using the 'foundation internal ratings-based approach' under Basel II at the end of last year. The strengthening of these ratios largely reflects profit growth after accounting for dividends in the first half of the year, the improvement in the available-for-sale debt securities reserve due to the narrowing of credit spreads and a change in calculation methodology.

The Directors have declared a second interim dividend of HK$1.10 per share, payable on 2 September 2009. This brings the total distribution for the first half of 2009 to HK$2.20 per share, the same as in the first half of last year.

Outlook

Following the implementation of large-scale fiscal and monetary stimulus programmes in many major economies, there are some early signs that the pace of global economic contraction has begun to moderate. However, operating conditions will remain challenging on the road to worldwide recovery.

The mainland economy has shown itself to be more resilient than most. Demand for exports has declined sharply, but comprehensive government efforts to promote economic activity have helped support continued domestic consumption.

As a highly open economy, 
Hong Kong
 has seen contraction in both export and domestic sectors. Action by the government is offering important assistance to businesses, but given the city's significant dependence on external demand, economic recovery among its major trading partners will be a crucial factor in regaining growth momentum.

Hang Seng's solid financial fundamentals and strong brand will remain important stabilising forces in uncertain market conditions. 

We will continue to uphold our core principles and further enhance our relationships with customers and other stakeholders as we work to achieve long-term growth. 

 
Review by Margaret Leung, Vice-Chairman and Chief Executive 

Hang Seng's well-respected brand, premium service, and prudent approach to business helped differentiate us from our peers in the challenging operating conditions experienced during the first half of 2009. Supported by our diverse portfolio of products, we adapted to the changing needs of customers - maintaining a strong position and achieving increased market share in both loans and deposits compared with the end of last year. 

While working to protect our business against the effects of the global economic turbulence, we remained committed to developing wealth management, Commercial Banking and mainland 
China
 business as key drivers of long-term growth. 

In the uncertain investment environment, we provided customers with yield enhancement opportunities through more defensive products. Our wide range of insurance solutions helped us increase our 
Hong Kong
 market share for life insurance (in terms of new business) to 16.3 per cent during the first quarter of the year. We strengthened wealth management growth prospects by expanding product offerings for commercial customers and on the Mainland.

Our cross-border Commercial Banking services and offering of government-guaranteed SME loans provided valuable support to new and existing customers in the difficult economic conditions. 

In the changing credit conditions, Corporate Banking improved loan pricing, underpinning solid growth in net interest income. 

Treasury moved forward with its strategy for enhancing the quality and performance of the balance sheet management portfolio and capitalised on increased customer interest in foreign exchange-linked investments. 

Assisted by close collaboration between colleagues in Hong Kong and on the Mainland, Hang Seng Bank (
China
) Limited further enhanced service delivery and widened its product range. This helped drive a 45 per cent increase in the customer base compared with a year earlier.

Customer Groups

Personal Financial Services recorded a 34.4 per cent decline in profit before tax to HK$3,467 million, due mainly to the substantial fall in wealth management income compared with the same period last year in the adverse investment environment. Operating profit excluding loan impairment charges was down 30.4 per cent at HK$3,579 million. However, profit before tax and operating profit excluding loan impairment charges were up by 10.9 per cent and 7.6 per cent respectively compared with the second half of 2008.

Wealth management income was HK$2,176 million - down 31.7 per cent on the first half of last year, but up 35.8 per cent compared with the second half.

Our new Securities Select Customer Trading Centre capitalised on rising investor interest in securities during the second quarter and we achieved growth in the securities account base and market share. Income from securities broking and related services fell by 15 per cent but grew by 25.4 per cent compared with the first and second halves of 2008 respectively. We achieved record turnover in sales of foreign exchange-linked investment deposits.

Overall, investment-related income was up 3.3 per cent on the second half of last year, but down 52.7 per cent on the first half, due mainly to the significantly lower level of investor transactions. Private Banking was also affected by poor investment sentiment, with income down by 70.5 per cent.

Supported by our comprehensive range of life insurance products, we achieved a 12.7 per cent rise in policies in force and a 19.1 per cent increase in total annualised premiums to HK$13.0 billion. Life insurance income grew by 20.4 per cent compared with the first half of 2008 and 110.6 per cent compared with the second half.

Despite narrowing spreads on deposits and mortgage loans, net interest income declined only slightly by 6.5 per cent to HK$4,015 million, due to our successful strategy to improve investment returns on the life insurance portfolio. 

A series of customer acquisition and card utilisation campaigns helped us expand our credit card business and we gained market share in terms of the card base, spending and receivables. In competitive conditions, we leveraged our online services to maintain a strong position in mortgage lending, ranking first for equitable mortgages and second for residential mortgages in Hong Kong during the first quarter of the year. 

Commercial Banking's operating profit excluding loan impairment charges was HK$951 million - down 22 per cent and 16.2 per cent on the first and second halves of last year respectively. Total operating income was down 12.9 per cent, due largely to an 18.5 per cent drop in net interest income. 

Average customer deposits grew by 3.1 per cent, but margin compression in the near-zero interest rate environment led to a 48.7 per cent decline in related net interest income. Reduced international trade flows resulted in a 4.9 per cent drop in average customer advances and a 23.4 per cent fall in trade finance. The repricing of loans to reflect prevailing credit conditions underpinned a 16.9 per cent increase in net interest income from advances.

Commercial Banking's non-interest income fell by a modest 5.4 per cent. We focused on structured deposits to serve customers looking for lower-risk yield enhancement. A strengthened product suite and coordinated marketing efforts drove the 230.3 per cent increase in corporate life insurance income. Corporate wealth management business contributed 12.9 per cent to Commercial Banking's total operating income, up from 10.4 per cent in 2008.

We continued to assist SMEs dealing with tough operating conditions. Since late 2008, we have approved over 3,400 government-guaranteed SME loans - totalling more than HK$10 billion. 

Commercial Banking's profit before tax was down 36.6 per cent at HK$1,080 million, due mainly to higher loan impairment charges in the difficult economic environment. With continued vigilance in risk management, asset quality overall remained within our expectations. Much improved market conditions in the first half of this year led to a 66.4 per cent reduction in loan impairment charges compared with the second half of 2008, reflected in the 40.8 per cent increase in profit before tax compared with the second half of last year.
 
Corporate Banking recorded an operating profit excluding loan impairment charges of HK$517 million - a 41.6 per cent increase compared with the first half of 2008 and a 14.9 per cent increase compared with the second half. At HK$449 million, profit before tax was up 23.0 per cent and 60.4 per cent compared with the first and second halves of last year respectively.

Total operating income grew by 31.4 per cent, driven largely by the 31.9 per cent increase in net interest income. Supported by a strong balance sheet and liquidity, we continued to provide customers with new and renewed facilities while adjusting pricing in line with the credit environment, achieving a 66.2 per cent rise in net interest income from advances. Net interest income from deposits was down 34.5 per cent, with the increase in low-cost current and savings account deposits only partly offsetting the fall in time deposits. 

Treasury's operating profit excluding credit risk provisions grew by 6.2 per cent to HK$1,804 million. Compared with the second half of last year, operating profit excluding credit risk provisions increased by 34.7 per cent. We continued with our prudent risk management strategy - striving for stable revenue growth through investment in selected high-quality negotiable instruments. 

In challenging market conditions, we maintained the momentum of customer-driven Treasury business by focusing on the increased demand for foreign exchange-linked products.

Treasury's profit before tax grew by 1.7 per cent to HK$2,017 million.

Mainland Business

As at 30 June 2009, Hang Seng 
China
's network stood at 34 outlets across 11 cities. 

Significant growth in the customer base - driven by the further development of wealth management offerings and growing Commercial Banking capabilities - helped support an increase in net interest income, with total operating income rising by 19.9 per cent.

Under our strategy to create a springboard for future deposits growth, we continued to target the affluent personal customer segment, achieving a 77.0 per cent rise in Prestige Banking customers compared with a year earlier.

In the uncertain economic conditions, we took a prudent approach to lending - emphasising loan quality over business growth - resulting in a 12.9 per cent decline in customer advances. We further strengthened the management of credit risk and operational risk. Loan impairment charges were higher compared with the first half of 2008, but significantly lower compared with the second half. Deposits rose by 1.2 per cent.

Profit before tax recorded steady growth. Higher total operating income and a reduction in losses on the revaluation of US dollar capital funds against the renminbi were partly offset by the cost of network expansion, investment in human resources and the rise in loan impairment charges.

We continued to work with Industrial Bank to good effect. Our dual-branded credit card is now one of the favoured cards on the Mainland among younger generations and we are stepping up collaboration in areas such as wealth management and trade services.
 
Our cooperation with new strategic partner Yantai Bank Co., Ltd moved forward with the launch of its updated corporate image and tagline. 

Including the share of profits from strategic partners, our Mainland business contributed 11.7 per cent to total profit before tax, compared with 9.4 per cent in the first half of 2008.

Looking Ahead

The global financial crisis that broke out in 2008 continues to pose challenges for business. Although major economies across the world have introduced stimulus measures, it is too soon to tell how successful such measures will be in driving sustainable growth momentum.

With 
Hong Kong
's economy heavily reliant on trade, the outlook for the rest of the year and into 2010 remains cloudy. New investment projects and solid domestic consumption are helping to revive economic growth on the Mainland, although the pace is likely to be slower than that achieved in the past decade.

We will further enhance our product and service offerings to drive the expansion of our customer base - particularly among segments such as the affluent and young people - and provide greater choice for investors.

In mid July, our attractive promotion on IPO margin financing received an excellent customer response, with Personal Financial Services achieving a new high for stagging finance and a new high in the amount of financing applied for online - which reached 74 per cent. Towards the end of the month, we became the first financial institution in Hong Kong to obtain permission from the Financial Supervisory Commission in 
Taiwan
 to make dual-listing applications with the Taiwan Stock Exchange for two of our exchange-traded funds (ETFs) - the Hang Seng Index ETF and the Hang Seng H-Share Index ETF.

Making full use of our distribution, product manufacturing and time-to-market strengths, we will continue to tailor financial services to meet customer needs in changing economic conditions.

Our strong cross-border capabilities and the expansion of our corporate wealth management proposition will help us deepen relationships with commercial customers and attract new business. 

Treasury will continue to actively manage its portfolio to achieve an optimal mix of investments that strikes a good balance between risk and return. 

We will further strengthen our profile on the Mainland through brand-building initiatives and strategic business collaboration with our local partners. Hang Seng 
China
 will open more outlets in high-potential cities, focusing particularly on the Pearl River Delta region to take advantage of the new opportunities for business expansion provided under CEPA VI. 

Businesses across the board will continue to be tested in the second half of 2009. With its highly respected brand and dedicated staff, Hang Seng is well positioned to overcome the obstacles that lie ahead and build on its competitive strengths to capture future opportunities for growth.
 
Results summary

Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the group') reported an unaudited profit attributable to shareholders of HK$6,451 million for the first half of 2009, down 28.8 per cent compared with the first half of 2008. Despite the challenging macroeconomic environment and continuing difficulties in the financial markets, the group achieved growth of 28.1 per cent against the second half of 2008, due mainly to the HK$1,967 million reduction in loan impairment charges and other credit risk provisions. Earnings per share were HK$3.37, down HK$1.37 compared with the same period last year. 

- Operating profit excluding loan impairment charges and other credit risk provisions
 fell by HK$1,939 million, or 20.8 per cent, to HK$7,361 million. Affected by the worldwide economic downturn and deteriorating operating conditions, net interest income and non-interest income both recorded significant declines. Operating expenses were contained at a lower level than last year.

-
 
Net interest income
 decreased by HK$977 million, or 11.8 per cent, despite the 4.2 per cent increase in average interest-earning assets. Markedly reduced deposit spreads and a lower contribution from net free funds in the near-zero interest rate environment outweighed the benefits from improved loan spreads. 
Net interest margin
 for the first half of 2009 was 2.06 per cent - down 37 basis points compared with the same period last year. Net interest spread dropped by 21 basis points to 1.99 per cent and the contribution from net free funds declined by 16 basis points to 0.07 per cent. 

- 
Net fees and commissions income 
dropped by HK$1,101 million, or 36.4 per cent, to HK$1,926 million, due largely to reduced demand for investment-related products as a result of negative market sentiment. The volatility in global equity markets and the unfavourable investment climate dampened investor activity, with income from sales of retail investment funds and third party structured investment products fell by 70.8 per cent and 98.3 per cent respectively. With lower stock market turnover, income generated from stockbroking and related services fell by 14.7 per cent. Private banking recorded a 74.0 per cent drop in fee income, reflecting the diminished client appetite for trading and structured products. To meet the insurance needs of customers, the group offered a comprehensive range of health and wealth insurance solutions for all life stages. This drove a 90.7 per cent rise in insurance fee income and helped to increase
 the group's market share to 16.3 per cent in terms of new business in the first quarter of the year. Credit card business also continued to gain market share in terms of cards in issue, spending and receivables and achieved encouraging fee income growth of 5.8 per cent.

- Trading income 
improved by HK$276 million, or 36.4 per cent, to HK$1,035 million. Foreign exchange income registered significant growth of HK$395 million, or 73.8 per cent, attributable partly to increased trading net interest income from funding swaps and the continued strong customer demand for foreign exchanged-linked structured products. The rise was also driven by the reduced losses on the revaluation of certain US dollar capital funds - maintained in the bank's mainland subsidiary bank and subject to regulatory controls - against the renminbi. Securities, derivatives and other trading income dropped by HK$119 million, or 53.1 per cent, resulting from the shrinking demand for equity-linked investment products.
 
- 
Income
 
from insurance business, including 
net earned insurance premiums, net interest income, net fee income and net income from financial instruments designated at fair value, the change in present value of in-force business,
 and after deducting 
net insurance claims incurred and movement in policyholders' liabilities,
 grew by HK$242 million, or 24.0 per cent, to HK$1,251 million. Life insurance business was ranked No. 2 in 
Hong Kong
 in terms of direct new business, with a market share of 16.3 per cent for the first quarter of 2009. To cater for the increase in customer concerns about health issues, more emphasis was placed on products offering greater protection and medical coverage. Net interest income and fee income from life insurance business grew by 58.2 per cent, attributable mainly to the increase in the size of the investment portfolio. Investment returns on life insurance funds also improved significantly from a loss of HK$1,030 million in the first half of 2008 to a loss of HK$133 million in the first half of 2009. 

- Net operating income
 
before loan impairment charges and other credit risk provisions 
decreased by HK$2,044 million, or 16.2 per cent, to HK$10,576 million. 

- Operating expenses
 were reduced by HK$105 million, or 3.2 per cent, compared with the first half of 2008. With the deterioration in financial and economic conditions, the bank maintained strict cost control. Excluding mainland business, operating expenses dropped by 4.7 per cent, attributable largely to lower performance-related pay expenses and marketing expenditure. Mainland-related operating expenses rose by 9.1 per cent, reflecting the expansion of the bank's wholly owned mainland banking subsidiary, Hang Seng Bank (China) Limited ('Hang Seng China'), from 30 to 34 outlets as well as the increase in headcount from 1,312 to 1,411 in the last twelve months.

- Operating profit 
was down by HK$2,372 million, or 26.0 per cent, to HK$6,740 million, after accounting for the HK$433 million increase in 
loan impairment charges and other credit risk provisions 
in the uncertain economic conditions. Compared with the second half of 2008, operating profit grew strongly by HK$2,127 million, or 46.1 per cent, due mainly to the substantial reduction in loan impairment charges and other credit risk provisions as a result of the more stable financial markets and credit environment in the first half of 2009.

- Profit before tax 
was down by 27.7 per cent at HK$7,618 million after taking the following items into account:


Consolidated financial positions and key ratios

Total assets
 increased by HK$28.0 billion, or 3.7 per cent, to HK$790.1 billion. In light of the weak global economy and the fact that financial markets were still recovering from the credit crisis, Treasury continued to take a highly prudent approach in managing its accrual investments. Surplus funds arising from trading assets that matured in the first half of 2009 were redeployed to interbank placements and available-for-sale debt securities to attain yield enhancement in light of the more stable financial market. As a result, financial investments rose by 24.4 per cent - primarily in high-quality debt securities which included government guaranteed debt securities. Customer advances dropped slightly by 1.1 per cent, due mainly to the fall in mainland lending as Hang Seng China refined loan risk criteria to emphasise lending quality over business expansion in the uncertain credit environment. In a highly competitive market, the group was able to sustain a leading position in mortgage business, recording encouraging growth in its residential mortgage lending. Customer deposits rose by HK$24.7 billion, or 4.1 per cent, to HK$629.2 billion, reflecting customers' lukewarm attitude towards investment and a preference for liquidity in the uncertain market conditions. At 30 June 2009, the advances-to-deposits ratio was 51.7 per cent, compared with 54.4 per cent and 58.1 per cent at the end of December 2008 and June 2008 respectively.

As at 30 June 2009, shareholders' funds (excluding proposed dividends) were HK$51,158 million, an increase of HK$5,268 million, or 11.5 per cent. Retained profits rose by HK$3,564 million, reflecting the increase in attributable profit (excluding first and second interim dividends) for the first half of 2009. The available-for-sale investments reserve improved by HK$1,819 million, due mainly to the narrowing of credit spreads as a result of stabilisation in credit markets. 

The 
return on average total assets
 was 1.7 per cent, compared with 2.4 per cent and 1.3 per cent for the first and second halves of 2008 respectively. The 
return on average shareholders' funds
 was 25.1 per cent (32.8 per cent in the first half of 2008 and 18.7 per cent in the second half of 2008).

At 30 June 2009, the 
capital adequacy ratio
 was 16.6 per cent, up from 12.5 per cent at the end of 2008. The 
core capital ratio
 was 13.1
 per cent, up from 9.5 per cent. The ratios were calculated in accordance with the internal ratings-based approach under the Banking (Capital) Rules issued by the Hong Kong Monetary Authority for the implementation of Basel II. Effective 1 January 2009, the bank has migrated to the 'advanced internal ratings-based approach' under the Basel II framework to calculate its capital ratios. The capital adequacy ratio and core capital ratio at 31 December 2008 were calculated using the 'foundation internal ratings-based approach'. 
The strengthening of these ratios largely reflects profit growth after accounting for dividends in the first half of the year, the improvement in the available-for-sale debt securities reserve due to the narrowing of credit spreads and a change in calculation methodology.
 

The bank maintained a strong liquidity position. The 
average liquidity ratio
 for the first half of 2009 was 47.5 per cent (calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance), compared with 47.3 per cent for the first half of 2008.

The cost efficiency ratio for the first half of 2009 was 30.4 per cent, compared with 26.3 per cent and 32.5 per cent for the first and second halves of 2008 respectively. 

Dividends

The Directors have declared a second interim dividend of HK$1.10 per share, which will be payable on 2 September 2009 to shareholders on the register of shareholders as of 18 August 2009. Together with the first interim dividend, the total distribution for the first half of 2009 will amount to HK$2.20 per share, the same as in the first half of 2008.

 
Customer group performance


Personal 








Total

Inter-




Financial
Commercial
Corporate





Reportable
segment



Figures in HK$m
Services

Banking

Banking

Treasury

Other

Segment
elimination

Total


















Half-year ended
















30 June 2009

































Net interest income
4,015

987

583

1,353

337

7,275

__

7,275

Net fee income/(expense)
1,294

524

79

(19
)
48

1,926

__

1,926

Trading income/(loss)
317

115

10

616

(23
)
1,035

__

1,035

Net loss from financial 
















 instruments designated at
















 fair value 
(170
)
__

__

(9
)
(16
)
(195
)
__

(195
)
Dividend income
1

__

__

__

4

5

__

5

Net earned insurance premiums
6,549

108

1

__

__

6,658

__

6,658

Other operating income
264

15

1

__

307

587

(237
)
350

Total operating income
12,270

1,749

674

1,941

657

17,291

(237
)
17,054

Net insurance claims
















  incurred and movement in
















       policyholders' liabilities
(6,413
)
(65
)
__

__

__

(6,478
)
__

(6,478
)
Net operating income
















 before loan impairment
















 charges and other credit
















 risk provisions
5,857

1,684

674

1,941

657

10,813

(237
)
10,576

Loan impairment charges
















  and other credit risk
  provisions
(274
)
(263
)
(82
)
(2
)
__

(621
)
__

(621
)
Net operating income
5,583

1,421

592

1,939

657

10,192

(237
)
9,955

Total operating expenses
 ^
(2,278
)
(733
)
(157
)
(137
)
(147
)
(3,452
)
237

(3,215
)
Operating profit
3,305

688

435

1,802

510

6,740

__

6,740

Gains less losses from
















financial  investments and fixed assets
96

53

14

(95
)
(13
)
55

__

55

Net surplus on property
















  revaluation
__

__

__

__

60

60

__

60

Share of profits from associates
66

339

__

310

48

763

__

763

Profit before tax
3,467

1,080

449

2,017

605

7,618

__

7,618

Share of profit before tax
45.5
%
14.2
%
5.9
%
26.5
%
7.9
%
100.0
%
__

100.0
%


































Operating profit excluding
















  loan impairment charges
















  and other credit risk
  provisions
3,579

951

517

1,804

510

7,361

__

7,361


















^ 
Depreciation/amortisation 
















  included in total operating 
















  expenses
(82
)
(15
)
(4
)
(2
)
(162
)
(265
)
__

(265
)


































At 30 June 2009

































Total assets
218,251

84,180

90,115

366,245

31,330

790,121

__

790,121

Total liabilities
542,284

106,419

32,593

27,141

28,423

736,860

__

736,860

Investments in associates
683

3,608

__

2,666

2,372

9,329

__

9,329


 

Personal 








Total

Inter-




Financial
Commercial
Corporate





Reportable
segment



Figures in HK$m
Services

Banking

Banking

Treasury

Other

Segment
elimination

Total


















Half-year ended
















30 June 2008

































Net interest income
4,295

1,211

442

1,536

768

8,252

__

8,252

Net fee income/(expense)
2,380

547

61

(17
)
56

3,027

__

3,027

Trading income/(loss)
485

125

8

294

(153
)
759

__

759

Net (loss)/income from 
















  financial instruments
















  designated at fair value 
(1,029
)
(1
)
__

6

__

(1,024
)
__

(1,024
)
Dividend income
17

5

__

__

32

54

__

54

Net earned insurance premiums
6,832

96

2

__

__

6,930

__

6,930

Other operating income/(loss)
435

24

__

(1
)
300

758

(233
)
525

Total operating income
13,415

2,007

513

1,818

1,003

18,756

(233
)
18,523

Net insurance claims
















  incurred and movement
















 
       in policyholders' liabilities
(5,843
)
(59
)
(1
)
__

__

(5,903
)
__

(5,903
)
Net operating income
















 before loan impairment
















 charges and other credit
















 risk Provisions
7,572

1,948

512

1,818

1,003

12,853

(233
)
12,620

Loan impairment charges
















  and other credit risk
  provisions
(86
)
(71
)
(31
)
__

__

(188
)
__

(188
)
Net operating income
7,486

1,877

481

1,818

1,003

12,665

(233
)
12,432

Total operating expenses ^
(2,431
)
(729
)
(147
)
(120
)
(126
)
(3,553
)
233

(3,320
)
Operating profit
5,055

1,148

334

1,698

877

9,112

__

9,112

Gains less losses from
















 financial investments and
 fixed assets
175

96

31

__

(56
)
246

__

246

Net surplus on property
















  revaluation
__

__

__

__

229

229

__

229

Share of profits from
 associates
54

459

__

285

145

943

__

943

Profit before tax
5,284

1,703

365

1,983

1,195

10,530

__

10,530

Share of profit before tax
50.2
%
16.2
%
3.5
%
18.8
%
11.3
%
100.0
%
__

100.0
%


































Operating profit excluding
















  loan impairment charges
















  and other credit risk
  provisions
5,141

1,219

365

1,698

877

9,300

__

9,300


















^ 
Depreciation/amortisation 
















  included in total operating 
















  expenses
(64
)
(11
)
(3
)
(2
)
(148
)
(228
)
__

(228
)


































At 30 June 2008

































Total assets
210,593

93,416

85,595

320,004

38,308

747,916

__

747,916

Total liabilities
473,224

96,559

46,288

37,937

38,300

692,308

__

692,308

Investments in associates
379

2,412

__

1,923

2,435

7,149

__

7,149


 

Personal 








Total

Inter-




Financial
Commercial
Corporate





Reportable
segment



Figures in HK$m
Services

Banking

Banking

Treasury

Other

Segment
elimination

Total


















Half-year ended
















31 December 2008

































Net interest income
4,405

1,200

546

1,146

683

7,980

__

7,980

Net fee income/(expense)
1,316

519

66

(16
)
57

1,942

__

1,942

Trading income/(loss)
258

120

10

347

(39
)
696

__

696

Net (loss)/income from 
















  financial instruments
















  designated at fair value
(14
)
(1
)
__

(16
)
24

(7
)
__

(7
)
Dividend income
8

5

__

__

15

28

__

28

Net earned insurance
  premiums
5,303

117

1

__

__

5,421

__

5,421

Other operating income
  4

30

  2

5

371

412

(236
)
176

Total operating income
11,280

1,990

625

1,466

1,111

16,472

(236
)
16,236

Net insurance claims
















  incurred and movement
















 
       in policyholders' liabilities
(5,506
)
(54
)
__

__

__

(5,560
)
__

(5,560
)
Net operating income
















  before loan impairment
















  charges and other credit
















  risk Provisions
5,774

1,936

625

1,466

1,111

10,912

(236
)
10,676

Loan impairment charges
















  and other credit risk
  provisions
(261
)
(782
)
(170
)
(1,375
)
__

(2,588
)
__

(2,588
)
Net operating income
5,513

1,154

455

91

1,111

8,324

(236
)
8,088

Total operating expenses
 ^
(2,448
)
(801
)
(175
)
(127
)
(160
)
(3,711
)
236

(3,475
)
Operating profit/(loss)
3,065

353

280

(36
)
951

4,613

__

4,613

Gains less losses from
















financial investments and fixed assets
(19
)
(11
)
__

(84
)
135

21

__

21

Net surplus/(deficit) on
















  property revaluation
__

__

__

__

(150
)
(150
)
__

(150
)
Share of profits/(losses)
  from associates
80

425

__

416

(57
)
864

__

864

Profit before tax
3,126

767

280

296

879

5,348

__

5,348

Share of profit before tax
58.5
%
14.4
%
5.2
%
5.5
%
16.4
%
100.0
%
__

100.0
%


































Operating profit excluding
















  loan impairment charges
















  and other credit risk
  provisions
3,326

1,135

450

1,339

951

7,201

__

7,201


















^ 
Depreciation/amortisation 
















  included in total operating 
















  expenses
(76
)
(13
)
(4
)
(1
)
(170
)
(264
)
__

(264
)


































At 31 December 2008

































Total assets
211,092

85,791

93,570

345,920

25,795

762,168

__

762,168

Total liabilities
508,596

96,905

41,981

34,575

28,485

710,542

__

710,542

Investments in associates
501

3,194

__

2,784

2,391

8,870

__

8,870



Personal Financial Services ('PFS') 
reported a profit before tax of HK$3,467 million for the first half of 2009, 34.4 per cent lower than same period last year but up 10.9 per cent on the second half, due mainly to the continuing impact of the unfavourable economic conditions and reduced customer appetite for wealth management investment services. Operating profit excluding loan impairment charges was down 30.4 per cent at HK$3,579 million but up 7.6 per cent compared with the second half of last year.

Despite lower interest spreads on deposits and secured lending in the low interest rate environment, net interest income was down only 6.5 per cent at HK$4,015 million, having benefited from improved investment returns on the insurance funds portfolio.

Unsecured lending business registered strong year-on-year growth of 16.5 per cent in operating income, due mainly to the expansion of credit cards in force as well as card spending and receivables. Working within closely monitored credit risk parameters, PFS grew its card base to 1.8 million, representing a year-on-year increase of 9.1 per cent. The bank's customer loyalty scheme and card utilisation programmes drove up card spending by 5.3 per cent to HK$27.5 billion - outperforming the market which shrank.

In the active property loans market, the bank maintained a leading position for total mortgage loans with a market share of 15.2 per cent as of June 2009.

Non-interest income was affected by weak investor sentiment at the start of 2009, falling by 43.8 per cent compared with the same period last year, but up 34.6 per cent on the second half. Fee income from the selling of investment products and private banking declined significantly compared with a year earlier. Nevertheless, securities turnover achieved robust growth, reaching a 17-month high of HK$52.3 billion in June 2009.

Life insurance recorded solid sales with year-on-year growth of 12.7 per cent in terms of policies in force. Total annualised premiums amounted to HK$13 billion - up 19.1 per cent compared with a year earlier. Against a backdrop of strong competition, life insurance products were revamped to include new embedded benefits, which helped drive an increase in market share to 16.3 per cent in terms of new business in the first quarter of the year. 

PFS continued to expand the self-directed customer segment with innovative service propositions. Personal e-banking exceeded 
920,000
 
registered customers in the first half of 2009 and enrolment for the e-Statement service grew by 
23.2 per cent
. In May, the bank launched its pioneering mobile phone-based straight-through travel insurance application service.

Commercial Banking ('CMB')
 
contributed 14.2 per cent to the bank's total pre-tax profit in the first half of 2009, down 2.0 percentage points on a year earlier. Operating profit excluding loan impairment charges fell by 22.0 per cent to HK$951 million, due primarily to narrowing deposit spreads in the near-zero interest rate environment. With increased loan impairment charges in the poor economic environment and a lower contribution from associates, profit before tax dropped by 36.6 per cent to HK$1,080 million. In challenging market conditions, CMB managed to contain the upward trend in loan impairment charges by further refining its prudent credit policies to sharpen the focus on high-quality lending, reflected in the 40.8 per cent increase in profit before tax compared with the second half of last year. 

Average customer advances fell by 4.9 per cent against the backdrop of the significant slowdown in global economic activity. Trade finance declined by 23.4 per cent, reflecting reduced export trade. In the changing credit environment, CMB actively managed its loans portfolio to improve pricing. However, falling deposit spreads dampened the positive effects of the 3.1 per cent rise in average customer deposits, leading to an overall decline of 18.5 per cent in net interest income.

CMB continued to leverage its strong customer relationships to expand corporate wealth management. Underpinned by a strengthened product suite and coordinated marketing efforts, CMB made good progress with growing corporate life insurance business, recording an encouraging 230.3 per cent rise in income. In response to the changing investment sentiment, CMB rapidly shifted its focus to 'back-to-basic' investments such as structured products and securities trading. This helped cushion the adverse effects of the slow investment environment, resulting in a drop of 14.7 per cent in corporate wealth management revenue. Corporate wealth management contributed 12.9 per cent of CMB's total operating income.

In line with the increasingly strong economic linkages between Hong Kong and the Mainland, CMB continued to pursue a strategy of offering one-stop seamless financial solutions to middle-market enterprises ('MMEs') through its cross-border commercial banking teams in Hong Kong, the Mainland and Macau.

Recognising the crucial role that small and medium-sized enterprises ('SMEs') have to play in driving the economy, the HKSAR Government launched a package of relief measures to support SMEs, including the SME Loan Guarantee Scheme ('SGS') and Special Loan Guarantee Scheme ('SpGS'). In support of the schemes, CMB launched a series of marketing campaigns, including print and radio advertisements, that included preferential offers, a pre-approved direct mailing programme and customer seminars. The Bank has approved over 3,400 applications with a total loan amount of more than HK$10 billion.

CMB continued to encourage customers to switch to online and automated channels to enable the more efficient use of bank resources. As at 30 June 2009, over 71,000 customers had registered for Business e-Banking services, up 22.7 per cent on a year earlier. During the same period, the number of online business transactions grew by 13.9 per cent and branch counter transactions fell by 17.4 per cent.

Corporate Banking ('CIB') 
achieved an increase of 41.6 per cent in operating profit excluding loan impairment charges, driven largely by satisfactory growth of 31.9 per cent in net interest income. Compared with the second half of last year, operating profit excluding loan impairment charges was up 14.9 per cent. Advances to customers decreased slightly by 3.6
 
per cent compared with the end of last year, mainly due to fewer advances to manufacturing and real estate companies and hotels and restaurants. Profit before tax rose by HK$84
 
million, or 23.0
 
per cent, to HK$449
 
million.
 
Throughout the first half of 2009, CIB supported customers with new or renewed facilities while adjusting pricing in line with the credit environment. Net interest income from advances grew by 66.2 per cent.

CIB continued to focus on better yield transactions and remained active in financing the Mainland projects of Hong Kong-based corporations as well as working to expand its customer base.

Treasury ('TRY') 
reported satisfactory year-on-year growth of 6.8 per cent in operating income, due mainly to stable interest margins on the balance sheet management portfolio under the bank's strategy of investing in selected high-quality securities. Operating income was up 32.4 per cent compared with the second half of last year. Net trading income for the first six months of 2009 doubled compared with the same period last year, providing momentum for operating income to outperform. The remarkable performance of net trading income was mainly attributable to the increase in trading net interest income from funding swaps and strong customer demand for foreign exchange-linked structured products.

Treasury's net interest income registered at HK$1,353 million for the first half of 2009, 11.9 per cent lower than same period last year. Including the net increase of HK$471 million in funding swa
p^
 income (described below) - which was recognised as foreign exchange income - net interest income rose by HK$288 million, or 22.7 per cent. In the face of an uncertain operating environment, Treasury continued its prudent risk management strategy by striving to achieve an optimal mix of income sources from accrual investments.  

Net operating income after credit risk provisions registered satisfactory growth of 6.7 per cent, or HK$121 million. The improvement in global credit markets noted from the second quarter of 2009 saved the bank from suffering significant fair value losses and having to make further provisions for potential impairments.  

Treasury also made good use of opportunities to dispose of higher-risk assets in the balance sheet management portfolio. This strategy significantly improved the credit quality and marked-to-market performance of the portfolio. However, with the accompanying disposal loss of HK$95 million, profit before tax recorded only modest growth of 1.7 per cent to HK$2,017 million - representing 26.5 per cent of the group's total profit before tax.

^
 Treasury from time to time employs foreign exchange swaps for its funding activities, which in essence involve swapping a currency ('original currency') into another currency ('swap currency') at the spot exchange rate for short-term placement and simultaneously entering into a forward exchange contract to convert the funds back to the original currency on maturity of the placement. In accordance with HKAS39, the exchange difference of the spot and forward contracts is required to be recognised as a foreign exchange gain/loss, while the corresponding interest differential between the original and swap funding is reflected in net interest income.
 
 
Mainland business

At 30 June 2009, Hang Seng Bank (China) Limited ('Hang Seng China') 
operated a network of 34 outlets in 
Beijing, Shanghai, Guangzhou, Dongguan, Shenzhen, Fuzhou, Nanjing, Hangzhou, Ningbo, Tianjin and Kunming. The bank has a branch in Shenzhen for foreign currency wholesale business and a representative office in 
Xiamen
. 

In the uncertain credit environment, greater caution in extending new loans saw lending drop by 12.9 per cent compared to the end of 2008. Customer deposits rose slightly by 1.2 per cent, affected by customers' tightened liquidity and increased cautiousness towards foreign banks following the financial tsunami. Adverse market conditions notwithstanding, Hang Seng 
China
 was able to maintain solid growth in its customer base, which increased by 14 per cent compared with 31 December 2008. The total number of Prestige Banking customers grew by 21 per cent. Total operating income rose by 19.9 per cent, with encouraging growth in net interest income and the reduced exchange losses upon the revaluation of US dollar capital funds against the renminbi partly offset by the reduction in other non-interest income.

Hang Seng 
China
 continued to enrich and diversify its product offerings to cater for different market conditions and promote wealth management awareness among its target customers. Hang Seng 
China
 is the only locally incorporated foreign bank to have launched partially protected renminbi equity linked investment products, offering debit cards and joining the bankcard association of China UnionPay. The award-winning 'Easy Touch' and the index-linked '
Ping
 
Pang
 
Range
' were launched in response to increased customer demand for capital protected investment products. Variations such as the transfer-in mortgage and guaranteed company mortgage loan were added to mortgage products to capture more business. 

Hang Seng 
China
 is striving to improve its network and business development efficiency by increasing its penetration in four key cities. Resources are also being redeployed to achieve greater management and operational efficiency. Management of credit risk and operational risk continues to be strengthened through proactive risk management practices.

The bank remains firmly committed to developing its mainland business, both through its own presence and long-term strategic relationships within strategic mainland partners. The bank's newest mainland associate, Yantai Bank Co., Ltd, began to contribute profit during the first half of 2009. Including the bank's share of profit from Industrial Bank Co., Ltd, mainland business contributed 11.7 per cent of total profit before tax, compared with 9.4 per cent for the first half of 2008.
 
 
Contents
 
The financial information in this news release is based on the unaudited consolidated financial statements of Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the group') for the six months ended 30 June 2009.

1
    Highlights of Results
2
    Chairman's Comment
4
    Chief Executive's Review
9
    Results Summary
13
    Customer Group Performance
19
    Mainland Business
20
    Contents
22
    Consolidated Income Statement
23
    Consolidated Statement of Comprehensive Income
24
    Consolidated Statement of Financial Position
25
    Consolidated Statement of Changes in Equity
27
    Consolidated Cash Flow Statement
28
    Financial Review
        28
    Net interest income
        30
    Net fee income
        31
    Trading income
        32
    Net loss from financial instruments designated at fair value
        32
    Other operating income
        33
    Analysis of income from wealth management business
        35
    Loan impairment charges and other credit risk provisions
        36
    Operating expenses
        37
    Gains less losses from financial investments and fixed assets
        38
    Tax expense
        39
    Earnings per share
        39
    Dividends per share
        39
    Segmental analysis
        42
    Cash and balances with banks and other financial institutions
        42
    Placings with and advances to banks and other financial institutions
        43
    Trading assets
        44
    Financial assets designated at fair value
        45
    Advances to customers
        46
    Loan impairment allowances against advances to customers
        47
    Impaired advances and allowances
        48
    Overdue advances
        49
    Rescheduled advances
        49
    Segmental analysis of advances to customers by geographical area
        50
    Gross advances to customers by industry sector
        52
    Financial investments
        54
    Investments in associates
        54
    Other assets
        54
    Current, savings and other deposit accounts
        55
    Certificates of deposit and other debt securities in issue
        55
    Trading liabilities
        56
    Other liabilities
        57
    Subordinated liabilities
        58
    Shareholders' funds
        59
    Capital resources management
        60
    Liquidity ratio
        61
    Reconciliation of cash flow statement
        62
    Contingent liabilities, commitments and derivatives
        66
    Statutory accounts and accounting policies
        67
    Comparative figures
        67
    Property revaluation
        67
    Foreign currency positions
        68
    Ultimate holding company
        68
    Register of shareholders
        68
    Proposed timetable for the remaining 2009 quarterly dividends
        69
    Code on corporate governance practices
        69
    Board of directors
        69
    News release
 
 
Consolidated Income Statement (unaudited)

Half-year ended

Half-year ended

Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Interest income

8,775


13,665


  12,507 

Interest expense

(1,500
)

(5,413
)

  (4,527
)
Net interest income

7,275


8,252


  7,980 

Fee income

2,327


3,368


  2,336 

Fee expense

(401
)

(341
)

  (394
)
Net fee income

1,926


3,027


  1,942

Trading income 

1,035


759


  696

Net loss from financial









  instruments designated at fair value  

(195
)
  
(1,024
)

  (7
)
Dividend income

5


54


  28

Net earned insurance premiums

6,658


6,930


  5,421

Other operating income 

350


525


  176

Total operating income 

17,054


18,523


  16,236

Net insurance claims incurred and









  movement in policyholders' liabilities

(6,478
)

(5,903
)

  (5,560
)
Net operating income before loan









  impairment charges and







   

  other credit risk provisions

10,576


12,620


  10,676 

Loan impairment charges and









  other credit risk provisions

(621
)

(188
)

  (2,588
)
Net operating income 

9,955


12,432


8,088 

Employee compensation and benefits

(1,669
)

(1,736
)

  (1,716
)
General and administrative expenses 

(1,281
)

(1,356
)

  (1,495
)
Depreciation of premises, plant 







   

  and equipment 

(225
)

(201
)

  (231
)
Amortisation of intangible assets

(40
)

(27
)

  (33
)
Total operating expenses

(3,215
)

(3,320
)

  (3,475
)
Operating profit 

6,740


9,112


  4,613

Gains less losses from financial investments









  and fixed assets

55


  246 


  21

Net surplus/(deficit) on property revaluation

60


229


  (150
)
Share of profits from associates  

763


943


  864 

Profit before tax 

7,618


10,530


  5,348

Tax expense

(1,167
)

(1,466
)

  (313
)
Profit for the period

6,451


9,064


  5,035











Profit attributable to shareholders

6,451


9,064


  5,035











Earnings per share (in HK$)

3.37


4.74


2.63


Details of dividends payable to shareholders of the bank attributable to the profit for the half year are set out on page 39.

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:


Half-year ended


Half-year ended


Half-year ended

Figures in HK$m

30 June 2009


30 June 2008


31 December 2008











 
Interest income

8,545


13,376


12,223

 
Interest expense

(1,124
)

(4,679
)

(3,687
)
 
Net interest income

7,421


8,697


8,536

Net interest income and expense reported as 'Net trading income'

(196
)

(551
)

(660
)
Net interest income and expense reported as 'Net income









 from financial instruments designated at fair value'

50


106


104













 
Consolidated Statement of Comprehensive Income (unaudited)

 

Half-year ended


Half-year ended


Half-year ended


30 June


30 June


31 December

Figures in HK$m 
2009


2008


2008










Profit for the period
6,451


9,064


  5,035 










Other comprehensive income








Premises:








- unrealised surplus/(deficit) on 








  
revaluation of 
premises
244


559


  (388 
)
- deferred taxes
(40
)

(90
)

66

Available-for-sale investments reserve:








- fair value changes taken to equity:






   

  -- on debt securities
1,934


(1,448
)

(2,179
)
  -- on equity shares
28


(1,095
)

(842
)
- fair value changes transferred








  from/(to) income statement:








  -- on impairment
4


67


488

  -- on hedged items
114


(22
)

  (474
)
  -- on disposal
(64
)

(369
)

  (194
)
- share of changes in equity of associates








  -- fair value changes
73


(56
)

(7
)
- deferred taxes
(270
)

170


247

Cash flow hedging reserve:








- fair value changes taken to equity
194


49


821

- fair value changes transferred to








  income statement
(511
)

(234
)

(142
)
- deferred taxes
48


30


(106
)
Defined benefit plans:








- 
Actuarial 
gains/(losses)
 on 
defined






   

  benefit 
plans
1,520


(506
)

  (2,510
)
- deferred taxes
(251
)

83


414

Exchange differences on translation of:








- financial statements of overseas






   

  branches, subsidiaries and associates
(12
)

677


(55
)
- others
5


5


__

Effect of decrease in tax rate on








  deferred tax balance at 1 January 2008
__


30


__

Other comprehensive income for the








  period, net of tax
3,016


(2,150
)

(4,861
)

Total comprehensive income








  for the period
9,467


6,914


  174



















Total comprehensive income








  for the period attributable to








  shareholders
9,467


6,914


  174 


9,467


6,914


  174 











 
Consolidated Statement of Financial Position (unaudited)
 



At 30 June



At 30 June



At 31 December

Figures in HK$m

2009


2008


2008











ASSETS









Cash and balances with banks and









  other financial institutions

51,065


19,755


24,822

Placings with and advances to banks and









  other financial institutions

55,223


136,534


  69,579

Trading assets

84,517


13,689


108,389

Financial assets designated at fair value 

6,025


12,607


7,798

Derivative financial instruments

4,927


6,043


7,104

Advances to customers

325,371


337,157


329,121

Financial investments

225,338


184,654


181,159

Investments in associates

9,329


7,149


8,870

Investment properties

2,716


2,776


2,593

Premises, plant and equipment 

6,887


7,487


7,090

Interest in leasehold land held for own use









  under operating lease

543


558


551

Intangible assets

3,621


3,297


3,385

Other assets 

14,534


16,205


11,506

Deferred tax assets

25


5


201

Total assets

790,121


747,916


762,168











LIABILITIES AND EQUITY



















Liabilities









Current, savings and other deposit accounts

591,267


535,148


562,183

Deposits from banks

4,603


19,247


11,556

Trading liabilities 

53,387


53,767


48,282

Financial liabilities designated at fair value

1,452


1,431


1,407

Derivative financial instruments

8,778


8,882


14,945

Certificates of deposit and other 









  debt securities in issue 

2,294


4,026


2,772

Other liabilities 

14,328


17,629


15,448

Liabilities to customers under









  insurance contracts 

49,479


38,737


43,835

Current tax liabilities 

739


2,902


94

Deferred tax liabilities

1,221


1,184


711

Subordinated liabilities 

9,312


9,355


9,309

Total liabilities

736,860


692,308


710,542











Equity









Share capital

9,559


9,559


9,559

Retained profits

36,082


37,358


32,518

Other reserves

5,517


6,588


3,813

Proposed dividends

2,103


2,103


5,736

Shareholders
'
 funds

53,261


55,608


51,626

Total equity and liabilities

790,121


747,916


762,168













Consolidated Statement of Changes in Equity 
(unaudited) 
 
 


Half­year to

Half-year to

Half­year to



30 June 
2009

30 June
 2008

31 December 2008

Figures in HK$m















Share capital







  At beginning and end of period

9,559

9,559

9,559









Retained profits (including proposed dividends)







  At beginning of period

38,254

38,609

39,461

  Dividends to shareholders







  - Dividends approved in
     respect of the previous year

(5,736
)
(5,736
)
__

  - Dividends declared in respect
    of the current period

(2,103
)
(2,103
)
(4,206
)
  Transfer

45

59

62

  Total comprehensive income 
   for the period

7,725

8,632

2,937



38,185

39,461

38,254









Other reserves







Premises revaluation reserve







  At beginning of period

3,711

3,639

4,094

  Transfer

(45
)
(59
)
(62
)
  Total comprehensive income 
  for the period

204

514

  (321
)


3,870

4,094

3,711









Available­for­sale investment reserve







  At beginning of period

(3,823
)
1,892

(862
)
  Total comprehensive income 
    for the period

1,819

(2,754
)
(2,961
)


(2,004
)
(862
)
(3,823
)








Cash flow hedging reserve







  At beginning of period

562

144

(11
)
  Total comprehensive income 
    for the period

(269
)
(155
)
573



293

(11
)
562









Foreign exchange reserve







  At beginning of period

1,379

757

1,434

  Total comprehensive income 
   for the period

(12
)
677

(55
)


1,367

1,434

1,379









 


Half­year to

Half-year to

Half­year to



30 June 
2009

30 June
 2008

31 December 2008

Figures in HK$m















Other reserve







  At beginning of period

1,984

1,856

1,933

Cost of share-based payment
  arrangements

7

77

50

Total comprehensive income 
  for the period

__


__

1



1,991

1,933

1,984









Total equity







  At beginning of period

51,626

56,456

55,608

  Dividends to shareholders

(7,839
)
(7,839
)
(4,206
)
  Cost of share-based payment  
    arrangements

7

77

50

  Total comprehensive income 
    for the period

9,467

6,914

174



53,261

55,608

51,626



Consolidated Cash Flow Statement
 (unaudited)
 

Half-year ended

Half-year ended 




30 June


30 June


Figures in HK$m

2009


2008










Net cash inflow/(outflow) from operating activities

102,831


(44,918
)









Cash flows from investing activities















Dividends received from associates

358


258


Purchase of available-for-sale investments

(35,448
)

(27,368
)

Purchase of held-to-maturity debt securities

(130
)

(134
)

Proceeds from sale or redemption of







  available-for-sale investments

26,397


84,669


Proceeds from redemption of held-to-maturity







  debt securities

132


71


Purchase of fixed assets and intangible assets

(157
)

(367
)

Proceeds from sale of fixed assets and asset held for 
  sale

__


233


Interest received from available-for-sale investments

2,142


5,218


Dividends received from available-for-sale investments

4


54


Net cash (outflow)/inflow from investing activities

(6,702
)

62,634








Cash flows from financing activities













Dividends paid 

(7,839
)

(7,839
)
Interest paid for subordinated liabilities

(86
)

(205
)
Net cash outflow from financing activities

(7,925
)

(8,044
)







Increase in cash and cash equivalents

88,204


9,672








Cash and cash equivalents at 1 January

76,116


113,474

Effect of foreign exchange rate changes

1,895


988

   Cash and cash equivalents at 30 June

166,215


124,134










Financial Review

 
Net interest income

Half-year ended

Half-year ended

Half-year ended


30 June


30 June


31 December

Figures in HK$m
2009


2008


2008










Net interest income/(expense) arising from:







- financial assets and liabilities that are 








  not at fair value through profit and loss
7,431


8,717


8,560

- trading assets and liabilities  
(196
)

(551
)

(660
)
- financial instruments designated








  at fair value
40


86


80


7,275


8,252


7,980










Average interest-earning assets
711,253


682,728


693,716










Net interest spread
1.99
%

2.20
%

2.10
%
Net interest margin 
2.06
%

2.43
%

2.29
%


Despite a HK$28.5 billion, or 4.2 per cent, increase in average interest-earning assets to HK$711.3 billion, a 4.9 per cent rise in average customer deposits, and the shifting of time deposits to low-cost savings deposits, net interest income fell by HK$977 million, or 11.8 per cent, to HK$7,275 million.

Net interest margin 
narrowed 
by 37 basis points to 2.06 per cent. Net interest spread declined by 21 basis points to 1.99 per cent, 
mainly 
caused by markedly reduced deposit spreads under the 
current low 
interest rate environment which offered 
little room for the reduction o
f
 interest rates paid to customers. Volume growth was noted in 
the 
average 
balance of 
mortgage lending, 
with strong volume growth offsetting the effect of tighter spreads on mortgages in an intensely competitive market
. The increase in higher-yielding personal loans and credit cards also 
helped support net interest income revenue streams
. 
I
nterest income from
 the
 
life insurance fund investments portfolio grew by 
51.6
 per cent
.
 Including the net increase of HK$471 million in funding swap net interest income - which was recognised as a foreign exchange gain under trading income - the decrease in net interest income was reduced from HK$977 million to HK$506 million, or 6.3 per cent. Net interest margin on this basis dropped by 23 basis points to 2.12 per cent. This was contributed by 
the improvement in 
yields from the Treasury's balance sheet management portfolio
 
which 
benefited from the steepening interest rate 
yield
 curve and the successful strategy of investing in selective quality negotiable instruments.

The contribution from net free funds also dropped by 16 basis points to 0.07 per cent as a result of the decline in average market interest rates. 

Compared with the second half of 2008, net interest income dropped by HK$705 million, or 8.8 per cent, with average interest-earning assets maintaining a stable growth of 2.5 per cent. Net interest margin was down by 23 basis points
.
 
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 is reported 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:


Half-year ended

Half-year ended

Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Net interest income

7,421


8,697


8,536

Average interest-earning assets

653,655


664,892


664,610











Net interest spread

2.23
%

2.33
%

2.34
%
Net interest margin 

2.29
%

2.63
%

2.55
%
 
 
Net fee income

Half-year ended


Half-year ended


Half-year ended


30 June


30 June


31 December

Figures in HK$m

2009



2008



2008













- Stockbroking and related   
  services

689



808



  551 

- Retail investment funds 

226



773



  311 

- Structured investment products

5



297



  44 

- Insurance 

103



54



  44 

- Account services

143



141



  141 

- Private banking

46



177



  57 

- Remittances

101



107



  105 

- Cards

659



623



  681 

- Credit facilities

67



60



  72 

- Trade services

173



199



  210 

- Other

115



129



  120 

Fee income

2,327



3,368



  2,336 

Fee expense

(401)



(341
)


  (394
)


1,926



3,027



1,942














Net fee income dropped by HK$1,101 million, or 36.4 per cent, compared with the first half of 2008, to HK$1,926 million. 

With the continuing unfavourable economic environment and subdued customer interest in investment products, income from retail investment funds and sales of structured investment products decreased substantially by 70.8 per cent and 98.3 per cent respectively. Against the backdrop of lower equity market turnover, income from stockbroking and related services decreased by 14.7 per cent. Private banking investment services fee income fell by 74.0 per cent, reflecting the reduced client appetite for trading and structured investment products. 

Card services income was 5.8 per cent higher than in the same period last year and was broadly in line with the growth in average card balances. The bank's customer loyalty scheme and card utilisation programmes helped to drive up card spending in the first half of 2009 to outperform the shrinking market. The increase in merchant income was supported by year-on-year increases of 9.1 per cent in the number of cards in circulation and 5.3 per cent in cardholder spending. 

Insurance income rose by 90.7 per cent, due mainly to the successful sale of HSBC Jade Global Universal Life product. 

Compared with the second half of 2008, net fee income remained broadly unchanged. Higher income from insurance and stockbroking and related services was offset by the decrease in income from retail investment funds, structured investment products and trade services.
 
Trading income


Half-year ended

Half-year ended

Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Trading income:









- foreign exchange

930


535


849

- securities, derivatives and 









  other trading activities

105


224


(153
)


1,035


759


696


Trading income rose significantly by HK$276 million, or 36.4 per cent, to HK$1,035 million. Foreign exchange income increased by 73.8 per cent, due mainly to the favourable increase in net interest income from funding swaps and the decrease in exchange losses on Hang Seng 
China
's US dollar capital funds upon revaluation against the renminbi. Normal foreign exchange trading, however, fell by 32.2 per cent. 

Income from securities, derivatives and other trading was down by HK$119 million, due largely to decreased customer appetite for equity-linked structured products
. 
 

 
Net loss from financial instruments designated at fair value


Half-year ended

Half-year ended

Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Net loss on assets
  designated at fair value which
  back insurance and
  investment contracts

(170
)

(1,030
)

(15
)
Net change in fair value of 
  other financial instruments  
  designated at fair value 

(25
)

6


8



(195
)

(1,024
)

(7
)

Net loss from financial instruments designated at fair value improved by HK$829 million, or 81.0 per cent, compared with the first half of 2008, to reach HK$195 million, reflecting the more stable financial markets in the first half of 2009 and the swapping of the equity component of the investment assets of the life insurance portfolios for high-quality debt securities in the second half of 2008. 
 
 
Other operating income


Half-year ended

Half-year ended

Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Rental income from 









  investment properties

73


66


72

Movement in present value 









  of in-force long-term  









  insurance business

202


363


  19 

Other

75


96


  85 



350


525


  176 



Analysis of income from wealth management business

Half-year ended
Half-year ended

Half-year ended


30 June


30 June


31 December

Figures in HK$m

2009



2008



2008













Investment income:











- retail investment funds

226



773



311

- structured investment product
s^

204



689



193

- private bankin
g^^

58



187



61

- 
securities broking and related services

689



808



551

- margin trading and others 

76



52



67



1,253



2,509



1,183

Insurance income:











- life insurance

1,089



862



521

- general insurance and others

162



147



167



1,251



1,009



688

Total 

2,504



3,518



1,871


^ 
Income from structured investment products includes income reported under net fee income on the sales of third-party structured investment products. It also includes profit generated from the selling of structured investment products in issue, reported under trading income.

^^ 
Income from private banking includes income reported under net fee income on investment services and profit generated from selling of structured investment products in issue, reported under trading income.
 
Wealth 
management business remained muted during the first half of 2009, recording a 28.8 per cent decline in income. To cater for changing customer demands in the turbulent financial markets environment, the group rapidly shifted its focus to highly defensive products including life insurance. This resulted in an encouraging growth of 24.0 per cent in insurance income which partly offset the 50.1 per cent decline in investment income. 

Income from retail investment funds and structured products has been adversely affected by the unfavourable investment climate and volatility in equity markets since the second half of 2008. The bank focused on offering a diverse variety of products with a focus on lower-risk yield enhancement but continuing investor caution saw investment funds turnover fall by 84.2 per cent and investment funds income decline by 70.8 per cent year on year. Structured investment products income dropped by 70.4 per cent compared with same period last year. 
 
Following the stock market rebound in the second quarter of 2009, the bank's securities business gained momentum and grew its market share. Securities broking and related services income recorded a rebound as compared to the second half of 2008 - rising by 25.0 per cent but was down 14.7 per cent year on year. Securities turnover declined by 5.3 per cent compared with the same period last year. The bank also captured additional sales opportunities via its recently opened Securities Select Customer Trading Centre.  

Private Banking was adversely affected by the weak investment sentiment. This led to fewer customer transactions and a 69.0 per cent decline in wealth management income in the first half of the year. 

Leveraging its strong customer relationships and flexible wealth management strategy, the group was successful in sustaining business by focusing on defensive products that provided investors with stable returns in the uncertain market
 conditions
. A comprehensive range of health and wealth insurance solutions for all life stages enabled life insurance sales to remain resilient. Despite the intensely competitive environment, the Group achieved an increase in life insurance market share to 16.3 per cent in terms of direct new business for the first quarter of 2009 and was the No. 2 provider in 
Hong Kong
. Total policies in force grew by 12.7 per cent year-on-year and annualised premiums increased by 19.1 per cent. A mobile phone-based straight-through 
travel insurance 
enrolment service was launched
 
during the first half of the year to
 supplement 
the bank's
 proven e-channel
. This pioneering service provides a timely and convenient way for customers to enrol for travel cover prior to departing on a trip.

General insurance income increased by 10.2 per cent to HK$162 million
.

Half-year 
ended
Half-year      
ended      

Half-year    
ended  


30 June


30 June


31 December

Figures in HK$m

2009



2008



2008













Life insurance:











- net interest income and fee income

951



601



799
 
- investment returns on life insurance 











  f
unds

(133
)


(1,030
)


      (35
)
- net earned insurance premiums

6,502



6,774



5,249

- claims, benefits and surrenders paid

(948
)


(300
)


(376
)
- movement in policyholders' liabilitie
s^
 

(5,496
)


(5,555
)


(5,148
)
- reinsurers' share of claims incurred and











  movement in policyholders' liabilities

11



9



13

- movement in present value of in-force 











  long-term insurance business 

202



363



19



1,089



862



521

General insurance and others

162



147



167

Total 

1,251



1,009



688


^
 Including premium and investment reserves

Loan impairment charges and other credit risk provisions


Half-year ended

Half-year ended

Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Loan impairment charges:









- individually assessed

(288
)

(56
)

(869
)
- collectively assessed

(333
)

(132
)

(344
)


(621
)

(188
)

(1,213
)
Of which:









- new and additional 

(709
)

(278
)

(1,245
)
- releases

61


60


6

- recoveries

27


30


26



(621
)

(188
)

(1,213
)










Other credit risk provisions

-


-


(1,375
)










Loan impairment charges and other 









  credit risk provisions

(621
)

(188
)

(2,588
)

Loan impairment charges and other credit risk provisions increased by HK$433 million to HK$621 million year-on-year. As compared to the second half of 2008, loan impairment charges and other credit risk provisions decreased significantly by HK$1,967 million, or 76.0 per cent, due mainly to the HK$1,
375
 million reduction in other credit risk provisions
 as a result of 
the write down of the carrying value of 
certain available-for-sale debt securities in 
the 
second half of 2008
.

Individually assessed provisions rose by HK$232 million due mainly 
to the 
downgrad
e 
of certain corporate and commercial banking customers.

Collectively assessed provisions rose by HK$201 million due largely to the rise in 
credit card 
delinquencies against the background of higher card spending and the unfavourable credit environment. Impairment provisions for personal loan portfolios 
increased in line with the rising bankruptcy trend 
and allowances for loans not individually identified as impaired also increased as a result of higher historical loss rates to reflect the turbulence in the global credit markets.
 
Operating expenses


Half-year ended
Half-year ended
Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Employee compensation and benefits:









- salaries and other costs

1,401


1,351


1,466

- performance-related pay

123


301


161

- retirement benefit costs

145


84


89



1,669


1,736


1,716

General and administrative expenses:









- rental expenses

218


203


220

- other premises and equipment 

442


422


504

- marketing and advertising expenses

174


242


274

- other operating expenses

447


489


497



1,281


1,356


1,495

Depreciation of business premises









  and equipment

225


201


231

Amortisation of intangible assets

40


27


33



3,215


3,320


3,475











Cost efficiency ratio

30.4
%

26.3
%

32.5
%











At 30 June

At 30 June
At 31 December

Staff number
s^
 by region

2009


2008


2008

Hong Kong

7,972


8,240


8,256

Mainland 

1,411


1,312


1,450

Others

55


58


58

Total 

9,438


9,610


9,764

^
 
Full-time equivalent

Operating expenses fell by HK$105 million, or 3.2 per cent, compared with the first half of 2008, reflecting the bank's cost discipline in the difficult operating environment. Excluding mainland business, operating expenses fell by 4.7 per cent.

E
mployee compensation and benefits
 decreased by HK$67 million, or 3.9 per cent. Sa
laries and other costs increased by 
3.7
 per cent, 
reflecting 
the increase in 
average 
headcount and other staff
-
related cost
s
.
 Performance-related pay expenses declined
 substantially 
by 59.1 per cent while retirement benefit costs increased due to a reduction in the assumed 
investment return 
at the end of 200
8
. General and administrative expenses decreased by 5.5 per cent, attributable to c
lose cost management 
in marketing and advertising, although this was partly offset by rising rental expenses and other premises and equipment costs. Rental expenses rose due to increased rents for branches in Hong Kong as well as new branches on the Mainland and the bank's large office premises in 
Kowloon
 
Bay
. Depreciation charges rose by 11.9 per cent, reflecting
 the 
acquisition of equipment, fixtures and fittings for the bank's 
Kowloon
 
Bay
 office and Head Office in Central.
 
The group's number of full-time equivalent staff dropped by 326 compared with 2008 year-end - mainly from 
Hong Kong
 operations. The headcount number was closely monitored and gradually reduced through natural attrition. Headcount for mainland operations remained static when compared with last year-end.

The cost efficiency ratio for the first half of 2009 was 30.4 per cent, compared with 26.3 per cent for the first half of 2008, due primarily to the reduction in net operating income before impairment charges and other credit risk provisions.


Gains less losses from financial investments and fixed assets  


Half-year ended

Half-year ended

Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Net gains from disposal of  









  available-for-sale equity
  securities

159


369


277











Net losses from disposal of









  available-for-sale debt securities

(95
)

__


(83
)










Impairment of available-for-sale 



  equity securities 

(4
)

(118
)

(166
)










Gains less losses on disposal of









  fixed assets

(5
)

(5
)

(7
)


55


246


21











Gains less losses from financial investments and fixed assets amounted to HK$55 million, a decrease of HK$191 million compared with the first half of 2008. As the group disposed of the majority of its equity holdings in 2008, net gains from the disposal of available-for-sale equity securities decreased by HK$210 million, or 56.9 per cent. I
mpairment charges for certain available-for-sale equity securities also decreased by HK$114 million, or 96.6 per cent,
 as a result of the disposal in equity holdings.

 
Tax expense

Taxation in the consolidated income statement represents:


Half-year ended

Half-year ended

Half-year ended


30 June

30 June

31 December

Figures in HK$m

2009


2008


2008











Current tax - provision for 









  
Hong Kong
 profits tax









Tax for the period

977


1,447


720

Adjustment in respect of 









  prior periods

(3
)

(13
)

(337
)










Current tax - taxation 
  outside Hong Kong









  









Tax for the period

3


5


(26
)










Deferred tax









Origination and reversal of 









  temporary differences

190


75


(44
)
Effect of decrease in tax rate









  on deferred tax balances 









  at 1 January 2008

__


(48
)

__

Total tax expenses

1,167


1,466


313












The current tax provision is based on the estimated assessable profit for the first half of 2009, and is determined for the bank and its subsidiaries operating in Hong Kong by using the 
Hong Kong
 profits tax rate of 16.5 per cent (same as 2008). 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 period when the liability is settled or the asset is realised.

 
Earnings per share

The calculation of earnings per share for the first half of 2009 is based on earnings of HK$6,451 million (HK$9,064 million and HK$5,035 million for the first and second halves of 2008 respectively) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from the first and second halves of 2008).


Dividends per share

 
Half-year ended
 
Half-year ended
 
Half-year ended
 
 
 
30 June
 
 
30 June
 
31 December
 
 
 
2009
 
 
2008
 
 
2008
 
 
HK$
HK$m
 
HK$
HK$m
 
HK$
HK$m
 
 
per share
 
 
per share
 
 
per share
 
 
 
 
 
 
 
 
 
 
 
 
First interim
1.10
2,103
 
1.10
2,103
 
__
__
 
Second interim
1.10
2,103
 
1.10
2,103
 
__
__
 
Third interim
__
__
 
__
__
 
1.10
2,103
 
Fourth interim
__
__
 
__
__
 
3.00
5,736
 
 
2.20
4,206
 
2.20
4,206
 
4.10
7,839
 


Segmental analysis 

The group's
 business comprises five customer groups. 
On first-time adoption of HKFRS 8 'Operating segments' and in a manner consistent with the way in which information is reported internally for the purposes of resource allocation and performance assessment, the group has identified the following five reportable segments.

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.

(a) Segment result

For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the customer groups by way of internal capital allocation and fund 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 rates for usage of premises are reflected in other operating income for the 'Other' customer group and total operating expenses for the respective customer groups.
 
Profit before tax contributed by the customer groups for the periods stated is set out in the table below. More customer group analysis and discussions are set out in the 'Customer group performance' section on page 13.


Personal 








Total


Financial
Commercial
Corporate




Reportable

Figures in HK$m
Services

Banking

Banking

Treasury

Other
Segment














Half-year ended 30 June 2009

























Profit before tax
3,467

1,080

449

2,017

605

7,618

Share of profit before tax
45.5
%
14.2
%
5.9
%
26.5
%
7.9
%
100.0
%













Half-year ended 30 June 2008

























Profit before tax
5,284

1,703

365

1,983

1,195

10,530

Share of profit before tax
50.2
%
16.2
%
3.5
%
18.8
%
11.3
%
100.0
%













Half-year ended 31 December 2008
























Profit before tax
3,126

767

280

296

879

5,348

Share of profit before tax
58.5
%
14.4
%
5.2
%
5.5
%
16.4
%
100.0
%

 
(b)
    Geographic information

The geographical regions in this analysis are classified by the location of the principal operations of the subsidiary companies or, in the case of the bank itself, by the location of the branches responsible for reporting the results or advancing the funds.







Mainland



Figures in HK$m
Hong Kong
Americas

and other

Total











Half-year ended 30 June 2009



















Income and expense









Total operating income

16,058

499

497

17,054

Profit before tax

6,391

449

778

7,618


At 30 June 2009



















Total assets

680,589

60,265

49,267

790,121

Total liabilities

707,734

1,169

27,957

736,860

Contingent liabilities and commitments

193,094

__

15,786

208,880











Half-year ended 30 June 2008



















Income and expense









Total operating income

16,789

1,296

438

18,523

Profit before tax

8,410

1,273

847

10,530


At 30 June 2008



















Total assets

620,326

74,177

53,413

747,916

Total liabilities

658,663

3,453

30,192

692,308

Contingent liabilities and commitments

207,082

__

12,417

219,499











Half-year ended 31 December 2008



















Income and expense









Total operating income

14,592

1,082

562

16,236

Profit before tax

4,424

498

426

5,348


At 31 December 2008



















Total assets

656,411

55,365

50,392

762,168

Total liabilities

680,296

1,238

29,008

710,542

Contingent liabilities and commitments

196,778

__

13,464

210,242

 
 
Cash and balances with banks and other financial institutions


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Cash in hand

3,621


3,099


3,696

Balances with central banks

31,637


2,049


2,426

Balances with banks and 









      other financial institutions

15,807


14,607


18,700



51,065


19,755


24,822













Placings with and advances to banks and other financial institutions 


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Placings with and advances to









 banks and other financial institutions 









 maturing within one month

28,456


99,200


47,025

Placings with and advances to banks 









  and other financial institutions 









      maturing after one month

26,767


37,334


22,554



55,223


136,534


 69,579

 
Trading assets 


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Treasury bills

79,426


6,732


103,621

Other debt securities

4,340


5,413


4,750

Debt securities

83,766


12,145


108,371

Equity shares

1


6


__

Total trading securities

83,767


12,151


108,371

Othe
r^

750


1,538


18

Total trading assets

84,517


13,689


108,389











Debt securities:









- listed in 
Hong Kong

2,872


4,454


3,631

- listed outside 
Hong Kong

153


431


269



3,025


4,885


3,900

- unlisted

80,741


7,260


104,471



83,766


12,145


108,371

Equity shares:









- listed in 
Hong Kong

1


6


__











Total trading securities

83,767


12,151


108,371











Debt securities:









Issued by public bodies:









- central governments and central 
   banks

83,168


11,049


107,428

- other public sector entities

373


379


378



83,541


11,428


107,806

Issued by other bodies:









- banks and other financial institutions

80


401


306

- corporate entities

145


316


259



225


717


565



83,766


12,145


108,371

Equity shares:









Issued by corporate entities

1


6


__

Total trading securities

83,767


12,151


108,371











^ 
This represents amount receivable from counterparties on trading transactions not yet settled.


With the severe turbulence in the financial markets and interventions by various governments and central banks to stabilise their financial systems in the second half of 2008, the bank has preserved its liquidity and yield by deploying surplus funds from matured available-for-sale securities and short-term interbank placements to high quality trading debt securities in late 2008. These trading securities are mostly in the form of treasury bills with short tenors issued by governments. During the first half of 2009, Treasury redeployed the surplus funds upon the maturity of trading assets to interbank placements and available-for-sale debt securities to achieve yield enhancement while prudently managing risk in the more stable financial markets and credit environment experienced in the first half of 2009. As a result, trading securities declined by HK$24,604 million, or 22.7 per cent, to HK$83,767 million when compared with last year-end. 


Financial assets designated at fair value  


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Certificates of deposit

139


190


163

Other debt securities

5,481


9,813


7,273

Debt securities

5,620


10,003


7,436

Equity shares

405


2,604


362



6,025


12,607


7,798











Debt securities:









- listed in 
Hong Kong

559


1,233


834

- listed outside 
Hong Kong

271


2,006


1,004



830


3,239


1,838

- unlisted

4,790


6,764


5,598



5,620


10,003


7,436

Equity shares:









- listed in 
Hong Kong

34


1,759


26

- listed outside 
Hong Kong

54


115


57



88


1,874


83

- unlisted

317


730


279



405


2,604


362



6,025


12,607


7,798











Debt securities:









Issued by public bodies:









- central governments and central banks

556


2,298


924

- other public sector entities

409


623


564



965


2,921


1,488

Issued by other bodies:









- banks and other financial institutions

4,441


5,589


5,317

- corporate entities

214


1,493


631



4,655


7,082


5,948



5,620


10,003


7,436

Equity shares:









Issued by corporate entities

405


2,604


362



6,025


12,607


7,798











 
Advances to customers


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Gross advances to customers

327,731


338,202


331,164

Less:









Loan impairment allowances:









- individually assessed

(1,492
)

(415
)

(1,241
)
- collectively assessed

(868
)

(630
)

(802
)


325,371


337,157


329,121





















Included in advances to customers are:









- Trade bills

2,773


3,676


2,899

  Less: loan impairment allowances

(39
)

(12
)

(30
)


2,734


3,664


2,869











 
Loan impairment allowances against advances to customers























Individually

Collectively




Figures in HK$m

assessed

assessed


Total











At 1 January 2009

1,241


802


2,043

Amounts written off

(29
)

(283
)

(312
)
Recoveries of advances









  written off in previous years

9


18


27

New impairment allowances









  charged to income statement

358


351


709

Impairment allowances released 









  to income statement

(70
)

(18
)

(88
)
Unwinding of discount of loan









  impairment allowances









  recognised as 'interest income'

(17
)

(2
)

(19
)
At 30 June 2009

1,492


868


2,360


Total loan impairment allowances as a percentage of gross advances to customers are as follows:


At 30 June

At 30 June

At 31 December



2009


2008


2008



%


%


%











Loan impairment allowances:









- individually assessed

0.46


0.12


0.37

- collectively assessed

0.26


0.19


0.24

Total loan impairment allowances

0.72


0.31


0.61












Total loan impairment allowances as a percentage of gross advances to customers was 0.72 per cent at 30 June 2009, 0.11 percentage points higher than at the end of 2008. Individually assessed allowances as a percentage of gross advances rose by 0.09 percentage points to 0.46 per cent, reflecting the downgrading of certain corporate and commercial banking customers as a result of the weak credit environment
.

 
Impaired advances and allowances


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Gross impaired advances

3,742


1,391


3,404

Individually assessed allowances 

(1,492
)

(415
)

(1,241
)


2,250


976


2,163











Individually assessed allowances









  as a percentage of









  gross impaired advances

39.9
%

29.8
%

36.5
%










Gross impaired advances 









  as a percentage of gross 









  advances to customers

1.1
%

0.4
%

1.0
%











Impaired advances are those advances where objective evidence exists that full repayment of principal or interest is considered unlikely. 

Gross impaired advances rose by HK$338 million, or 9.9 per cent, to HK$3,742 million compared with last year-end, with the downgrade of certain commercial banking accounts partly offset by the write-off of irrecoverable balances against impairment allowances and customer repayments. Gross impaired advances as a percentage of gross advances to customers was 1.1 per cent
, broadly in line with the end of 2008.



At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008









(restated)

Gross individually assessed









  impaired advances

3,650


1,300


3,297

Individually assessed allowances 

(1,492
)

(415
)

(1,241
)


2,158


885


2,056











Gross individually assessed









  impaired advances









  as a percentage of









  gross advances to customers

1.1
%

0.4
%

1.0
%










Amount of collateral which









  has been taken into account









  in respect of individually assessed









  impaired advances to customers

2,105


848


1,927













Collateral includes any tangible security that carries a fair market value and is readily marketable. This includes (but is not limited to) cash and deposits, stocks and bonds, mortgages over properties and charges over other fixed assets such as plant and equipment. Where collateral values are greater than gross advances, only the amount of collateral up to the gross advance has been included.


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 30 June

At 30 June

At 31 December




2009



2008



2008


HK$m

%

HK$m

%

HK$m

%














Gross advances to 
 
  customers which have












  been overdue with












  respect to either principal












  or interest for periods of: 












- more than three months
  but not more than six












  months
628

0.2

217

0.1

340

0.1

- more than six months
  but not more than one












  year
830

0.3

164

__

419

0.1

- more than one year
500

0.1

336

0.1

311

0.1


1,958

0.6

717

0.2

1,070

0.3


Advances with a specific repayment date are classified as overdue when the principal or interest is overdue and remains unpaid at period-end. Advances repayable by regular instalments are treated as overdue when an instalment payment is overdue and remains unpaid at period-end. Advances repayable on demand are classified as overdue either when a demand for repayment has been served on the borrower but repayment has not been made in accordance with the demand notice, or when the advances have remained continuously outside the approved limit advised to the borrower for more than the overdue period in question.

Overdue advances rose by 83.0 per cent to HK$1,958 million at 30 June 2009. Overdue advances as a percentage of gross advances to customers stood at 0.6 per cent, higher than last year's end by 0.3 percentage points.

 
Rescheduled advances 

Rescheduled advances and their expression as a percentage of gross advances to customers are as follows:


At 30 June

At 30 June

At 31 December




2009



2008



2008


HK$m

%

HK$m

%

HK$m

%

Rescheduled advances 












   
to customers
666

0.2

272

0.1

281

0.1















Rescheduled advances are those advances 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 12 months. Rescheduled advances that have been overdue for more than three months under the rescheduled terms are reported as overdue advances (page 48).

Rescheduled advances increased by HK$385 million, or 137.0 per cent, to HK$666 million at 30 June 2009, representing 0.2 per cent of gross advances to customers.


Segmental analysis of advances to customers by geographical area

Advances to customers by geographical area are classified according to the location of the counterparties after taking into account the transfer of risk. In general, risk transfer applies when an advance is guaranteed by a party located in an area that is different from that of the counterparty. At 30 June 2009, over 90 per cent (over 90 per cent at 30 June 2008 and 31 December 2008) of the group's advances to customers, including related impaired advances and overdue advances, were classified under 
Hong Kong
. There was no geographical segment other than 
Hong Kong
 to which the bank's advances to customers is not less than 10 per cent of total loans and advances.
 
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 HKMA is as follows:


At 30 June

At 30 June

At 31 December



2009


2008


2008

Figures in HK$m

















Gross advances to customers for









  use in 
Hong Kong



















Industrial, commercial and









  financial sectors









Property development

22,865


20,658


25,314

Property investment

66,060


62,251


66,179

Financial concerns

2,130


2,468


3,146

Stockbrokers

2,736


313


526

Wholesale and retail trade

6,489


6,875


6,183

Manufacturing

11,350


13,767


12,828

Transport and transport equipment

8,031


8,837


8,400

Recreational activities

28


235


26

Information technology

1,265


1,051


1,075

Other

25,348


20,380


21,553



146,302


136,835


145,230

Individuals









Advances for the purchase of flats under 









  the Government Home Ownership









  Scheme, Private Sector Participation 









  Scheme and Tenants Purchase Scheme

15,740


17,934


16,739

Advances for the purchase of other









  residential properties

91,656


94,792


89,669

Credit card advances

12,780


11,685


12,841

Other

10,992


13,698


11,892



131,168


138,109


131,141

Total gross advances for









  use in 
Hong Kong

277,470


274,944


276,371

Trade finance

18,878


25,206


19,039

Gross advances for









  use outside 
Hong Kong

31,383


38,052


35,754

Gross advances to customers

327,731


338,202


331,164













Gross advances to customers fell slightly by HK$3.4 billion, or 1.0 per cent, to HK$327.7 billion compared with the previous year-end.

Loans for use in 
Hong Kong
 increased by HK$1.1 billion, or 0.4 per cent. Lending to property development, property investment and financial concerns (including financial vehicles) declined, due mainly to the repayment of certain existing large loans. Lending to stockbrokers increased by HK$2.2 billion, reflecting IPO-related financing. In the face of the deepening global financial crisis last year, the Hong Kong Government launched two government-guaranteed schemes - the SME Loan Guarantee Scheme ('SGS') and the Special Loan Guarantee Scheme ('SpGS') - to facilitate financial institutions in supporting SMEs in challenging credit conditions. The bank actively promoted these schemes to its existing clientele and potential new customers. This bolstered loan growth to wholesale and retail trade companies and partly offset the decline in lending to manufacturing companies that arose from large repayments of existing loans in the first half of the year. Growth in lending to 'Other' was mainly pick-ups of certain new financing of large corporate customers.  

Lending to individuals was maintained at broadly the same level as last year-end. Excluding the fall in Government Home Ownership Scheme ('GHOS') mortgages, lending to individuals grew by 0.9 per cent. Despite price competition, the bank was able to sustain a leading position in the mortgage market by offering comprehensive mortgage consultancy and e-mortgage services. Residential mortgage lending to individuals recorded growth of 2.2 per cent. Credit card advances remained flat while other loans to individuals fell by 7.6 per cent, reflecting the decrease in unsecured lending as a result of the bank's prudent management of credit risk.

Despite the significant contraction in global trade activity, trade finance only decreased by 0.8 per cent, reflecting the strength of our seamless financial services proposition that covers Hong Kong, the Mainland and 
Macau
.

Loans for use outside 
Hong Kong
 decreased by HK$4.4 billion, or 12.2 per cent. In the uncertain credit environment, the group was more cautious in embarking on new loan business on the Mainland, resulting in a reduction in mainland lending. Trade finance on the Mainland also declined.

Financial investments


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Available-for-sale at fair value:









- debt securities

180,413


156,464


144,520

- equity shares

295


2,987


434

Held-to-maturity debt securities 









   
at amortised cost

44,630


25,203


36,205



225,338


184,654


181,159











Fair value of held-to-maturity debt securities

44,823


24,720


39,315











Treasury bills

35,778


3,796


9,927

Certificates of deposit

9,469


21,694


12,871

Other debt securities

179,796


156,177


157,927

Debt securities

225,043


181,667


180,725

Equity shares

295


2,987


434



225,338


184,654


181,159











Debt securities:









- listed in 
Hong Kong

5,526


5,084


5,604

- listed outside 
Hong Kong

65,791


60,382


67,018



71,317


65,466


72,622

- unlisted

153,726


116,201


108,103



225,043


181,667


180,725

Equity shares:









- listed in 
Hong Kong

48


2,273


37

- listed outside 
Hong Kong

64


128


68



112


2,401


105

- unlisted

183


586


329



295


2,987


434



225,338


184,654


181,159











Fair value of listed financial investments

71,398


67,798


73,048











Debt securities:









Issued by public bodies:









- central governments and central banks

44,478


8,617


16,643

- other public sector entities

9,463


3,902


4,353



53,941


12,519


20,996

Issued by other bodies:









- banks and other financial institutions

154,640


156,105


144,167

- corporate entities

16,462


13,043


15,562



171,102


169,148


159,729



225,043


181,667


180,725

Equity shares:









Issued by corporate entities

295


2,987


434



225,338


184,654


181,159























Debt securities by rating agency designation


At 30 June

At 30 June

At 31 December
Figures in HK$m

2009


2008


2008









AAA

86,125


14,753


40,775
AA- to AA+

67,826


91,449


71,511
A- to A+

58,544


62,230


56,296
B+ to BBB+

7,978


9,058


7,572
B and lower

151


-


160
Unrated 

4,419


4,177


4,411


225,043


181,667


180,725

Financial investments include treasury bills, certificates of deposit, other debt securities and equity shares intended to be held for an indefinite period of time.

Available-for-sale investments may be sold in response to needs for liquidity or changes in the market environment, and are carried at fair value with the gains and losses from changes 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. 

Financial investments rose by HK$44.2 billion, or 24.4 per cent, compared with last year-end. Investments were primarily in high-quality debt securities or debt securities guaranteed by governments, reflecting the bank's strategy to identify quality investment opportunities that enable it to optimise returns while prudently managing risk. At 30 June 2009, 98.0 per cent of the group's holdings of debt securities were assigned with investment grade ratings by rating agencies. The unrated debt securities were issued by subsidiaries of investment-grade banks and are guaranteed by their corresponding holding companies. These notes rank pari passu with all of the respective guarantor's other senior debt obligations. The group did not hold any investments in structured investment vehicles or any sub-prime related assets such as collateralised debt obligations, mortgage-backed securities and other asset-backed securities.

 
Investments in associates


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Share of net assets

8,782


6,848


8,314

Intangibles

119


__


157

Goodwill 

428


301


399



9,329


7,149


8,870


Investments in associates increased by HK$459 million, due mainly to the increase in the bank's share of net assets of 
Industrial Bank Co., Ltd.


Other assets


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Items in the course of collection









  from other banks

7,059


6,856


4,028

Prepayments and accrued income

2,263


3,072


2,711

Assets held for sale









- Repossessed assets

59


99


136

- Other assets held for sale

254


62


16

Acceptances and endorsements

3,388


3,834


3,090

Retirement benefit assets

64


88


30

Other accounts

1,447


2,194


1,495



14,534


16,205


11,506












 
Current, savings and other deposit accounts


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Current, savings and 









  other deposit accounts:









- as stated in consolidated
   statement of 









   financial position

591,267


535,148


562,183

- structured deposits reported as









  trading liabilities

28,306


31,067


29,785



619,573


566,215


591,968

By type:









- demand and current accounts

43,594


37,674


36,321

- savings accounts

380,090


259,058


294,556

- time and other deposits

195,889


269,483


261,091



619,573


566,215


591,968


Certificates of deposit and other debt securities in issue


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Certificates of deposit and  









  other debt securities in issue:









- as stated in consolidated
  statement of 









  financial position

2,294


4,026


2,772

   - structured certificates of deposit 









  and other debt securities in issue









  reported as trading liabilities

7,329


9,867


9,716

 

9,623


13,893


12,488











By type: 









- certificates of deposit in issue

3,206


4,660


6,633

- other debt securities in issue

6,417


9,233


5,855



9,623


13,893


12,488











Customer deposits and certificates of deposit and other debt securities in issue stood at HK$629.2 billion at 30 June 2009, a rise of 4.1 per cent over the end of 2008 and 8.5 per cent year on year. Higher growth was recorded in savings and current account balances, reflecting a shift from time deposits and customer preference for liquidity over other investments in the low interest rate environment. Structured deposits and other structured certificates of deposits and other debt securities in issue fell, due primarily to reduced demand for investment-related products as a result of the negative market sentiment. Deposits with Hang Seng China rose slightly by 1.2 per cent.


Trading liabilities


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Structured certificates of deposit and









  other debt securities in issue

7,329


9,867


9,716

Structured deposits

28,306


31,067


29,785

Short positions in securities and other

17,752


12,833


8,781



53,387


53,767


48,282












 
Other liabilities


At 30 June

At 30 June

At 31 December

Figures in HK$m

2009


2008


2008











Items in the course of transmission









  to other banks

5,644


7,951


4,583

Accruals

2,106


2,775


2,924

Acceptances and endorsements

3,388


3,834


3,090

Retirement benefit liabilities

2,071


1,098


3,532

Other

1,119


1,971


1,319



14,328


17,629


15,448












 
Subordinated liabilities



At 30 June

At 30 June

At 31 December

Figures in HK$m


2009


2008


2008












Nominal value
Description




















Amount owed to third parties




















HK$1,500 million
Callable floating rate










  subordinated notes










  due June 2015

1,499


1,497


1,498












HK$1,000 million
4.125 per cent callable










  fixed rate subordinated









 
  notes due June 2015 

1,017


979


994












US$450 million
Callable floating rate 










  subordinated notes










  due July 2016 

3,479


3,498


3,478












US$300 million
Callable floating rate 










  subordinated notes










  due July 2017 

2,319


2,332


2,318












Amount owed to HSBC Group undertakings




















US$260 million
Callable floating rate










  subordinated loan debt










  due December 2015

2,015


2,028


  2,015




10,329


10,334


10,303

Representing:










- measured at amortised cost

9,312


9,355


9,309

- designated at fair value

1,017


979


994




10,329


10,334


10,303












There was no subordinated debt issued during the first half of 2009. The outstanding subordinated notes, which qualify as supplementary capital, serve to help the bank maintain a more balanced capital structure and support business growth.

Shareholders' funds 


At 30 June

At 30 June
At 31 December


Figures in HK$m

2009


2008


2008













Share capital

9,559


9,559


9,559


Retained profits

36,082


37,358


32,518


Premises revaluation reserve

3,870


4,094


3,711


Cash flow hedging reserve

293


(11
)

562


Available-for-sale investments
  reserve










- on debt securities

(2,191
)

(2,214
)

(4,137
)

- on equity securities

187


1,352


314


Capital redemption reserve

99


99


99


Other reserves

3,259


3,268


3,264


Total reserves

41,599


43,946


36,331




51,158


53,505


45,890


Proposed dividends

2,103


2,103


5,736


Shareholders' funds

53,261


55,608


51,626













Return on average shareholders' funds

25.1
%
32.8
%
18.7
%












Shareholders' funds (excluding proposed dividends) grew by HK$5,268 million, or 11.5 per cent, to HK$51,158 million at 30 June 2009. Retained profits rose by HK$3,564 million, mainly reflecting the growth in attributable profit (excluding first and second interim dividends) during the period. The premises revaluation reserve increased by HK$159 million on the back of the rebound in the property market during second quarter of the year.

In accordance with accounting standards, available-for-sale debt and equity securities (other than held-to-maturity debt securities) should be measured at fair value. The carrying amounts of the various debt and equity securities are reviewed at the balance sheet date to determine whether there is any objective evidence of impairment. If evidence exists, the relevant carrying amount is reduced to the estimated recoverable amount by means of an impairment charge to the income statement.

The available-for-sale investments reserve for debt securities showed a deficit of HK$2,191 million compared with a deficit of HK$4,137 million at last year-end, reflecting the improvement and stabilisation in the global credit market and the disposal of high-risk assets under the bank's prudent risk management strategy. The group assessed that there were no impaired debt securities during the period, and accordingly, no impairment loss have been recognised. 

The return on average shareholders' funds was 25.1 per cent, compared with 32.8 per cent and 18.7 per cent for the first and second halves of 2008 respectively.

There was no purchase, sale or redemption by the bank, or any of its subsidiaries, of the bank's securities during the first half of 2009.

 
Capital resources management 

Analysis of capital base and risk-weighted assets


At 30 June

At 30 June

At 31 December


Figures in HK$m

2009


2008

2008












Capital base










Core capital:










- Share capital

9,559


9,559


9,559


- Retained profits

28,799


33,262


24,290


- Classified as regulatory reserve

(770
)

(1,061
)

(854
)

- Less: deductible of core capital

(547
)

(301
)

(557
)

- Less: 50 per cent of total 










  unconsolidated investments and 










  other deductions

(6,709
)

(6,430
) 

(6,330
)

- Total core capital

30,332


35,029


26,108













Supplementary capital:










- Fair value gains on the revaluation  










  of property

3,608


3,750


3,465


- Fair value gains on the
  revaluation of available-for-sale










  investment










  and equity 

612


507


649


- Collective impairment allowances

85


68


78


- Regulatory reserve

85


127


94


- Surplus provision

-


-


101


- Term subordinated debt 

10,367


10,354


10,357


- Less: 50 per cent of total 










  unconsolidated investments and










  other deductions

(6,709
)

(6,430
)

(6,330
)

- Total supplementary capital

8,048


8,376


8,414











Total capital base after deductions

38,380


43,405


34,522











Risk-weighted assets









- Credit risk

191,308


272,701


235,576

- Market risk

1,476


2,333


1,684

- Operational risk

38,863


36,314


38,104



231,647


311,348


275,364











Capital adequacy ratio

16.6
%
13.9
%
12.5
%
Core capital ratio

13.1
%
11.3
%
9.5
%











Capital ratios at 30 June 2009 were compiled in accordance with the Banking (Capital) Rules ('the Capital Rules') issued by the Hong Kong Monetary Authority ('HKMA') under section 98A of the Hong Kong Banking Ordinance for the implementation of Basel II, which came into effect on 1 January 2007. Having obtained approval from the HKMA to adopt the advanced internal ratings-based approach ('AIRB') to calculate the risk-weighted assets for credit risk from 1 January 2009, the bank used the AIRB approach to calculate its credit risk exposure at 30 June 2009. The standardised (operational risk) approach and internal models approach were used to calculate its operational risk and market risk respectively. The capital adequacy ratio and core capital ratio at 31 December 2008 were calculated using the foundation internal ratings-based approach ('FIRB'). On 30 June 2009, the capital adequacy ratio and core capital ratio were 16.6 per cent and 13.1 per cent, compared 12.5 per cent and 9.5 per cent at last year-end. 
The strengthening of these ratios largely reflects profit growth after accounting for dividends in the first half of the year, the improvement in the available-for-sale debt securities reserve due to the narrowing of credit spreads and a change in calculation methodology.
  

The basis of consolidation for calculation of capital ratios under the Capital Rules follows the basis of consolidation for financial reporting with the exclusion of subsidiaries which are 'regulated financial entities' (e.g. insurance and securities companies) as defined by the Capital Rules. Accordingly, the investment costs of these unconsolidated regulated financial entities are deducted from the capital base.

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' of HK$770 million (HK$1,061 million and HK$854 million at 30 June 2008 and 31 December 2008 respectively) from retained profits. 


Liquidity ratio

The average liquidity ratio for the periods indicated, calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance, is as follows:


Half-year ended

Half-year ended

Half-year ended



30 June


30 June

31 December



2009


2008


2008











The bank and its subsidiaries 









  designated by the HKMA 

47.5
%

47.3
%

45.5
%











Reconciliation of cash flow statement 

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


Half year ended

Half year ended



30 June


30 June

Figures in HK$m
    

2009


2008








Operating profit

6,740


9,112

Net interest income

(7,275
)

(8,252
)
Dividend income

(5
)

(54 
))
Loan impairment charges and other






  credit risk provisions

621


188

Impairment of available-for-sale equity securities

4


118

Depreciation

225


201

Amortisation of intangible assets

40


27

Amortisation of available-for-sale investments

19


(333
)
Amortisation of held-to-maturity debt securities

1


__

Advances written off net of recoveries

(285
)

(192
)
Interest received

6,132


7,021

Interest paid

(769
)

(4,818
)
Operating profit before changes in working capital

5,448


3,018

Change in treasury bills and certificates of deposit






  with original maturity more than three months

(10,310
)

9,223

Change in placings with and advances to banks






  maturing after one month

(4,213
)

(17,675
)
Change in trading assets

92,246


(2,881
))
Change in financial assets designated at fair value

37


(125
)
Change in derivative financial instruments

(3,990
)

3,069

Change in advances to customers

3,415


(28,797
)
Change in other assets

(7,063
)

(3,354
)
Change in financial liabilities designated at fair value

22


(10
)
Change in current, savings and other deposit accounts

29,084


(11,505
)
Change in deposits from banks

(6,833
)

(1,101
))
Change in trading liabilities

5,105


5,616

Change in certificates of deposit and






  other debt securities in issue

(478
)

(1,659
)
Change in other liabilities

3,161


4,724

Elimination of exchange differences






  and other non-cash items

(2,489
)

(3,435
)
Cash generated from/(used in) operating activities

103,142


(44,892
))
Taxation paid

(311
)

(26
)
Net cash inflow/(outflow) from operating activities

102,831


(44,918
))



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


At 30 June

At 30 June

Figures in HK$m

2009


2008








Cash and balances with banks and






  other financial institutions

51,065


19,755

Placings with and advances to banks and other 






  financial institutions maturing within one month

27,539


96,126

Treasury bills

87,611


5,371

Certificates of deposit

__


2,882



166,215


124,134



Contingent liabilities, commitments and derivatives





Credit 

Risk-


Contract
equivalent
weighted

Figures in HK$m

amount

amount

amount









At 30 June 2009















Direct credit substitutes

3,063

3,063

1,659

Transaction-related contingencies

570

347

161

Trade-related contingencies

8,905

2,195

1,415

Forward asset purchases

27

27

27

Undrawn formal standby facilities, credit lines







  and other commitments to lend:







- not unconditionally cancellable
 ^

30,624

16,776

7,399

- unconditionally cancellable

149,008

51,948

12,208



192,197

74,356

22,869









Exchange rate contracts:







Spot and forward foreign exchange

408,031

5,633

597

Other exchange rate contracts

36,469

1,390

371



444,500

7,023

968









Interest rate contracts:







Interest rate swaps

219,022

3,121

402

Other interest rate contracts

142

1

__



219,164

3,122

402









Other derivative contracts

13,090

852

86










^
 
The contract amount for undrawn formal standby facilities, credit lines and other commitments to lend with original maturity of 'not more than one year' and 'more than one year' were HK$16,748 million and HK$13,876 million respectively.





Credit 

Risk-


Contract
equivalent
weighted

Figures in HK$m

amount

amount

amount









At 30 June 2008















Direct credit substitutes

3,554

3,554

1,775

Transaction-related contingencies

1,233

616

555

Trade-related contingencies

11,203

2,241

1,460

Forward asset purchases

196

196

196

Undrawn formal standby facilities, credit lines







  and other commitments to lend:







- not unconditionally cancellable 

33,121

23,389

8,318

- unconditionally cancellable

147,070

28,786

5,527



196,377

58,782

17,831









Exchange rate contracts:







Spot and forward foreign exchange

487,800

7,351

1,852

Other exchange rate contracts

80,674

1,777

870



568,474

9,128

2,722









Interest rate contracts:







Interest rate swaps

226,277

2,078

406

Other interest rate contracts

262

1

__



226,539

2,079

406









Other derivative contracts

29,714

2,948

1,678
















Credit 

Risk-


Contract
equivalent
weighted

Figures in HK$m

amount

amount

amount









At 31 December 2008















Direct credit substitutes

4,174

4,174

2,132

Transaction-related contingencies

1,016

507

418

Trade-related contingencies

7,046

1,409

922

Forward asset purchases

59

59

59

Undrawn formal standby facilities, credit lines







  and other commitments to lend:







- not unconditionally cancellable 

23,708

15,992

6,389

- unconditionally cancellable

155,505

30,971

3,586



191,508

53,112

13,506









Exchange rate contracts:







Spot and forward foreign exchange

500,166

7,364

1,872

Other exchange rate contracts

51,226

1,836

778



551,392

9,200

2,650









Interest rate contracts:







Interest rate swaps

248,758

4,144

1,117

Other interest rate contracts

142

1

__



248,900

4,145

1,117









Other derivative contracts

15,705

1,141

343










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. The nominal contract amounts, credit equivalent amounts, risk-weighted amounts and the consolidation basis for the periods indicated were calculated in accordance with the Banking (Capital) Rules issued by the HKMA, which came into effect on 1 January 2007. 

For the above analysis, 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.
 
Derivative financial instruments are held for trading or designated as either fair value hedges 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 30 June 2009

At 30 June 2008

At 31 December 2008
Figures in HK$m
Trading

Designated at fair value

Hedging

Trading

Designated at fair value

Hedging

Trading

Designated at fair value

Hedging


















Contract amounts:

















Interest rate contracts
161,346



1,683

60,966

147,990



1,929

77,233

161,519



1,797

85,942
Exchange rate contracts
544,640

70

-

728,581

-

-

655,777

-

-
Other derivative contracts
16,728

-

-

49,454

747

-

21,168

-

-

722,714

1,753

60,966 

926,025


2,676

77,233

838,464


1,797

85,942


















Derivative assets:

















Interest rate contracts
1,780



29

724

981



6

562

2,121



31

1,410
Exchange rate contracts
2,132




-




-

2,873




-




-

3,300




-




-
Other derivative contracts
262

-

-

1,398

223

-

242

-

-

 4,174


 29

724 

5,252


229

562

5,663


31

1,410


















Derivative liabilities:

















Interest rate contracts
1,841

23

606

1,022



19

256

2,249



30

569
Exchange rate contracts
1,940




-




-

2,649




-




-

5,717




-




-
Other derivative contracts
4,368

-

-

4,924

12

-

6,380

-

-

 8,149

23

606 

8,595


31

256

14,346


30

569



















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.

 
Additional information
 
1. 
    Statutory accounts and accounting policies

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

Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2008 ('2008 accounts'), which have been delivered to the Registrar of Companies and the HKMA. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 2 March 2009.

Disclosures required by the Banking (Disclosure) Rules issued by the HKMA are contained in the bank's Interim Report which will be published on the websites of The Stock Exchange of Hong Kong Limited and the bank on the date of the issue of this news release.

The news release has been prepared on a basis consistent with the accounting policies adopted in the 2008 accounts except for the following: 

On 1 January 2009, the group adopted HKFRS 8 'Operating Segments' (HKFRS 8), which replaced HKAS 14 'Segment Reporting'. HKFRS 8 requires segment information to be reported using the same measure reported to the chief operating decision-maker for the purpose of making decisions about allocating resources to the segment and assessing its performance. The group's HKFRS 8 operating segments are determined to be customer group segments because the chief operating decision-maker uses customer group information in order to make decisions about allocating resources and assessing performance. The five operating segments, or customer groups, are: Personal Financial Services, Commercial Banking, Corporate Banking, Treasury, and 'Other'. Segment information provided to the chief operating decision maker is on HKFRS basis.

On 1 January 2009, the group adopted revised HKAS 1 'Presentation of Financial Statements' (HKAS 1). The revised standard aims to improve users' ability to analyse and compare information given in financial statements. The adoption of the revised standard has no effect on the results reported in the group's consolidated financial statements. It does, however, result in certain presentational changes in the group's primary financial statements, including:


The group also adopted a number of insignificant amendments to standards and interpretations. These are described under note 7 of the 2008 Annual Report and Accounts.

 
2.
    Comparative figures

As a result of the application of HKAS 1 (revised 2007), 
Presentation of financial statements
, certain comparative figures have been adjusted to conform with the current period's presentation and to provide comparative amounts in respect of items disclosed for the first time in 2009. Further details of these developments are disclosed in the additional information above and note 2 of 2009 Interim Report. 


3.
    Property revaluation

A revaluation of Hang Seng's premises and investment properties in 
Hong Kong
 was performed in June 2009 to reflect property market movements in the first half of 2009. The group's premises and investment properties were revalued by DTZ Debenham Tie Leung Limited, an independent professional valuer, and carried out by qualified persons who are members of the Hong Kong Institute of Surveyors. The basis of the valuation of premises was open market value for existing use and the basis of valuation for investment properties was open market value. The net revaluation surplus for group premises amounted to HK$211 million of which HK$244 million was credited to premises revaluation reserve and HK$33 million was charged to the income statement. Revaluation gains of HK$93 million on investment properties were recognised through the income statement. The related deferred tax provisions for group premises and investment properties were HK$35 million and HK$15 million respectively.

The revaluation exercise also covered business premises/investment properties reclassified as properties held for sale. In accordance with HKFRS 5, there was no revaluation gain/loss recognised through the income statement.


4.
    Foreign currency positions 

Foreign currency exposures include those arising from trading, non-trading and structural positions. Net option position is calculated on the basis of delta-weighted positions of all foreign exchange options contracts. At 30 June 2009, the US dollar (US$) was the currency in which the group had non-structural foreign currency positions that were not less than 10 per cent of the total net position in all foreign currencies. The group also had a Chinese renminbi (RMB) structural foreign currency position, which was not less than 10 percent of the total net structural position in all foreign currencies.


At 30 June

At 30 June

At 31 December

Figures in HK$m


2009



2008



2008


US$

RMB

US$

RMB

US$

RMB

Non-structural position












Spot assets
220,606

36,442

211,580

41,181

240,624

37,665

Spot liabilities
(189,501
)
(36,031
)
(195,205
)
(42,101
)
(200,971
)
(37,568
)
Forward purchases
227,596

27,145

284,711

44,852

269,935

26,549

Forward sales
(251,599
)
(27,633
)
(298,470
)
(45,877
)
(303,047
)
(27,082
)
Net option position
2

__

(29
)
__

(1
)
__

Net long/(short) non-structural position
7,104

(77
)
2,587

(1,945
)
6,540

(436
)















At 30 June 2009, the group's major structural foreign currency positions were in US$ and RMB.


At 30 June

At 30 June

At 31 December




2009



2008



2008




% of  



% of  



% of  




total net



total net



total net




structural



structural



structural


HK$m

position

HK$m

position

HK$m

position

Structural positions












US dollar
285

2.0

287

2.2

285

2.0

Renminbi
13,589

96.3

12,265

96.0

13,343

96.5



5.
    Ultimate holding company

Hang Seng Bank is an indirectly held, 62.14 per cent-owned, subsidiary of HSBC Holdings plc.


6.
    Register of shareholders

The register of shareholders of the bank will be closed on Tuesday, 18 August 2009, during which no transfer of shares can be registered. In order to qualify for the second interim dividend, all transfers, accompanied by the relevant share certificates, must be lodged with the bank's registrars, Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration no later than 4:30 pm on Monday, 17 August 2009. The second interim dividend will be payable on Wednesday, 2 September 2009 to shareholders whose names appear on the register of shareholders of the bank on Tuesday, 18 August 2009. Shares of the bank will be traded ex-dividend as from Friday, 14 August 2009.


7.
    Proposed timetable for the remaining 2009 quarterly dividends 


Third
Fourth

interim dividend
interim dividend



Announcement
2 November 2009
1 March 2010
Book close and record date
17 November 2009
16 March 2010
Payment date
2 December 2009
31 March 2010

 
8. 
    Code on Corporate Governance Practices

The bank is committed to high standards of corporate governance. The bank has followed the module on 'Corporate Governance of Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority and all the code provisions set out in the Code on Corporate Governance Practices contained in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited throughout the six months ended 30 June 2009.

The Audit Committee of the bank has reviewed the results for the six months ended 30 June 2009.


9. 
    Board of Directors

As at 3 August 2009, the Board of Directors of the bank comprises Dr Raymond K F Ch'ien* (Chairman), Mrs 
Margaret Leung
 (Vice-Chairman and Chief Executive), Mr Edgar D Ancona
#
, Mr John C C Chan*, Dr Marvin K T Cheung*, Mr 
Alexander A Flockhart
#
, Mr Jenkin Hui*, Mr Peter T C Lee*, Dr Eric K C Li*, Dr Vincent H S Lo
#
, Mr Joseph C Y Poon, Mr Richard Y S Tang* and Mr Peter T S Wong
#
.

*
    Independent non-executive Directors
#
    Non-executive Directors


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 the bank's website 
www.hangseng.com
.

The 2009 Interim Report and Financial Statements, which contains all disclosures required by the Banking (Disclosure) Rules issued by the HKMA, will be published on the websites of The Stock Exchange of Hong Kong Limited and the bank on the date of the issue of this news release. Printed copies of the 2009 Interim Report will be sent to shareholders in late August 2009.

Media enquiries to
:
Walter Cheung 
    
    
      Telephone: (852) 2198 4020
Michelle Chan
    
    
    
    Telephone: (852) 2198 4236
 


 

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: 03 August 2009