hsba201108016k3.htm
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- ..............).
 
 
 

 
 
 

 
 
1 August 2011
 
 
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
2011 INTERIM CONSOLIDATED RESULTS - HIGHLIGHTS
 
 
 
·  
Net operating income before loan impairment charges and other credit risk provisions up 17% to HK$73,456m (HK$62,827m in the first half of 2010).
 
·  
Pre-tax profit up 20% to HK$46,234m (HK$38,575m in the first half of 2010).
 
·  
Attributable profit up 20% to HK$34,292m (HK$28,675m in the first half of 2010).
 
·  
Return on average shareholders' equity of 22.5% (22.8% in the first half of 2010).
 
·  
Assets up 9% to HK$5,497bn (HK$5,040bn at the end of 2010).
 
·  
Cost efficiency ratio of 45.2% (44.0% for the first half of 2010).
 
Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. The abbreviations 'HK$m' and 'HK$bn' represent millions and billions (thousands of millions) of Hong Kong dollars respectively.
 
Comment by Stuart Gulliver, Chairman
 
Asian economies started 2011 with robust economic and trade growth, while there were signs of economic recovery commencing in the US and Europe, led by Germany. However, the second quarter saw some changes, with demand from mainland China weakening and a slowing of the global trade cycle, exacerbated by the tragic earthquake in Japan. Investor concerns over sovereign debt levels have also dented confidence. In this environment, we have maintained a vigilant eye on risk and, although we continue to see good opportunities to grow lending in Asia, we anticipate more measured growth during the second half overall. We expect an easing of inflation pressures and successful policy tightening in mainland China to pave the way for a stabilisation of sustainable economic growth.
 
During the first half of 2011, The Hongkong and Shanghai Banking Corporation Limited performed strongly, achieving record profits of HK$46,234m, an increase of 20% compared with the first half of 2010. Growth was broadly based across the region, with the Rest of Asia-Pacific performing particularly well, delivering over half of group profits, reflecting our investments of recent years. In Hong Kong the economy maintained robust growth, driven by demand from mainland China and the domestic sector, although inflation has become an increasing concern. Despite upward pressures on wages, we maintained strong management of costs, which although higher than in the first half of 2010, were 4% lower than in the second half.
 
We continued to grow loans and advances to customers, which increased by 13% in Hong Kong and 11% in the Rest of Asia-Pacific since year end. We maintained our focus on good quality lending and growth in risk weighted assets was lower than that of loans. The net interest margin remained broadly stable; while deposit spreads saw some improvement in countries where interest rates rose, asset spreads narrowed as competition increased. Our drive to grow non-interest income continued to yield successful results across a broad range of products and services, including trade-related fees, payments and cash management, foreign exchange, increased sales of wealth management products and fees on funds under management.
 
Despite global uncertainties, our focus on meeting the needs of existing customers, combined with a cautious approach to risk management, led to further improvement in asset quality and loan impairment charges during the first half of 2011 reached an exceptionally low level. In our Hong Kong residential mortgage book, loan to value ratios remain low both on new lending and also on the book overall. While we are not seeing signs of deterioration in asset quality across our markets in Asia, our approach to managing and limiting risk continues to be one of caution and vigilance.
 
The internationalisation of the renminbi (RMB) gathered momentum during the first half and HSBC consolidated its position as a leader in the provision of RMB denominated offerings. New product and service launches included the RMB business card, autopay, cashier order and the HSBC Offshore Renminbi Bond Index. RMB deposits and trade settlement volumes showed good growth and, at the end of the period, we offered RMB trade settlement in over 50 markets. We held the highest market share as book-runner of offshore RMB bonds during the period and were joint lead arranger for the first offshore RMB equity IPO. As the market grows and matures, we are starting to see some signs of demand for RMB denominated loans to finance trade.

In Retail Banking and Wealth Management ('RBWM') profits increased by 20%. We continued to generate good returns and focused on expanding our sales capacity with the addition of over 750 new relationship managers. In Hong Kong, we maintained our No.1 market position in deposits, cards and mortgages and mortgage balances saw growth of 7%. In the Rest of Asia-Pacific, profits more than doubled and India recorded a significant improvement in performance as our strategy of improving efficiency and growing our mortgage and wealth business delivered encouraging results. Across the region, margins began to improve, while fee income grew, boosted by higher insurance and wealth revenues. Loan impairments reduced and, following reductions in unsecured balances in a number of markets, the book is well positioned for any future stresses.
 
In Commercial Banking ('CMB') profits growth remained strong, at 23% in Hong Kong and 42% in the Rest of Asia-Pacific. Customer demand for both loans and non-interest products continued at high levels, particularly in Hong Kong, and we grew deposits. We continued to focus on connecting customers in their trade activities across borders and fee income grew by 21% with strong growth in trade revenues, foreign exchange and payments and cash management. Cross-border business continued to increase, with particularly strong growth between Hong Kong and mainland China. Growth in lending across the region was predominantly in trade finance and we maintained a strong focus on asset quality, evidenced by a low charge for loan impairments.
 
Global Banking and Markets ('GB&M') maintained good momentum and delivered business progress across all product areas. Loan growth remained strong and we grew profits by 15% while continuing to invest in growing core businesses including our equities platform. During the first half we completed a number of landmark Hong Kong and mainland China equity capital markets deals. In debt capital markets we maintained our No.1 market position in several categories including Asia-Pacific ex-Japan, Asian local currency bonds, Hong Kong bonds and offshore RMB bonds. During the period we achieved widespread market recognition and gained several prestigious awards, including Asiamoney's Best Bank award, FinanceAsia's Best Bank in Hong Kong, Euromoney's Best Flow House, Risk Adviser and Debt House in Asia and Global Trade Review's award for Best Export Finance Bank in Asia-Pacific.
 
Insurance generated another period of good results, with strong growth in revenues and new business premiums. In Hong Kong we maintained our leading market shares in Life new business annualised premiums at 27% and in total in-force Life business at 22%. We also maintained our top position in assets managed under the Mandatory Provident Fund, with almost a third of the market. Increased demand for wealth products boosted revenues in Singapore and Malaysia.
 
While the global economy faces considerable challenges and growth is likely to slow further during the second half, Asia's fundamentals remain strong and the region is well-positioned to continue to develop intra-regional trade and business flows. With its unrivalled network and expertise, I believe that HSBC is very well placed to connect and support our retail and commercial customers as they seek to expand their international activities.
 
 
 
Results by Geographical Region
  
 
Geographical regions
Hong Kong
  
Rest of Asia-
Pacific
  
Intra- segment elimination
  
Total
  
 
 
HK$m
  
HK$m
  
HK$m
  
HK$m
  
                 
Period ended 30 June 2011
                
                 
Net interest income
16,872
  
18,845
  
(2)
  
35,715
  
                 
Net fee income
11,754
  
8,185
  
-
  
19,939
  
                 
Net trading income
4,362
  
6,442
  
2
  
10,806
  
                 
Net income from financial instruments designated at
fair value
309
  
39
  
-
  
348
  
                 
Gains less losses from financial investments
247
  
(178)
  
-
  
69
  
                 
Dividend income
543
  
2
  
-
  
545
  
                 
Net earned insurance premiums
20,216
  
2,666
  
-
  
22,882
  
                 
Other operating income
7,151
  
1,256
  
(2,219)
  
6,188
  
                 
Total operating income
61,454
  
37,257
  
(2,219)
  
96,492
  
                 
Net insurance claims incurred and movement in policyholders' liabilities
(20,953)
  
(2,083)
  
-
  
(23,036)
  
                 
Net operating income before loan impairment
charges and other credit risk provisions
40,501
  
35,174
  
(2,219)
  
73,456
  
                 
Loan impairment charges and other credit risk
provisions
(186)
  
(802)
  
-
  
(988)
  
                 
Net operating income
40,315
  
34,372
  
(2,219)
  
72,468
  
                 
Operating expenses
(17,699)
  
(17,705)
  
2,219
  
(33,185)
  
                 
Operating profit
22,616
  
16,667
  
-
  
39,283
  
                 
Share of profit in associates and joint ventures
243
  
6,708
  
-
  
6,951
  
                 
Profit before tax
22,859
  
23,375
  
-
  
46,234
  
                 
Share of profit before tax
49.4%
  
50.6%
  
-
  
100%
  
                 
Net advances to customers
1,193,969
  
930,218
  
-
  
2,124,187
  
                 
Total assets
3,574,763
  
2,313,617
  
(391,321)
  
5,497,059
  
                 
Customer accounts
2,220,666
  
1,230,011
  
-
  
3,450,677
  
 

Geographical regions
Hong Kong
  
Rest of Asia-
Pacific
  
Intra- segment
elimination
  
Total
 
HK$m
  
HK$m
  
HK$m
  
HK$m
               
Period ended 30 June 2010
              
               
Net interest income
14,964
  
14,316
  
29
  
29,309
               
Net fee income
9,882
  
6,811
  
-
  
16,693
               
Net trading income
4,380
  
5,803
  
(29)
  
10,154
               
Net income from financial instruments designated at
fair value
4
  
9
  
-
  
13
               
Gains less losses from financial investments
979
  
305
  
-
  
1,284
               
Dividend income
110
  
218
  
-
  
328
               
Net earned insurance premiums
17,494
  
1,538
  
-
  
19,032
               
Other operating income
5,159
  
1,141
  
(2,254)
  
4,046
               
Total operating income
52,972
  
30,141
  
(2,254)
  
80,859
               
Net insurance claims incurred and movement in policyholders' liabilities
(16,858)
  
(1,174)
  
-
  
(18,032)
               
Net operating income before loan impairment
charges and other credit risk provisions
36,114
  
28,967
  
(2,254)
  
62,827
               
Loan impairment charges and other credit risk
provisions
(487)
  
(1,467)
  
-
  
(1,954)
               
Net operating income
35,627
  
27,500
  
(2,254)
  
60,873
               
Operating expenses
(14,695)
  
(15,183)
  
2,254
  
(27,624)
               
Operating profit
20,932
  
12,317
  
-
  
33,249
               
Share of profit in associates and joint ventures
89
  
5,237
  
-
  
5,326
               
Profit before tax
21,021
  
17,554
  
-
  
38,575
               
Share of profit before tax
54.5%
  
45.5%
  
-
  
100.0%
               
Net advances to customers
854,435
  
698,129
  
-
  
1,552,564
               
Total assets
3,076,607
  
1,888,245
  
(330,023)
  
4,634,829
               
Customer accounts
1,990,074
  
998,986
  
-
  
2,989,060
 
 
 
Results by Geographic Customer Group
 
Hong Kong
                      
 
Retail
Banking
and
Wealth
Management
  
Commercial
Banking
  
Global
Banking &
Markets
  
Other
  
Intra-
segment
elimination
  
Total
         
         
         
         
 
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
                       
Period ended 30 June 2011
                      
                       
Net interest income/(expense)
9,774
  
4,867
  
3,899
  
(1,822)
  
154
  
16,872
                       
Net fee income
7,066
  
2,767
  
1,843
  
78
  
-
  
11,754
                       
Net trading income/(expense)
479
  
672
  
3,424
  
(58)
  
(155)
  
4,362
                       
Net income/(loss) from
financial instruments designated at fair value
502
  
(207)
  
14
  
(1)
  
1
  
309
                       
Gains less losses from
financial investments
-
  
-
  
153
  
94
  
-
  
247
                       
Dividend income
1
  
4
  
84
  
454
  
-
  
543
                       
Net earned insurance premiums
17,075
  
3,066
  
75
  
-
  
-
  
20,216
                       
Other operating income
2,915
  
641
  
179
  
4,311
  
(895)
  
7,151
                       
Total operating income/(expense)
37,812
  
11,810
  
9,671
  
3,056
  
(895)
  
61,454
                       
Net insurance claims incurred and movement in policyholders' liabilities
(18,236)
  
(2,658)
  
(59)
  
-
  
-
  
(20,953)
                       
Net operating income/
(expense) before loan impairment charges and other credit risk provisions
19,576
  
9,152
  
9,612
  
3,056
  
(895)
  
40,501
                       
Loan impairment (charges)/ releases and other credit risk provisions
(300)
  
(56)
  
170
  
-
  
-
  
(186)
                       
Net operating income/
(expense)
19,276
  
9,096
  
9,782
  
3,056
  
(895)
  
40,315
                       
Operating expenses
(6,939)
  
(2,687)
  
(4,915)
  
(4,053)
  
895
  
(17,699)
                       
Operating profit/(loss)
12,337
  
6,409
  
4,867
  
(997)
  
-
  
22,616
                       
Share of profit in associates
and joint ventures
24
  
10
  
7
  
202
  
-
  
243
                       
Profit/(loss) before tax
12,361
  
6,419
  
4,874
  
(795)
  
-
  
22,859
                       
Share of profit before tax
26.7%
  
13.9%
  
10.5%
  
(1.7)%
  
-
  
49.4%
                       
Net advances to customers
420,233
  
455,490
  
304,471
  
13,775
  
-
  
1,193,969
                       
Customer accounts
1,366,892
  
581,805
  
267,310
  
4,659
  
-
  
2,220,666

Hong Kong
                      
 
Retail
Banking
and
Wealth
Management
  
Commercial
Banking
  
Global
Banking &
Markets
  
Other
  
Intra-
segment
elimination
  
Total
         
         
         
         
 
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
                       
Period ended 30 June 2010
                      
                       
Net interest income/(expense)
10,005
  
3,920
  
3,396
  
(1,924)
  
(433)
  
14,964
                       
Net fee income
5,693
  
2,367
  
1,754
  
68
  
-
  
9,882
                       
Net trading income
431
  
410
  
3,070
  
36
  
433
  
4,380
                       
Net income/(loss) from
financial instruments designated at fair value
(505)
  
178
  
323
  
8
  
-
  
4
                       
Gains less losses from
financial investments
(5)
  
-
  
499
  
485
  
-
  
979
                       
Dividend income
-
  
3
  
1
  
106
  
-
  
110
                       
Net earned insurance premiums
14,574
  
2,855
  
65
  
-
  
-
  
17,494
                       
Other operating income
1,763
  
208
  
188
  
3,937
  
(937)
  
5,159
                       
Total operating income/
(expense)
31,956
  
9,941
  
9,296
  
2,716
  
(937)
  
52,972
                       
Net insurance claims incurred and movement in policyholders' liabilities
(14,400)
  
(2,407)
  
(51)
  
-
  
-
  
(16,858)
                       
Net operating income/
(expense) before loan impairment charges and
other credit risk provisions
17,556
  
7,534
  
9,245
  
2,716
  
(937)
  
36,114
                       
Loan impairment (charges)/ releases and other credit risk provisions
(324)
  
(13)
  
(152)
  
2
  
-
  
(487)
                       
Net operating income/
(expense)
17,232
  
7,521
  
9,093
  
2,718
  
(937)
  
35,627
                       
Operating expenses
(6,051)
  
(2,299)
  
(3,806)
  
(3,476)
  
937
  
(14,695)
                       
Operating profit/(loss)
11,181
  
5,222
  
5,287
  
(758)
  
-
  
20,932
                       
Share of profit in associates
and joint ventures
18
  
(5)
  
-
  
76
  
-
  
89
                       
Profit/(loss) before tax
11,199
  
5,217
  
5,287
  
(682)
  
-
  
21,021
                       
Share of profit before tax
29.0%
  
13.5%
  
13.7%
  
(1.7)%
  
-
  
54.5%
                       
Net advances to customers
351,372
  
289,563
  
198,587
  
14,913
  
-
  
854,435
                       
Customer accounts
1,286,761
  
494,979
  
203,573
  
4,761
  
-
  
1,990,074
 
 
Rest of Asia-Pacific
                          
 
Retail
Banking
and
Wealth
Management
  
Commercial
Banking
  
Global
Banking &
Markets
  
Private
Banking
  
Other
  
Intra-
segment
elimination
  
Total
           
           
           
           
 
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
                           
Period ended 30 June 2011
                          
                           
Net interest income/(expense)
6,936
  
4,514
  
7,752
  
80
  
405
  
(842)
  
18,845
                           
Net fee income
3,449
  
2,019
  
2,670
  
84
  
(37)
  
-
  
8,185
                           
Net trading income/(expense)
387
  
584
  
4,899
  
37
  
(307)
  
842
  
6,442
                           
Net income/(loss) from financial instruments designated at fair value
56
  
14
  
4
  
-
  
(35)
  
-
  
39
                           
Gains less losses from financial investments
(2)
  
11
  
(181)
  
-
  
(6)
  
-
  
(178)
                           
Dividend income
(1)
  
-
  
-
  
-
  
3
  
-
  
2
                           
Net earned insurance premiums
1,753
  
913
  
-
  
-
  
-
  
-
  
2,666
                           
Other operating income
547
  
246
  
251
  
4
  
430
  
(222)
  
1,256
                           
Total operating income/(expense)
13,125
  
8,301
  
15,395
  
205
  
453
  
(222)
  
37,257
                           
Net insurance claims incurred and movement in policyholders' liabilities
(1,345)
  
(738)
  
-
  
-
  
-
  
-
  
(2,083)
                           
Net operating income/(expense) before loan impairment charges and other credit risk provisions
11,780
  
7,563
  
15,395
  
205
  
453
  
(222)
  
35,174
                           
Loan impairment (charges) /releases and other credit risk provisions
(874)
  
40
  
32
  
-
  
-
  
-
  
(802)
                           
Net operating income/(expense)
10,906
  
7,603
  
15,427
  
205
  
453
  
(222)
  
34,372
                           
Operating expenses
(9,119)
  
(3,574)
  
(4,721)
  
(187)
  
(326)
  
222
  
(17,705)
                           
Operating profit/(loss)
1,787
  
4,029
  
10,706
  
18
  
127
  
-
  
16,667
                           
Share of profit in associates and joint ventures
836
  
4,216
  
1,645
  
-
  
11
  
-
  
6,708
                           
Profit/(loss) before tax
2,623
  
8,245
  
12,351
  
18
  
138
  
-
  
23,375
                           
Share of profit before tax
5.7%
  
17.8%
  
26.8%
  
-
  
0.3%
  
-
  
50.6%
                           
Net advances to customers
324,579
  
281,181
  
315,012
  
8,058
  
1,388
  
-
  
930,218
                           
Customer accounts
462,314
  
311,184
  
438,547
  
16,886
  
1,080
  
-
  
1,230,011

 
Rest of Asia-Pacific
                          
 
Retail
Banking
and
Wealth
Management
  
Commercial
Banking
  
Global
Banking &
Markets
  
Private
Banking
  
Other
  
Intra-
segment
elimination
  
Total
 
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
                           
Period ended 30 June 2010
                          
                           
Net interest income/(expense)
5,865
  
3,347
  
5,576
  
56
  
214
  
(742)
  
14,316
                           
Net fee income
2,926
  
1,586
  
2,262
  
75
  
(38)
  
-
  
6,811
                           
Net trading income/(expense)
275
  
478
  
4,351
  
21
  
(64)
  
742
  
5,803
                           
Net income/(loss) from financial instruments designated at fair value
18
  
8
  
(3)
  
-
  
(14)
  
-
  
9
                           
Gains less losses from financial investments
2
  
26
  
243
  
-
  
34
  
-
  
305
                           
Dividend income
-
  
-
  
-
  
-
  
218
  
-
  
218
                           
Net earned insurance premiums
1,335
  
203
  
-
  
-
  
-
  
-
  
1,538
                           
Other operating income
411
  
411
  
127
  
5
  
416
  
(229)
  
1,141
                           
Total operating income/(expense)
10,832
  
6,059
  
12,556
  
157
  
766
  
(229)
  
30,141
                           
Net insurance claims incurred and movement in policyholders' liabilities
(1,028)
  
(146)
  
-
  
-
  
-
  
-
  
(1,174)
                           
Net operating income/(expense) before loan impairment charges and other
credit risk provisions
9,804
  
5,913
  
12,556
  
157
  
766
  
(229)
  
28,967
                           
Loan impairment (charges) /releases and other credit risk provisions
(1,364)
  
80
  
(183)
  
-
  
-
  
-
  
(1,467)
                           
Net operating income/(expense)
8,440
  
5,993
  
12,373
  
157
  
766
  
(229)
  
27,500
                           
Operating expenses
(7,870)
  
(2,920)
  
(4,045)
  
(171)
  
(406)
  
229
  
(15,183)
                           
Operating profit/(loss)
570
  
3,073
  
8,328
  
(14)
  
360
  
-
  
12,317
                           
Share of profit in associates and joint ventures
693
  
2,753
  
1,397
  
-
  
394
  
-
  
5,237
                           
Profit/(loss) before tax
1,263
  
5,826
  
9,725
  
(14)
  
754
  
-
  
17,554
                           
Share of profit before tax
3.2%
  
15.1%
  
25.2%
  
-
  
2.0%
  
-
  
45.5%
                           
Net advances to customers
243,877
  
204,743
  
241,792
  
6,388
  
1,329
  
-
  
698,129
                           
Customer accounts
381,200
  
242,215
  
360,972
  
13,667
  
932
  
-
  
998,986
                             

 
Results by Geographic Region
 
Hong Kong reported pre-tax profits of HK$22,859m compared with HK$21,021m in the first half of 2010, an increase of 9%.
 
The increase in profitability was driven by strong balance sheet growth from 2010 onwards, higher sales of wealth management products, an increase in underwriting fees and sales of trade-related products and the refinement of the calculation of the present value of in-force ('PVIF') asset on long-term insurance business. Staff and support costs rose, driven by an increase in business volumes and the need to maintain our strong competitive position.
 
We maintained our market leadership in Hong Kong in mortgages, deposits, credit cards and insurance. The robust growth in lending balances continued, increasing by 13% compared with 31 December 2010, while deposit balances grew by 3%.
 
We remain ideally positioned to capture cross-border opportunities, particularly with mainland China. CMB cross-border referrals between Hong Kong and mainland China increased by more than 50% and Premier referrals increased by 47%.
 
Collaboration between CMB and GB&M continued to meet the demands of fast growing mid-market companies, by providing foreign exchange and derivatives products as well as access to debt and equity markets to fund business growth.
 
We continued to bolster our position as a leading international RMB bank. We were appointed as joint lead arranger for Hong Kong's first RMB-denominated equity initial public offering ('IPO') and led the market in offshore RMB bond issuance. We were the first international bank to offer CMB customers a dedicated RMB Business Card in Hong Kong.
 
Net interest income was 13% higher than the first half of 2010, primarily due to strong loan growth, particularly in CMB and GB&M. This was partly offset by lower asset spreads in RBWM and CMB resulting from competitive pressures. Balance Sheet Management results remained strong.
 
The targeted expansion of our lending book reflected our balance sheet strength, together with continued strong economic growth and trade flows. The resultant increase in demand for credit saw significant increases in lending balances in CMB, notably in trade-related lending, as well as in GB&M. Average personal lending balances rose, primarily in residential mortgage lending as a result of the strong property market and our leadership in new mortgage business. The continued strength of the Hong Kong property market led the HKMA to introduce further prudential measures on loan to value ('LTV') ratios in June 2011, following similar measures taken in 2010. We continued to lend prudently and average LTV ratios were 51% on new residential mortgage draw-downs and an estimated 35% on the portfolio as a whole.
 
Asset spreads narrowed relative to the same period last year as a result of competitive pressures, particularly in trade-related and term lending and HIBOR-linked residential mortgages.
 
The strong results in Balance Sheet Management were attributable to increased duration in the overall portfolio, partly offset by reduced income resulting from the natural run-off of higher yielding positions.
 
Net fee income increased by 19%, primarily from increased sales of wealth management products in the low interest rate environment, particularly unit trusts, driven by improved investor sentiment and supported by an increase in sales staff in our wealth management business. In addition, fees from funds under management grew as a result of higher net inflows including the launch of two new funds in 2011. Underwriting fees also rose from our involvement in several significant IPOs, as did trade-related fees and remittances as transaction volumes increased driven by economic growth.
 
Net trading income reduced marginally. Revenue from foreign exchange trading increased due to higher levels of customer driven activity and successful capture of market volatility. The Rates and Equities businesses also performed well. This was more than offset by lower revenue in credit trading as credit spreads widened in some markets.
 
Net income from financial instruments designated at fair value rose by HK$305m, mainly due to investment gains in the first half of 2011 on assets held by the insurance business as equity markets improved, compared with revaluation losses in the same period last year. To the extent that these gains were attributed to policyholders, there was an offsetting change in 'Net insurance claims incurred and movement in liabilities to policyholders'. The revaluation losses on insurance assets in 2010 were offset by a revaluation gain on an unlisted equity investment.
 
Gains less losses from financial investments were 75% lower primarily due to the non-recurrence of significant gains on the sale of debt securities in the first half of 2010 in Balance Sheet Management, as well as the accounting gain recognised in 2010 on the reclassification of Bao Viet Holdings as an associate.
 
Net earned insurance premiums increased by 16% from the rise in sales of deferred annuity and unit-linked insurance products, reflecting increased demand. This growth in insurance sales resulted in a related increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.
 
Other operating income increased by 39% to HK$7,151m primarily due to a refinement of the calculation of the present value of in-force ('PVIF') asset on long-term insurance business during the period, as explained more fully in note 5. In addition, life insurance sales were higher in the first half of 2011.
 
Loan impairment charges and other credit risk provisions decreased from HK$487m to HK$186m, driven by releases and recoveries in GB&M compared with a specific impairment charge in the same period in 2010. Though impairment charges are currently low, we maintain a cautious outlook on the credit environment and continue to focus on maintaining high levels of asset quality.
 
Operating expenses rose by 20% as business volumes grew. Staff costs increased due to wage inflation in a competitive market, increased headcount, particularly in front office functions to strengthen our sales capacity, and higher sales incentives, reflecting our strong business performance in the first half of 2011. Staff costs also rose due to an acceleration in the expense recognition for deferred bonus awards.
 
We continued to invest in building out our key capabilities most notably in equities, prime services and commodities. Marketing and support costs also increased in line with higher business volumes and ongoing product development. Although our cost efficiency ratio is already at a relatively low level in Hong Kong, we continue to focus on improving operational efficiency while maintaining market leadership and strong growth.

Rest of Asia-Pacific reported pre-tax profits of HK$23,375m compared with HK$17,554m in the first half of 2010, an increase of 33%.
 
The growth in profitability in the region in the first half of 2011 reflected strong lending and deposit growth coupled with widening deposit spreads, higher trade volumes and a growing demand for wealth management products. The contribution from our associates in mainland China also grew. Costs increased to support business growth and maintain our competitive position in the region.
 
We continued building a domestic franchise in mainland China where we are the leading foreign bank and now have 108 outlets, 16 rural bank outlets and 38 Hang Seng Bank outlets. We were awarded the 'Best International Trade Bank' by Trade Finance and the 'Best Foreign Commercial Bank' by FinanceAsia, reinforcing our strong corporate brand in mainland China. We continued to expand our renminbi ('RMB') services and now have trade capabilities across more than 50 countries and offer RBWM RMB services across 11 countries in Asia.
 
We used our international connectivity to capture trade, capital and wealth flows across the region and in particular with mainland China. Cross-border referrals between mainland China and the rest of the world increased by more than 50% as we continued to facilitate outbound and inbound flows, particularly with Hong Kong.
 
We continued to invest and build scale in the other key strategic markets of India, Singapore, Malaysia, Australia and Indonesia. The acquisition of Royal Bank of Scotland plc's commercial and retail businesses in India is expected to be finalised in the second half of 2011. In Malaysia, we are the leading foreign bank by total assets and size of branch network and HSBC Amanah was named the world's number one Sukuk underwriter.
 
Net interest income increased by 32% due to strong loan and deposit growth coupled with wider deposit spreads as base rates rose in certain countries, partly offset by lower asset spreads than the first half of 2010 from increased competition.
 
Average lending balances increased primarily in trade and term lending in GB&M and CMB due to a higher demand for credit as a result of improved trade and business volumes in the region. RBWM lending balances also rose, mainly in residential mortgages, most notably in Australia and Singapore, driven by local marketing campaigns and increased demand for credit.
 
Asset spreads narrowed compared to the same period last year, primarily due to increased market competition.
 
Customer deposit balances grew, principally in Australia, Malaysia, Singapore and mainland China reflecting an increase in customer numbers and strong economic conditions across the region.
 
Deposit spreads increased as interest rates rose in certain countries, primarily in mainland China, India and Malaysia. Balance Sheet Management income grew year on year, with increases seen in mainland China, driven by profit opportunities in the interbank market and the widening of onshore US dollar lending spreads, and in Singapore reflecting the higher return on short-term lending and balance sheet growth.

Net fee income rose by 20%. Trade-related fees and those arising on payments and cash management increased in CMB and GB&M, reflecting higher trade and transaction volumes in the region. Securities services fee income increased driven by higher volumes and a growth in assets under custody reflecting equity market performance. Fee income in RBWM also rose as a result of the increased demand for investment products, notably unit trusts, reflecting successful sales activity and improved investor sentiment and the expansion of the structured products business in mainland China.
 
Net trading income increased by 11%, primarily from higher foreign exchange trading revenues most notably in mainland China and Taiwan as increased market volatility led to higher client volumes and wider spreads.
 
Net income from financial instruments designated at fair value increased by HK$30m to HK$39m mainly due to higher revaluation gains on assets held by the insurance business, primarily in Singapore. To the extent that these higher investment gains were attributed to policyholders, there was a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.
 
Losses from financial investments were HK$178m compared with gains of HK$305m in the first half of 2010, due to fewer gains on disposals of debt securities, notably government bonds, coupled with an impairment loss on an equity investment in 2011.
 
Other operating income increased by 10% to HK$1,256m, largely due to a refinement of the PVIF asset calculation, discussed more fully in note 5, as well as higher life insurance sales in the region.
 
Net earned insurance premiums increased by 73% to HK$2,666m, largely due to higher sales of insurance products in the region most notably in Singapore and Malaysia. This was driven by successful sales initiatives and increased demand for wealth products as economic conditions in the region continue to grow. The growth in the insurance business resulted in a related 77% increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.
 
Loan impairment charges and other credit risk provisions decreased from HK$1,467m to HK$802m as credit conditions throughout the region continued to improve. Loan impairment charges fell in RBWM, most notably in India as certain unsecured lending portfolios were managed down, and due to the non-recurrence of a specific impairment charge taken in GB&M in 2010. We maintain our cautious outlook on the credit environment and continue to focus on maintaining high levels of asset quality.
 
Operating expenses increased by 17% as volumes grew due to continued strong economic growth in the region. There was an increase in sales staff to support our continued business expansion in our key strategic markets and average wages rose, reflecting the increased demand for talent in the region.
 
Share of profit from associates and joint venturesincreased by 28%. A higher contribution from Bank of Communications was driven by strong loan growth, an improvement in spreads and an increase in fee-based revenue streams. Income from Industrial Bank increased as a result of loan growth.
 
Consolidated Income Statement
 
Half-year
ended
30 June
2011
  
Half-year
ended
30 June
2010
 
HK$m
  
HK$m
       
Interest income
50,677
  
40,108
Interest expense
(14,962)
  
(10,799)
       
Net interest income
35,715
  
29,309
       
Fee income
23,267
  
19,605
Fee expense
(3,328)
  
(2,912)
       
Net fee income
19,939
  
16,693
       
Net trading income
10,806
  
10,154
Net income from financial instruments designated at fair value
348
  
13
Gains less losses from financial investments
69
  
1,284
Dividend income
545
  
328
Net earned insurance premiums
22,882
  
19,032
Other operating income
6,188
  
4,046
       
Total operating income
96,492
  
80,859
       
Net insurance claims incurred and movement in policyholders' liabilities
(23,036)
  
(18,032)
       
Net operating income before loan impairment charges
      
and other credit risk provisions
73,456
  
62,827
       
Loan impairment charges and other credit risk provisions
(988)
  
(1,954)
       
Net operating income
72,468
  
60,873
       
Employee compensation and benefits
(18,970)
  
(15,496)
General and administrative expenses
(11,335)
  
(9,794)
Depreciation of property, plant and equipment
(1,884)
  
(1,620)
Amortisation and impairment of intangible assets
(996)
  
(714)
       
Total operating expenses
(33,185)
  
(27,624)
       
Operating profit
39,283
  
33,249
       
Share of profit in associates and joint ventures
6,951
  
5,326
       
Profit before tax
46,234
  
38,575
       
Tax expense
(8,897)
  
(7,207)
       
Profit for the period
37,337
  
31,368
       
Profit attributable to shareholders
34,292
  
28,675
Profit attributable to non-controlling interests
3,045
  
2,693
 
Consolidated Statement of Comprehensive Income
 
Half-year
ended
30 June
2011
  
Half-year
ended
30 June
2010
 
HK$m
  
HK$m
       
Profit for the period
37,337
  
31,368
       
Other comprehensive income
      
       
Available-for-sale investments:
      
- fair value changes taken to equity
(5,536)
  
1,992
- fair value changes transferred to the income statement on disposal
(75)
  
(1,168)
- fair value changes transferred to the income statement on hedged items
      
due to hedged risk
1
  
(1,043)
- income taxes
91
  
112
       
Cash flow hedges:
      
- fair value changes taken to equity
319
  
242
- fair value changes transferred to the income statement
(245)
  
(1,041)
- income taxes
(16)
  
136
       
Property revaluation:
      
- fair value changes taken to equity
6,451
  
2,358
- income taxes
(1,057)
  
(418)
       
Share of changes in equity of associates and joint ventures
(618)
  
(31)
       
Exchange differences
4,720
  
964
       
Actuarial losses on post-employment benefits:
      
- before income taxes
(1,025)
  
(784)
- income taxes
167
  
126
       
Other comprehensive income for the period, net of tax
3,177
  
1,445
       
Total comprehensive income for the period, net of tax
40,514
  
32,813
       
Total comprehensive income for the period attributable to:
      
- shareholders
36,959
  
29,461
- non-controlling interests
3,555
  
3,352
       
 
40,514
  
32,813

 
Consolidated Statement of Financial Position
 
At
30 June
2011
  
At
31 December
2010
 
HK$m
  
HK$m
       
ASSETS
      
Cash and short-term funds
952,611
  
807,985
Items in the course of collection from other banks
76,620
  
16,878
Placings with banks maturing after one month
163,473
  
149,557
Certificates of deposit
86,637
  
73,247
Hong Kong Government certificates of indebtedness
153,664
  
148,134
Trading assets
363,055
  
390,208
Financial assets designated at fair value
59,560
  
54,604
Derivatives
319,808
  
302,622
Advances to customers
2,124,187
  
1,891,060
Financial investments
783,718
  
826,662
Amounts due from Group companies
132,977
  
137,633
Interests in associates and joint ventures
82,812
  
75,568
Goodwill and intangible assets
33,347
  
29,690
Property, plant and equipment
78,482
  
72,347
Deferred tax assets
2,346
  
2,515
Retirement benefit assets
266
  
301
Other assets
83,496
  
60,907
       
Total assets
5,497,059
  
5,039,918
       
LIABILITIES
      
Hong Kong currency notes in circulation
153,664
  
148,134
Items in the course of transmission to other banks
94,660
  
26,495
Deposits by banks
241,316
  
167,827
Customer accounts
3,450,677
  
3,313,244
Trading liabilities
212,556
  
151,534
Financial liabilities designated at fair value
40,301
  
40,327
Derivatives
325,494
  
309,838
Debt securities in issue
75,399
  
59,283
Retirement benefit liabilities
5,863
  
4,713
Amounts due to Group companies
114,868
  
83,128
Other liabilities and provisions
75,371
  
70,946
Liabilities under insurance contracts issued
197,379
  
177,970
Current tax liabilities
7,912
  
4,419
Deferred tax liabilities
13,534
  
11,913
Subordinated liabilities
19,853
  
21,254
Preference shares
101,578
  
101,458
       
Total liabilities
5,130,425
  
4,692,483
       
EQUITY
      
Share capital
22,494
  
22,494
Other reserves
128,429
  
124,382
Retained profits
180,037
  
161,254
Proposed dividend
7,000
  
12,000
       
Total shareholders' equity
337,960
  
320,130
Non-controlling interests
28,674
  
27,305
       
Total equity
366,634
  
347,435
       
Total equity and liabilities
5,497,059
  
5,039,918
 
 
Consolidated Statement of Changes in Equity
          
 
Half-year
ended
30 June
2011
  
Half-year
ended
31 December
2010
  
Half-year
ended
30 June
2010
 
HK$m
  
HK$m
  
HK$m
           
Share capital
          
At beginning and end of period
22,494
  
22,494
  
22,494
           
Retained profits and proposed dividend
          
At beginning of period
173,254
  
160,818
  
148,105
Dividends paid
(19,000)
  
(12,000)
  
(14,850)
Movement in respect of share-based payment arrangements
86
  
7
  
152
Changes in ownership interests in subsidiaries
-
  
(88)
  
-
Other movements
(2)
  
8
  
2
Transfers
(823)
  
(4,296)
  
(617)
Total comprehensive income for the period
33,522
  
28,805
  
28,026
           
 
187,037
  
173,254
  
160,818
           
Other reserves
          
Property revaluation reserve
          
At beginning of period
29,980
  
24,455
  
22,983
Other movements
(24)
  
-
  
1
Transfers
(382)
  
(308)
  
(301)
Total comprehensive income for the period
4,915
  
5,833
  
1,772
           
 
34,489
  
29,980
  
24,455
           
Available-for-sale investment reserve
          
At beginning of period
57,553
  
42,908
  
43,385
Other movements
(2)
  
3
  
1
Transfers
-
  
-
  
(4)
Total comprehensive (expense)/income for the period
(6,008)
  
14,642
  
(474)
           
 
51,543
  
57,553
  
42,908
           
Cash flow hedging reserve
          
At beginning of period
106
  
229
  
848
Total comprehensive income/(expense) for the period
58
  
(123)
  
(619)
           
 
164
  
106
  
229
           
Foreign exchange reserve
          
At beginning of period
15,789
  
7,893
  
6,998
Total comprehensive income for the period
4,565
  
7,896
  
895
           
 
20,354
  
15,789
  
7,893
           
Other reserves
          
At beginning of period
20,954
  
16,323
  
15,389
Movement in respect of share-based payment arrangements
17
  
67
  
152
Transfers
1,205
  
4,604
  
922
Other movements
(204)
  
1
  
(1)
Total comprehensive expense for the period
(93)
  
(41)
  
(139)
           
 
21,879
  
20,954
  
16,323
 
 
 
Half-year
ended
30 June
2011
  
Half-year
ended
31 December
2010
  
Half-year
ended
30 June
2010
 
HK$m
  
HK$m
  
HK$m
           
Total shareholders equity
          
At beginning of period
320,130
  
275,120
  
260,202
Dividends paid
(19,000)
  
(12,000)
  
(14,850)
Movement in respect of share-based payment arrangements
103
  
74
  
304
Changes in ownership interest in subsidiaries
-
  
(88)
  
-
Other movements
(232)
  
12
  
3
Total comprehensive income for the period
36,959
  
57,012
  
29,461
           
 
337,960
  
320,130
  
275,120
           
Non-controlling interests
          
At beginning of period
27,305
  
27,674
  
26,425
Dividends paid
(2,171)
  
(1,707)
  
(2,192)
Movement in respect of share-based payment arrangements
10
  
20
  
16
Changes in non-controlling interests on deconsolidation
-
  
(1,708)
  
-
Other movements
(25)
  
(104)
  
73
Total comprehensive income for the period
3,555
  
3,130
  
3,352
           
 
28,674
  
27,305
  
27,674
           
Total equity
          
At beginning of period
347,435
  
302,794
  
286,627
Dividends paid
(21,171)
  
(13,707)
  
(17,042)
Movement in respect of share-based payment arrangements
113
  
94
  
320
Changes in ownership interest in subsidiaries
-
  
(88)
  
-
Changes in non-controlling interests on deconsolidation
-
  
(1,708)
  
-
Other movements
(257)
  
(92)
  
76
Total comprehensive income for the period
40,514
  
60,142
  
32,813
           
 
366,634
  
347,435
  
302,794
 
 
Consolidated Cash Flow Statement
 
Half-year
ended
30 June
2011
  
Half-year
ended
30 June
2010
 
HK$m
  
HK$m
       
Operating activities
      
       
Cash generated from/(used in) operations
73,073
  
(87,338)
Interest received on financial investments
6,471
  
6,759
Dividends received on financial investments
189
  
74
Dividends received from associates
510
  
1,500
Taxation paid
(4,817)
  
(4,560)
       
Net cash inflow /(outflow) from operating activities
75,426
  
(83,565)
       
Investing activities
      
       
Purchase of financial investments
(282,998)
  
(251,793)
Proceeds from sale or redemption of financial investments
322,280
  
307,806
Purchase of property, plant and equipment
(961)
  
(749)
Proceeds from sale of property, plant and equipment and assets held for sale
35
  
52
Purchase of other intangible assets
(815)
  
(629)
Net cash outflow in respect of the acquisition of and increased shareholding
   in subsidiaries
(143)
  
(105)
Net cash inflow in respect of the sale of a subsidiary
1
  
-
Net cash outflow in respect of the purchase of interests in associates and joint ventures
(218)
  
(3,452)
Net cash inflow in respect of the sale of interest in an associate
8
  
95
Net cash inflow from the sale of loan portfolios
4,670
  
-
       
Net cash inflow from investing activities
41,859
  
51,225
       
Net cash inflow/(outflow) before financing
117,285
  
(32,340)
       
Financing
      
       
Change in non-controlling interests
-
  
60
Repayment of subordinated liabilities
(1,650)
  
(1,580)
Ordinary dividends paid
(19,000)
  
(14,850)
Dividends paid to non-controlling interests
(2,171)
  
(2,192)
Interest paid on preference shares
(1,355)
  
(1,850)
Interest paid on subordinated liabilities
(409)
  
(277)
       
Net cash outflow from financing
(24,585)
  
(20,689)
       
Increase/(decrease) in cash and cash equivalents
92,700
  
(53,029)
 
Additional Information
 
1. Net interest income
 
 
Half-year
ended
30 June
2011
  
Half-year
ended
30 June
2010
 
HK$m
  
HK$m
       
Net interest income
35,715
  
29,309
Average interest-earning assets
3,877,827
  
3,259,261
Net interest spread
1.76%
  
1.74%
Net interest margin
1.86%
  
1.81%
 
Net interest income increased as a result of loan growth across the region and widening deposit spreads in certain countries, notably mainland China, India and Malaysia, offset by asset spread compression.
 
Average interest-earning assets increased by HK$618,566m or 19.0% compared to the half-year ended 30 June 2010. Average customer lending increased 40.1% with notable growth in trade-related lending in CMB and GB&M. Financial investments decreased with redeployment to customer lending as the business environment remained buoyant.
 
Net interest margin increased by five basis points to 1.86% compared to the first half of 2010, as more of the commercial surplus was deployed to customer lending and deposit spreads improved in parts of Rest of Asia-Pacific, offset by asset spread compression. Net interest spread increased by two basis points to 1.76%, whilst the contribution from net free funds increased by three basis points to 10 basis points.
 
In Hong Kong, the bank recorded a small decrease in net interest margin of three basis points to 1.32%. Average interest-earning assets increased by 12.9% compared to the first half of 2010. Asset spreads on customer advances, in particular HIBOR-linked mortgages and trade-related lending, continued to be constrained. This was largely offset by customer advances increasing as a proportion of the balance sheet compared to lower yielding financial investments.
 
At Hang Seng Bank, the net interest margin decreased by two basis points to 1.91% while the net interest spread decreased by five basis points to 1.84%. Net interest margin decreased due to narrowing deposit spreads as well as lower asset spreads, particularly on HIBOR mortgages in a competitive environment. Volume growth in corporate and trade lending helped to support net interest income.
 
In the Rest of Asia-Pacific, the net interest margin was 2.19%, 10 basis points higher than the first half of 2010, as interest rates rose in a number of countries across the region and deposit spreads improved. Notable growth in the loan book was recorded in mainland China, Singapore, Australia and Malaysia.

2. Net fee income
 
 
Half-year ended
30 June
2011
  
Half-year ended
30 June
2010
 
HK$m
  
HK$m
       
Account services
1,241
  
1,149
Credit facilities
1,423
  
1,350
Import/export
2,412
  
1,941
Remittances
1,372
  
1,149
Securities/stockbroking
4,380
  
4,048
Cards
3,219
  
2,901
Insurance
365
  
313
Unit trusts
2,237
  
1,432
Funds under management
2,357
  
2,186
Underwriting
609
  
351
Other
3,652
  
2,785
       
Fee income
23,267
  
19,605
Fee expense
(3,328)
  
(2,912)
       
 
19,939
  
16,693
 
 
Net fee income increased by HK$3,246m, or 19.4%, compared to the first half of 2010.
 
Fees from unit trusts rose by 56.2%, with notable increases in Hong Kong and Taiwan. The increase was driven by ongoing marketing campaigns and the growth in sales capacity in our wealth management business. Securities and stockbroking fees were up 8.2% due to increased brokerage transactions and improved market turnover in Hong Kong in 2011.
 
Fees from import/export and remittances increased by 24.3% and 19.4%, respectively, on the back of growing trade activities, notably in Hong Kong, Bangladesh, mainland China, Singapore and Vietnam.
 
Fee income from cards was up 11.0%, driven by higher transaction fees in Hong Kong from increased retail spending and, in Australia, through continued growth in co-branded credit cards.
 
Underwriting fee income increased by 73.5%, comprising higher fees generated from a number of large equity-underwriting participations in Hong Kong.

3. Gains less losses from financial investments
 
 
Half-year ended
30 June
2011
  
Half-year ended
30 June
2010
 
HK$m
  
HK$m
       
Gains on disposal of available-for-sale securities
192
  
1,312
Impairment of available-for-sale equity investments
(123)
  
(28)
       
 
69
  
1,284
 
 
Gains on disposal of available-for-sale securities decreased by HK$1,120m. This was mainly attributable to lower gains recognised on disposals of debt securities in Hong Kong, along with the non-recurrence of the gain on reclassification of Bao Viet Holdings to an associate following the purchase of additional shares in 2010.
 
 
4. Other operating income
 
 
Half-year ended
30 June
2011
  
Half-year ended
30 June
2010
 
HK$m
  
HK$m
       
Movement in present value of in-force insurance business
3,485
  
1,845
Gains on investment properties
427
  
153
Rental income from investment properties
92
  
155
(Loss)/ gains on disposal of property, plant and equipment, and assets held for sale
(23)
  
2
Other
2,207
  
1,891
       
 
6,188
  
4,046
 
The movement in present value of in-force insurance business rose substantially, by HK$1,640m or 88.9%, due to a refinement of the calculation of the PVIF asset, described more fully in note 5, along with strong sales of life insurance products in Hong Kong during the first half of 2011.
 
Gains on investment properties increased in comparison to the first half of 2010 reflecting the favourable property market conditions in Hong Kong.
 
The increase in 'Other' largely comprises higher recoveries of IT and other operating costs from shared services activities incurred on behalf of fellow group companies.


5. Insurance income
 
Included in the consolidated income statement are the following revenues earned by the insurance business:
 
 
 
Half-year ended
30 June
2011
  
Half-year ended
30 June
2010
 
HK$m
  
HK$m
       
Net interest income
3,237
  
2,748
Net fee income
454
  
545
Net trading loss
(164)
  
(9)
Net income/(loss) from financial instruments designated at fair value
366
  
(301)
Gains less losses from financial investments
(1)
  
385
Net earned insurance premiums
22,882
  
19,032
Movement in present value of in-force business
3,485
  
1,845
Other operating income
180
  
27
       
 
30,439
  
24,272
Net insurance claims incurred and movement in policyholders' liabilities
(23,036)
  
(18,032)
       
Net operating income
7,403
  
6,240
 
Net interest income increased by 17.8% as funds under management grew, reflecting net inflows from new and renewal insurance business.
 
Net income from financial instruments designated at fair value was HK$366m in 2011 compared to a loss of HK$301m in 2010, mainly reflecting revaluation gains on equities supporting unit-linked insurance contract liabilities, and to a lesser extent non-linked insurance contract liabilities, corresponding with an improved relative performance in key equity markets in 2011 compared with the first half of 2010. To the extent that gains and losses on revaluation are attributed to policyholders, there is an offsetting movement reported under 'Net insurance claims incurred and movement in policyholders' liabilities'.
 
Gains less losses from financial investments included the accounting gain of HK$386m in 2010 from the reclassification of Bao Viet Holdings to an associate following the purchase of additional shares.
 
Net earned insurance premiums rose by 20.2%, mainly from higher sales of deferred annuity and unit-linked products and higher renewal premiums on existing business.
 
The movement in present value of in-force business increased by 88.9%, driven by higher sales in 2011 compared with the first half of 2010 and a refinement of the calculation of the PVIF asset during the period. The revised PVIF approach explicitly rather than implicitly allows for non-economic risks and the cost of options and guarantees. Discount rates have been reduced as a result of this change. This refinement led to an increase of HK$1,133m which is included in 'Movement in present value of in-force business'.


6. Loan impairment charges and other credit risk provisions
 
 
Half-year ended
30 June
2011
  
Half-year ended
30 June
2010
 
HK$m
  
HK$m
       
Net charge for impairment of customer advances
      
- Individually assessed impairment allowances:
      
    New allowances
786
  
1,342
    Releases
(651)
  
(625)
    Recoveries
(181)
  
(117)
       
 
(46)
  
600
       
- Net charge for collectively assessed impairment allowances
1,047
  
1,355
       
Net charge/(release) for other credit risk provisions
(13)
  
(1)
       
Net charge for loan impairment and other credit risk provisions
988
  
1,954
 
 
The net charge for loan impairment and other credit risk provisions decreased by HK$966m, or 49.4%, compared to the first half of 2010.
 
The net charge for individually assessed allowances decreased by HK$646m as a number of large specific impairment charges recorded in the first half of 2010 did not recur, principally for customers in Hong Kong and India.
 
The net charge for collectively assessed impairment allowances fell by HK$308m, mainly driven by a managed reduction in cards and unsecured lending portfolios in India. The decline was partly offset by higher charges against corporate portfolios consistent with on-going loan growth, notably in Hong Kong, mainland China and Singapore.
 
There were no impairment losses or provisions against held-to-maturity investments. 
 
7. Employee compensation and benefits
 
 
At
30 June
2011
  
At
30 June
2010
 
HK$m
  
HK$m
       
Wages and salaries
17,536
  
14,330
Social security costs
454
  
352
Retirement benefit costs
980
  
814
       
 
18,970
  
15,496
       
Staff numbers by region - full-time equivalent
      
       
Hong Kong
28,835
  
26,936
Rest of Asia-Pacific
44,695
  
43,468
       
Total
73,530
  
70,404
       
       
 
 
Total employee compensation and benefits increased HK$3,474m, or 22.4%.Wages and salaries rose by HK$3,206m due to wage inflation in a competitive market, the annual salary increment and strong performances in various businesses. Staff costs also rose due to an acceleration in the expense recognition for deferred bonus awards.
 
Higher headcount in 2011 generally reflected increasing business volumes, additional product capabilities and operational demands across the region. The increases were most significant in Hong Kong, mainland China, Australia, Singapore, Vietnam and Taiwan.
 
8. General and administrative expenses
 
 
Half-year ended
30 June
2011
  
Half-year ended
30 June
2010
 
HK$m
  
HK$m
       
Premises and equipment
      
- Rental expenses
1,507
  
1,459
- Amortisation of prepaid operating lease payments
9
  
9
- Other premises and equipment
1,702
  
1,514
       
 
3,218
  
2,982
Marketing and advertising expenses
1,789
  
1,604
Other administrative expenses
6,351
  
5,216
Litigation and other provisions
(23)
  
(8)
       
 
11,335
  
9,794
 
 
General and administrative expenses rose by HK$1,541m, or 15.7%, compared to the first half of 2010.
 
Charges in respect of premises and equipment were HK$236m, or 7.9%, higher than 2010, predominantly in Hong Kong. The increase reflects both higher IT maintenance costs and higher property costs.
 
Marketing and advertising expenses rose by HK$185m, or 11.5%, reflecting increased promotional activity related to cards and wealth management, along with additional sponsorship campaigns.
 
Other administrative expenses increased by HK$1,135m, or 21.8%, with higher intercompany recharges on the back of growing transaction volumes and systems development. Meanwhile, increasing expenditure on recruitment, consultancy and travel was driven by increased business activity in 2011. 
 
9. Tax expense
 
The tax expense in the consolidated income statement comprises:
 
 
Half-year ended
30 June
2011
  
Half-year ended
30 June
2010
 
HK$m
  
HK$m
       
Current income tax
      
- Hong Kong profits tax
3,363
  
3,050
- Overseas taxation
4,605
  
2,954
Deferred taxation
929
  
1,203
       
 
8,897
  
7,207
 
The effective rate of tax for the first half of 2011 was 19.2%, compared with 18.7% for the first half of 2010.
 
 
10. Dividends
 
 
Half-year ended
30 June 2011
  
Half-year ended
30 June 2010
 
               HK$
      
               HK$
    
 
      per share
  
           HK$m
  
       per share
  
            HK$m
               
Ordinary dividends paid
              
- fourth interim dividend in respect of the
previous financial year approved and paid
during the year
1.33
  
12,000
  
0.98
  
8,850
- first interim dividend paid
0.78
  
7,000
  
0.67
  
6,000
               
 
2.11
  
19,000
  
1.65
  
14,850
 
 
The Directors have declared a second interim dividend in respect of the half-year ended 30 June 2011 of HK$7,000m (HK$0.78 per ordinary share). 
 
11. Advances to customers
 
 
At 30 June
2011
  
At 31 December
2010
 
HK$m
  
HK$m
       
Gross advances to customers
2,135,765
  
1,904,054
       
Impairment allowances:
      
- Individually assessed
(7,063)
  
(8,259)
- Collectively assessed
(4,515)
  
(4,735)
       
 
(11,578)
  
(12,994)
       
 
2,124,187
  
1,891,060
       
Allowances as a percentage of gross advances to customers:
      
- Individually assessed
0.33%
  
0.43%
- Collectively assessed
0.21%
  
0.25%
       
Total allowances
0.54%
  
0.68%
 
 
12. Impairment allowances against advances to customers
 
 
Individually
assessed
allowances
  
Collectively
assessed
allowances
  
Total
 
HK$m
  
HK$m
  
HK$m
           
At 1 January 2011
8,259
  
4,735
  
12,994
Amounts written off
(1,320)
  
(1,983)
  
(3,303)
Recoveries of advances written off in previous years
181
  
803
  
984
Net charge to income statement
(46)
  
1,047
  
1,001
Unwinding of discount of loan impairment
(46)
  
(137)
  
(183)
Exchange and other adjustments
35
  
50
  
85
           
At 30 June 2011
7,063
  
4,515
  
11,578

 
13. Impaired advances to customers and allowances
 
The geographical information shown below, and in note 14, has been classified by location of the principal operations of the subsidiary company or, in the case of the bank, by location of the branch responsible for advancing the funds.
 
     
Rest of
    
 
Hong Kong
  
Asia-Pacific
  
Total
 
HK$m
  
HK$m
  
HK$m
           
At 30 June 2011
          
           
Advances to customers which are considered to be impaired are
as follows:
          
           
Gross impaired advances
3,817
  
10,443
  
14,260
           
Individually assessed allowances
(2,238)
  
(4,825)
  
(7,063)
           
 
1,579
  
5,618
  
7,197
           
Individually assessed allowances as a percentage of gross
impaired advances
58.6%
  
46.2%
  
49.5%
           
Gross impaired advances as a percentage of gross advances to customers
0.3%
  
1.1%
  
0.7%
           
At 31 December 2010
          
           
Advances to customers which are considered to be impaired are
as follows:
          
           
Gross impaired advances
 4,987
  
 11,294
  
 16,281
           
Individually assessed allowances
(2,615)
  
(5,644)
  
(8,259)
           
 
2,372
  
5,650
  
8,022
           
Individually assessed allowances as a percentage of gross
impaired advances
       52.4%
  
       50.0%
  
       50.7%
           
Gross impaired advances as a percentage of gross advances to customers
       0.5%
  
       1.3%
  
       0.9%
 
 
Impaired advances to customers are those for which objective evidence exists that full repayment of principal or interest is considered unlikely.
 
Individually assessed allowances are made after taking into account the value of collateral held in respect of such advances.
 
14. Analysis of advances to customers based on categories used by the HSBC Group
 
The following analysis of advances to customers is based on categories used by the HSBC Group, including The Hongkong and Shanghai Banking Corporation Limited and its subsidiaries, for risk management purposes.
 
     
Rest of
    
 
Hong Kong
  
Asia-Pacific
  
Total
At 30 June 2011
HK$m
  
HK$m
  
HK$m
           
Residential mortgages
324,233
  
248,847
  
573,080
           
Hong Kong Government's Home Ownership Scheme,
Private Sector Participation Scheme and Tenants Purchase
Scheme mortgages
26,417
  
-
  
26,417
           
Credit card advances
35,725
  
35,712
  
71,437
           
Other personal
52,598
  
39,199
  
91,797
           
Total personal
438,973
  
323,758
  
762,731
           
Commercial, industrial and international trade
331,424
  
363,406
  
694,830
           
Commercial real estate
155,265
  
75,640
  
230,905
           
Other property-related lending
125,270
  
43,886
  
169,156
           
Government
25,306
  
3,347
  
28,653
           
Other commercial
95,352
  
104,439
  
199,791
           
Total corporate and commercial
732,617
  
590,718
  
1,323,335
           
Non-bank financial institutions
23,662
  
22,253
  
45,915
           
Settlement accounts
3,061
  
723
  
3,784
           
Total financial
26,723
  
22,976
  
49,699
           
Gross advances to customers
1,198,313
  
937,452
  
2,135,765
           
Individually assessed impairment allowances
(2,238)
  
(4,825)
  
(7,063)
           
Collectively assessed impairment allowances
(2,106)
  
(2,409)
  
(4,515)
           
Net advances to customers
1,193,969
  
930,218
  
2,124,187
 
 
 
 
Hong Kong
  
Rest of
Asia-Pacific
  
Total
At 31 December 2010
HK$m
  
HK$m
  
HK$m
           
Residential mortgages
299,271
  
221,558
  
520,829
           
Hong Kong Government's Home Ownership Scheme,
Private Sector Participation Scheme and Tenants Purchase
Scheme mortgages
27,496
  
-
  
27,496
           
Credit card advances
37,351
  
34,287
  
71,638
           
Other personal
47,874
  
37,779
  
85,653
           
Total personal
411,992
  
293,624
  
705,616
           
Commercial, industrial and international trade
260,020
  
325,253
  
585,273
           
Commercial real estate
150,142
  
67,804
  
217,946
           
Other property-related lending
118,401
  
42,231
  
160,632
           
Government
18,185
  
3,223
  
21,408
           
Other commercial
78,676
  
93,569
  
172,245
           
Total corporate and commercial
625,424
  
532,080
  
1,157,504
           
Non-bank financial institutions
21,952
  
16,486
  
38,438
           
Settlement accounts
2,020
  
476
  
2,496
           
Total financial
23,972
  
16,962
  
40,934
           
Gross advances to customers
1,061,388
  
842,666
  
1,904,054
           
Individually assessed impairment allowances
(2,615)
  
(5,644)
  
(8,259)
           
Collectively assessed impairment allowances
(2,178)
  
(2,557)
  
(4,735)
           
Net advances to customers
1,056,595
  
834,465
  
1,891,060
 
 
Net advances in Hong Kong increased by HK$137.4bn, or 13.0%, during the first half of 2011. The increase was largely attributable to the growth in corporate and commercial lending (up HK$107.2bn), reflecting higher demand, in particular in international trade loans, due to strong economic conditions. Mortgage lending increased by HK$25.0bn as the property market remained active with interest rates remaining low.
 
In the Rest of Asia-Pacific, net advances to customers increased by HK$95.8bn, or 11.5%, of which the impact of foreign exchange translation was HK$25.7bn. The underlying increase was mainly from corporate and commercial lending (up HK$44.1bn). Residential mortgages increased by HK$18.4bn, with growth notably in Singapore, Australia, mainland China and Malaysia.
 
 
15. Customer accounts
 
 
At 30 June
2011
  
At 31 December
2010
 
HK$m
  
HK$m
       
Current accounts
704,753
  
643,850
       
Savings accounts
1,749,306
  
1,765,835
       
Other deposit accounts
996,618
  
903,559
       
 
3,450,677
  
3,313,244
 
Customer accounts increased by HK$137.4bn, or 4.1%, during the first half of 2011.
 
In Hong Kong, customer accounts increased by HK$57.9bn or 2.7% and in the Rest of Asia-Pacific, customer accounts increased by HK$79.5bn or 6.9% compared to 31 December 2010.
 
The group's advances-to-deposits ratio increased to 61.6% at 30 June 2011, from 57.1% at 31 December 2010 as more of the commercial surplus was deployed to customer lending. 

 
16. Fair value of financial instruments
 
The following table provides an analysis of the basis for the valuation of financial assets and financial liabilities measured at fair value in the consolidated financial statements:
 
     
Valuation techniques
            
 
Quoted
market
price
Level 1
  
using
observable
inputs
Level 2
  
with
significant
non-
observable
inputs
Level 3
  
Third
party
total
  
Amounts
with
HSBC
entities
  
Total
At 30 June 2011
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
  
HK$m
                       
Assets
                      
                       
Trading assets
227,900
  
133,888
  
1,267
  
363,055
  
-
  
363,055
                       
Financial assets designated at
fair value
36,271
  
20,578
  
2,711
  
59,560
  
-
  
59,560
                       
Derivatives
4,107
  
251,407
  
1,655
  
257,169
  
62,639
  
319,808
                       
Available-for-sale investments
500,492
  
525,229
  
18,561
  
1,044,282
  
-
  
1,044,282
                       
Liabilities
                      
                       
Trading liabilities
91,423
  
104,893
  
16,240
  
212,556
  
-
  
212,556
                       
Financial liabilities designated
at fair value
-
  
40,301
  
-
  
40,301
  
-
  
40,301
                       
Derivatives
5,665
  
241,764
  
1,411
  
248,840
  
76,654
  
325,494
                       
At 31 December 2010
                      
                       
Assets
                      
                       
Trading assets
263,579
  
124,594
  
2,035
  
390,208
  
-
  
390,208
                       
Financial assets designated
at fair value
38,300
  
13,867
  
2,437
  
54,604
  
-
  
54,604
                       
Derivatives
2,533
  
236,479
  
1,372
  
240,384
  
62,238
  
302,622
                       
Available-for-sale investments
494,178
  
534,623
  
22,155
  
1,050,956
  
-
  
1,050,956
                       
Liabilities
                      
                       
Trading liabilities
56,846
  
80,174
  
14,514
  
151,534
  
-
  
151,534
                       
Financial liabilities designated
at fair value
-
  
40,327
  
-
  
40,327
  
-
  
40,327
                       
Derivatives
2,617
  
234,996
  
1,612
  
239,225
  
70,613
  
309,838
 
 
During the first half of 2011, the amounts of financial assets transferred in and out of Level 3 in the fair value hierarchy were HK$569m and HKD$2,553m respectively (Second half 2010: HK$6,815m and HK$3,395m). The total amounts of financial liabilities transferred in and out of Level 3 were HK$1,882m and HK$3,484m respectively (Second half 2010: HK$823m and HK$2,936m). There were no significant transfers between Level 1 and Level 2 in the period. 
 
 
 
17. Contingent liabilities and commitments
 
 
At 30 June
2011
  
At 31 December
2010
 
HK$m
  
HK$m
       
Contract amount:
      
       
Contingent liabilities
190,033
  
164,358
Commitments
1,488,208
  
1,371,114
       
 
1,678,241
  
1,535,472
 
 
18. Accounting policies
 
The accounting policies and methods of computation adopted by the group for this news release are consistent with those described on pages 34 to 54 of the 2010 Annual Report and Accounts. A number of new and revised Hong Kong Financial Reporting Standards have become effective in 2011. None has a material impact on the group.
 
 
19. Comparative information
 
From 1 January 2011 the Asset Management Group, previously reported within GB&M, was combined with what was previously reported as Personal Financial Services (PFS) to form Retail Banking and Wealth Management ('RBWM'). Comparative information has been restated accordingly.
 
 
20. Additional information
 
Additional financial information, including the group's capital ratios, relating to the period ended 30 June 2011, prepared in accordance with the Banking (Disclosure) Rules made under section 60A of the Banking Ordinance, will be made available on our website: www.hsbc.com.hk . A further press release will be issued to announce the availability of this information.
21. Statutory accounts
 
The information in this news release is not audited and does not constitute statutory accounts.
 
Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2010 which have been delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 28 February 2011. The Annual Report and Accounts for the year ended 31 December 2010, which include the statutory accounts, can be obtained on request from Group Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong, and may be viewed on our website: www.hsbc.com.hk .
 
 
22.Ultimate holding company
 
The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc.
 
 
23. Statement of compliance
 
The information in this news release for the half-year ended 30 June 2011 complies with Hong Kong Accounting Standard 34, Interim Financial Reporting.
 
 
 
 
 
Media enquiries to:    Cindy Tang - Telephone no: + 852 2822 1268
                                       Ruth Naderer - Telephone no: + 852 2822 4947
                                       Gareth Hewett - Telephone no: + 852 2822 4929


 
 
 

 
 
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: 1 August, 2011