28th Feb 2005 08:00
HSBC Holdings PLC28 February 2005 HANG SENG BANK LIMITED 2004 RESULTS - HIGHLIGHTS •Operating profit before provisions up 3.1 per cent to HK$11,830 million (HK$11,475 million in 2003). •Operating profit up 18.4 per cent to HK$12,644 million (HK$10,683 million in 2003). •Pre-tax profit up 20.0 per cent to HK$13,367 million (HK$11,137 million in 2003). •Attributable profit up 19.5 per cent to HK$11,395 million (HK$9,539 million in 2003). •Return on average shareholders' funds of 27.6 per cent (23.4 per cent in 2003). •Total assets up 9.1 per cent to HK$548.6 billion (HK$503.0 billion at 31 December 2003). •Earnings per share up 19.4 per cent to HK$5.96 (HK$4.99 per share in 2003). •Fourth interim dividend of HK$1.90 per share; total dividends of HK$5.20 per share for 2004 (HK$4.90 per share in 2003). •Total capital ratio of 12.0 per cent (13.2 per cent at 31 December 2003); tier 1 capital ratio of 10.8 per cent (11.3 per cent at 31 December 2003). •Cost:income ratio of 26.3 per cent (25.4 per cent in 2003). Hang Seng Bank attributable profit up 19.5 per cent to HK$11,395 million Hang Seng Bank Limited (the bank) and its subsidiary and associated companies(Hang Seng) reported a profit attributable to shareholders of HK$11,395 millionfor 2004, representing growth of 19.5 per cent compared with 2003. Earnings pershare of HK$5.96 was 19.4 per cent higher than 2003. Operating profit before provisions rose by HK$355 million, or 3.1 per cent, toHK$11,830 million. The 22.4 per cent growth in other operating income outweigheda 4.8 per cent fall in net interest income and an 8.2 per cent rise in operatingexpenses. Wealth management businesses in particular performed strongly, withincome growth of 35.1 per cent reflecting the strength of securities services,retail investment product sales and private banking. Wealth management incomealso benefited from the active stock market and positive investor sentiment.Life insurance made further advances in market share and profitability as therange of products providing protection and investment benefits was extended.Trade services and credit cards also performed well in business volume and feesand commissions. Dealing profits recorded strong growth from trading results, aswell as the provision of corporate treasury services and the packaging ofstructured investment products. Net interest income fell despite the growth inaverage interest earning assets and customer advances, reflecting theexceptionally low HK dollar interest rates throughout the year thatsignificantly reduced deposit spreads. Loan margins, in particular mortgages andcorporate lending, were further squeezed amidst fierce market competition andample market liquidity. Operating profit after provisions rose 18.4 per cent after accounting for therelease of HK$814 million in provisions for bad and doubtful debts, comparedwith a charge of HK$792 million last year. Specific provisions showed a netrelease of HK$2 million, compared with a net charge of HK$798 million last year.This was the combined effect of lower new and additional charges, and higherreleases and recoveries from doubtful accounts. Credit card losses reducedsignificantly, as bankruptcy and unemployment rates continued to fall. There wasa net release of provisions in respect of mortgages, reflecting the improvementin delinquency, higher recoveries from disposal of repossessed properties andsubstantial improvements in the negative equity position. This was the result ofthe sharp rally in property prices, with strong demand in particular in theprimary sector, reflecting an improved debt servicing capability in theimproving economic environment. Corporate and commercial banking accounts alsoshowed a net release in provisions with substantially lower new charges as thefinancial position of corporate customers continued to improve, in line with thestrong growth in the local economy. A total of HK$812 million was released fromgeneral provisions during the year in light of historical loss experience andthe improving credit environment. Profit before tax amounted to HK$13,367 million, which was HK$2,230 million, or20.0 per cent, higher than 2003, after accounting for the surplus on propertyrevaluation and the share of profits from associated companies. The increase inthe share of associated companies' profit was attributable to Industrial BankCo., Ltd, in which the bank acquired an interest of 15.98 per cent in May 2004. Attributable profit, after taxation and minority interests, rose by HK$1,856million, or 19.5 per cent. Excluding the impact of the release in generalprovisions and the related deferred taxation, attributable profit for 2004increased by HK$1,191 million, or 12.5 per cent, over 2003. Total assets grew HK$45.7 billion, or 9.1 per cent, to HK$548.6 billion at 31December 2004. Advances to customers recorded an encouraging growth of 9.8 percent, mainly in advances to the industrial and commercial sectors and tradefinance, in line with the strong growth in regional trade flows. Card andpersonal loans also reported robust growth. Private sector residential mortgagesrose slightly in a fiercely competitive market, while mortgages under thesuspended Government Home Ownership Scheme (GHOS) continued to fall. Customerdeposits, including certificates of deposit, rose by 5.3 per cent against lastyear-end. Shareholders' funds (excluding proposed dividends) rose by HK$3,352 million, or9.3 per cent, to HK$39,552 million at 31 December 2004, attributable to the risein retained profits and property revaluation reserves. The return on average total assets was 2.2 per cent (2.0 per cent in 2003). Thereturn on average shareholders' funds was 27.6 per cent, compared with 23.4 percent in 2003. The advances to deposits ratio rose to 54.4 per cent at 31 December 2004compared with 52.2 per cent at 31 December 2003, the effect of a faster pacedgrowth in customer advances than in customer deposits during 2004. Hang Sengcontinued to maintain a strong liquidity position, with the average liquidityratio in 2004 (calculated in accordance with the Fourth Schedule of the HongKong Banking Ordinance) at 47.2 per cent (46.2 per cent in 2003). The total capital ratio at 31 December 2004 was 12.0 per cent (13.2 per cent at31 December 2003) and the tier 1 capital ratio was 10.8 per cent (11.3 per centat 31 December 2003). The cost:income ratio was 26.3 per cent, compared with 25.4 per cent in 2003. The Directors have declared a fourth interim dividend of HK$1.90 per share,which will be payable on Thursday, 24 March 2005 to shareholders on the Registerof Shareholders as of Wednesday, 16 March 2005. Together with the first threequarters' interim dividends of HK$3.30 per share, the total distribution for2004 will amount to HK$5.20 per share (HK$4.90 per share for 2003). The total dividends for the year represent 87.2 per cent of the attributableprofit for 2004 (98.2 per cent in 2003). Comment by David Eldon, Chairman "Hang Seng achieved strong growth in 2004, supported by the recovery of HongKong's economy. Attributable profit grew by 19.5 per cent to a record HK$11,395million, underpinned by a robust increase in other operating income of 22.4 percent, and the release of provisions for bad and doubtful debts. "The rise in other operating income resulted from the growth in investmentservices income as we invested in our wealth management business. This more thanoffset a drop in net interest income of 4.8 per cent, arising from the reductionin deposit spreads caused by exceptionally low Hong Kong dollar interest rates. "We made substantial progress during the year in the development of our Mainlandbusiness with the completion of the acquisition of a 15.98 per cent interest inIndustrial Bank Co., Ltd. We are well positioned to take advantage of growthopportunities arising from the liberalisation of the Mainland's financialmarkets and we will continue to expand our network and services there. "Hong Kong's economy is expected to grow steadily in 2005, supported by thecloser economic relationship with the Mainland. In the face of the challenges ofsustained margin pressure and intense competition we will build on our financialstrength, quality customer service and growing wealth management capabilities todeliver value to our shareholders and customers." Contents The financial information in this news release is based on the auditedconsolidated accounts of Hang Seng Bank Limited and its subsidiary andassociated companies for the year ended 31 December 2004. Highlights of Results and Chairman's CommentContentsConsolidated Profit and Loss AccountConsolidated Balance SheetConsolidated Statement of Changes in EquityEconomic ProfitConsolidated Cash Flow StatementFinancial Review Net interest income Other operating income Operating expenses Provisions for bad and doubtful debts Profit on tangible fixed assets and long-term investments Taxation Earnings per share Dividends per share Segmental analysis Cash and short-term funds Placings with banks maturing after one month Certificates of deposit Securities held for dealing purposes Advances to customers Provisions against advances to customers Non-performing advances to customers and provisions Overdue advances to customers Rescheduled advances to customers Repossessed assets Segmental analysis of advances to customers by geographical area Gross advances to customers by industry sector Long-term investments Investments in associated companies Other assets Current, savings and other deposit accounts Deposits from banks Other liabilities Shareholders' funds Capital resources management Liquidity ratio Reconciliation of cash flow statement Contingent liabilities, commitments and derivatives Cross border claimsAdditional Information Statutory accounts and accounting policies Property revaluation Market risk Foreign currency positions Material related-party transactions Ultimate holding company Register of shareholders Proposed timetable for 2005 quarterly dividends News release Consolidated Profit and Loss Account Year ended 31DecFigures in HK$m 2004 2003 Interest income 12,471 12,846Interest expense (2,781) (2,667)Net interest income 9,690 10,179Other operating income 6,363 5,198Operating income 16,053 15,377Operating expenses (4,223) (3,902)Operating profit before provisions 11,830 11,475Provisions for bad and doubtful debts 814 (792)Operating profit 12,644 10,683Profit on tangible fixed assets and long-term investments 432 461Net surplus/(deficit) on property revaluation 148 (37)Share of profits of associated companies 143 30Profit on ordinary activities before tax 13,367 11,137Tax on profit on ordinary activities (1,764) (1,423)Profit on ordinary activities after tax 11,603 9,714Minority interests (208) (175)Profit attributable to shareholders 11,395 9,539Retained profits at 1 January 19,720 19,440Transfer from premises revaluation reserve- depreciation charge on revaluation surplus 75 68- realisation of revaluation surplus on disposal of premises 2 -Transfer from investment properties revaluation reserve- realisation of revaluation surplus on disposal of investment properties 141 23Exchange and other adjustments 4 18Dividends (9,942) (9,368)Retained profits at 31 December 21,395 19,720 Figures in HK$ Earnings per share 5.96 4.99Dividends per share 5.20 4.90 Consolidated Balance Sheet Figures in HK$m At 31Dec04 At 31Dec03 AssetsCash and short-term funds 68,198 71,903Placings with banks maturing after one month 16,231 18,029Certificates of deposit 33,590 28,683Securities held for dealing purposes 1,866 1,232Advances to customers 251,873 229,466Amounts due from immediate holding company and fellow subsidiary companies 4,598 13,715Long-term investments 138,025 113,881Investments in associated companies 2,397 549Tangible fixed assets 11,469 9,565Other assets 20,378 15,936 548,625 502,959 LiabilitiesCurrent, savings and other deposit accounts 463,416 439,913Deposits from banks 8,631 1,202Amounts due to immediate holding company and fellow subsidiary companies 3,928 2,412Other liabilities 28,613 19,147 504,588 462,674 Capital resourcesMinority interests 852 644Share capital 9,559 9,559Reserves 29,993 26,641Proposed dividends 3,633 3,441Shareholders' funds 43,185 39,641 44,037 40,285 548,625 502,959 Figures in HK$ Net asset value per share 23.03 21.07 Consolidated Statement of Changes in Equity Year ended 31DecFigures in HK$m 2004 2003 Shareholders' funds at 1 January 39,641 43,085 Increase/(decrease) in revaluation reserve of premises 1,203 (285)Deferred tax adjustment on revaluation of premises (6) (80)Increase/(decrease) in revaluation reserve of investment properties- bank and subsidiary companies 618 (273)- associated company 154 (125)Long-term equity investment revaluation reserve- unrealised gains on revaluation 332 410- realisation on disposal (406) (410)Deferred tax adjustment on revaluation of long-term equity investment - (2)Exchange and other adjustments 4 18Net gains/(losses) recognised in shareholders' funds for the year 1,899 (747)Profit attributable to shareholders for the year 11,395 9,539Dividends declared or approved during the year (9,750) (12,236)Shareholders' funds at 31 December 43,185 39,641 Economic Profit Economic profit is calculated from profit after tax, adjusted for non-cashitems, and takes into account the cost of capital invested by Hang Seng'sshareholders. For the year 2004, economic profit was HK$7,297 million, anincrease of HK$2,296 million, or 45.9 per cent, over last year. This wasattributable to the growth of HK$1,637 million in profit after tax (adjusted fornon-cash items) and the reduction of HK$659 million in cost of capital,following management's decision to revise the capital cost from 15.0 per cent to11.6 per cent to reflect changes in long-term interest rates and equity riskpremia. The trend of economic profits in the analysis indicates that Hang Sengcontinues to create value for its shareholders. Year ended31Dec 2004 2003 HK$m % HK$m % Average invested capital 34,494 31,021 Return on invested capital^ 11,286 32.7 9,649 31.1Cost of capital (3,989) (11.6) (4,648) (15.0)Economic profit 7,297 21.1 5,001 16.1 ^Return on invested capital represents profit after tax adjusted for non-cashitems. Consolidated Cash Flow Statement Year ended 31DecFigures in HK$m 2004 2003 Net cash inflow from operating activities 17,632 33,566 Cash flows from investing activities Purchase of an interest in an associated company (1,634) -Dividends received from an associated company 21 24Purchase of long-term investments (61,039) (98,041)Proceeds from sale or redemption of long-term investments 39,337 69,710Purchase of tangible fixed assets (148) (142)Proceeds from sale of tangible fixed assets 181 35Interest received from long-term investments 3,258 2,496Dividends received from long-term investments 131 56Net cash outflow from investing activities (19,893) (25,862) Cash flows from financing activitiesDividends paid (9,750) (10,324)Net cash outflow from financing activities (9,750) (10,324) Decrease in cash and cash equivalents (12,011) (2,620) Cash and cash equivalents at 1 January 77,575 76,817Effect of foreign exchange rate changes 1,487 3,378Cash and cash equivalents at 31 December 67,051 77,575 Financial Review Net interest income Figures in HK$m 2004 2003 Net interest income 9,690 10,179Average interest-earning assets 474,219 446,978Net interest spread 1.97% 2.21%Net interest margin 2.04% 2.28% Net interest income decreased by HK$489 million, or 4.8 per cent, compared with2003 although average interest-earning assets grew by HK$27.2 billion, or 6.1per cent. Net interest margin narrowed by 24 basis points to 2.04 per cent witha reduction in net interest spread of 24 basis points to 1.97 per cent.Contribution from net free funds remained at the same level of 0.07 per cent aslast year. Spreads on HK dollar deposits fell by 7 basis points, or HK$332 million, as inthe low interest rate environment, the bank was unable to reduce deposit ratespaid to customers. With abundant market liquidity there was also fierce marketcompetition in the mortgage sector, with a consequent reduction in portfolioyields and an increase in incentive payments. The surplus liquidity alsodepressed corporate lending margins which fell by 6 basis points. The averagespread of the securities portfolio fell as higher yielding papers matured andwere replaced at lower yields. The negative impact of the above on net interest income and net interest marginwas mitigated by the growth in average interest earning assets of 6.1 per centand a change in the asset mix as the bank sought diversification of the loanportfolio to higher yielding card and personal advances, trade finance and SMEloans. Investment in debt securities increased by 20.1 per cent as funds werere-deployed from short-term interbank placings to debt securities for yieldenhancement. The impact of the individual factors on net interest income and net interestmargin is analysed below: HK$m Basis points Net interest Net interest income margin Repricing of higher yielding debt securities (474) (10)Reduction in deposit spread (332) (7)Fall in mortgages portfolio yield (285) (6)Compression in corporate loan margin (285) (6)Change in average asset mix 238 5Growth in average interest-earning assets 649 - (489) (24) The average yield on the residential mortgage portfolio, excluding GHOSmortgages and staff loans, fell to 202 basis points below BLR for 2004, beforeaccounting for the effect of cash incentive payments. This compared with 177basis points below BLR in 2003. Cash incentive payments on new mortgage loans ofHK$157 million have been written off against interest income in 2004, comparedwith HK$130 million in 2003. Compared with the first half of 2004, net interest income in the second half of2004 improved by HK$268 million, or 5.7 per cent, with a 5 basis points increasein net interest margin to 2.07 per cent. Net interest spread increased by 4basis points to 1.99 per cent and contribution from net free funds rose by 1basis point to 0.08 per cent. Deposit spreads improved due to higher marketinterest rates in the second half of the year, which in turn benefited thecontribution of net free funds. Growth in customer advances and higher interestrecoveries from doubtful accounts also contributed to the increase in netinterest income in the second half of the year. Other operating income Figures in HK$m 2004 2003 Dividend income:- listed investments 44 52- unlisted investments 52 40 96 92Fees and commissions:- securities/stockbroking 560 361- retail investment products and funds under management 1,502 996- insurance 102 82- account services 214 211- remittance 125 132- cards 614 551- credit facilities 240 231- import/export 256 223- other 136 117Fees and commissions receivable 3,749 2,904Fees and commissions payable (409) (349) 3,340 2,555Dealing profits:- foreign exchange 975 764- securities and other trading activities 50 43 1,025 807Insurance underwriting 1,310 1,144Rental income from investment properties 202 210Other 390 390 6,363 5,198 Other operating income recorded strong growth of HK$1,165 million, or 22.4 percent, and contributed 39.6 per cent of total operating income compared with 33.8per cent in 2003. Net fees and commissions benefited from private investor sentiment and a buoyantstock market, with net income rising 30.7 per cent, driven by strong growth of55.1 per cent in securities broking and related services, 50.8 per cent inretail investment products and funds under management, and 6.7 per cent in cardservices. Trade services rose 14.8 per cent on the back of strong regional tradeflows. Dealing profits grew 27.0 per cent, mainly in foreign exchange income. This wasthe result of the improvement in proprietary trading, growth in corporatetreasury services and the increase in profit on market-linked investmentproducts provided to customers. Insurance commissions and underwriting profittogether grew by 15.6 per cent. Life insurance underwriting profit grew by 22.3per cent following a growth of 43.5 per cent in annualised premium from a widerrange of products with enhanced protection and investment returns. Analysis of income from wealth management businesses included in other operatingincome Figures in HK$m 2004 2003 Investment income:- retail investment products and funds under management 1,502 996- securities/stockbroking 560 361- margin trading 66 55 2,128 1,412Insurance income:- life (including embedded value) 1,041 851- general and others 269 282 1,310 1,133Total 3,438 2,545 Income from wealth management grew strongly by 35.1 per cent to HK$3,438million, representing 54.0 per cent of total other operating income, boosted by50.7 per cent growth in investment services income and 22.3 per cent growth inlife insurance income. Income from retail investment products and funds under management increased byHK$506 million, or 50.8 per cent, reflecting the bank's successful productstrategy of structuring products to meet specific customer investment needs.This resulted in an increase of 29.8 per cent in the sales of investment fundsand structured products, including capital guaranteed funds, unit trust fundsand structured instruments linked to the foreign exchange, equity and interestrate markets. Of particular note was the expansion of the Hang Seng series of investment fundswhich added 29 funds structured to capture growth potential in the global, Asia,Hong Kong and mainland China equities markets, as well as the commodity andproperty markets. Private banking business continued to expand in terms ofcustomer base, product range and investment portfolio. Total funds undermanagement, including discretionary and advisory, grew by HK$32.1 billion, or55.4 per cent, compared with the end of last year. Income from stockbroking and related securities services rose by 55.1 per centcompared with last year, reflecting the growth in stock market activities.Riding on the buoyant stock market and large IPO issues, promotional campaignswere launched to grow securities accounts and boost trading turnover. The growth momentum of the life insurance business continued, furtherpenetrating the bank's large customer base. The launch of new products providingenhanced protection and investment benefits, together with targeted marketingcampaigns, boosted annualised premium growth by 43.5 per cent. Underwritingprofits (including embedded value) grew 22.3 per cent. General insurance income,however, fell by 4.6 per cent due to higher claims for certain types ofinsurance. Operating expenses Figures in HK$m 2004 2003 Staff costs:- salaries and other costs 2,018 1,860- retirement benefit costs 169 183 2,187 2,043Depreciation 317 329Premises and equipment:- rental expenses 178 178- other 677 629 855 807Other operating expenses 864 723 4,223 3,902 Cost:income ratio 26.3% 25.4% Staff numbers by region^ 2004 2003 Hong Kong 7,229 7,076Mainland and others 313 204Total 7,542 7,280 ^Full-time equivalent Operating expenses increased by HK$321 million, or 8.2 per cent, to HK$4,223million. Staff costs increased by HK$144 million, or 7.0 per cent, mainly due tothe increase in average headcount number and the provision for performance basedstaff bonuses. Depreciation reduced by HK$12 million, or 3.6 per cent, whilepremises and equipment expenses rose by HK$48 million, or 5.9 per cent, mainlydue to the increase in IT expenditure. Other operating expenses rose by HK$141million, or 19.5 per cent, mainly in marketing expenditure to support theincreased focus on the sale of personal investment products and card services,and processing costs as further activities were outsourced to Group servicecentres in Guangzhou and Shanghai. Full-time equivalent staff (FTEs) increased by 262 in 2004, mainly to supportthe expansion on the Mainland where one new sub-branch was opened in Shanghaiduring the year and where new licences were obtained to conduct renminbibusiness in the Shenzhen and Fuzhou branches. Staff increases were also noted inpersonal financial services, where 80 financial planning managers were added aspart of the strategy to develop customer structured solutions. During the year,further back office processes, including cards, phone banking and trade financewith a total 129 FTEs were migrated to Group service centres. The cost:income ratio in 2004 was 26.3 per cent (25.4 per cent in 2003). Provisions for bad and doubtful debts Figures in HK$m 2004 2003 Net charge/(release) for bad and doubtful debtsAdvances to customersSpecific provisions:- new provisions 464 1,167- releases (357) (315)- recoveries (109) (54) (2) 798General provisions (812) (6)Net (release)/charge to profit and loss account (814) 792 Provisions for bad and doubtful debts showed a net release of HK$814 millioncompared with a net charge of HK$792 million for last year. Specific provisionsshowed a net release of HK$2 million against a net charge of HK$798 million forthe previous year. This was the combined effect of the reduction of HK$703million, or 60.2 per cent, in new and additional provisions and an increase ofHK$97 million, or 26.3 per cent, in releases and recoveries. Credit card lossesreduced significantly, as bankruptcy and unemployment rates continued to fall.There was a net release of mortgage provisions, reflecting lower delinquencylevels, reduced negative equity and larger recoveries from disposal ofrepossessed properties. This reflected the strong rally in property prices andimprovement in debt servicing capability in an improving economic environment.Corporate accounts also showed a net release as new and additional provisionsreduced significantly, following the improvement in the financial position ofcorporate customers. A total of HK$812 million was released from generalprovisions during the year in light of historical loss experience and theimproving credit environment. Profit on tangible fixed assets and long-term investments Figures in HK$m 2004 2003 Profit on disposal of long-term equity investments- realisation of amounts previously recognised in revaluation reserves at 1 January 371 418- gains/(losses) arising in current year 35 (8) 406 410 Profit less loss on disposal of held-to-maturity debt securities (4) 48Profit less loss on disposal of tangible fixed assets 30 3 432 461 Profit on disposal of tangible fixed assets and long-term investments fell byHK$29 million, or 6.3 per cent, to HK$432 million, being the net result of thelower profit on disposal of debt securities and equities, and the increase inprofit on disposal of investment properties. Taxation Taxation in the consolidated profit and loss account represents: Figures in HK$m 2004 2003 Current tax - provision for Hong Kong profits taxTax for the year 1,534 1,443Over-provision in respect of prior years (12) (39) 1,522 1,404Current tax - taxation outside Hong KongTax for the year 7 4Over-provision in respect of prior years - (14) 7 (10)Deferred taxOrigination and reversal of temporary differences 179 70Effect of increase in tax rate on deferred tax balances at 1 January - (9)Benefit of previously unrecognised tax losses now recognised - (36) 179 25Share of associated companies' taxation 56 4Total charge for taxation 1,764 1,423 Effective tax rate 13.2 12.8 The current tax provision is based on the estimated assessable profit in 2004,and is determined for the bank and its subsidiaries operating in the Hong KongSAR using the Hong Kong profits tax rate of 17.5 per cent (17.5 per cent for2003). For subsidiaries and branches operating in other jurisdictions, theappropriate tax rates prevailing in the countries in which they operate areused. Deferred tax is calculated at the tax rates that are expected to apply in theyear when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the profit and loss account, except when it relates toitems charged or credited directly to reserves, in which case the deferred taxis also dealt with in the reserves. The carrying amount of deferred tax assets/liabilities is reviewed at each balance sheet date and is reduced to the extentthat it is no longer probable that sufficient taxable profit will be availableto allow the related tax benefit to be utilised. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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