Hang Seng Bank 1H 2009 Results

3rd Aug 2009 09:18



HANG SENG BANK LIMITED

2009 INTERIM RESULTS - HIGHLIGHTS

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

 

Within this document, the Hong Kong Special Administrative Region of the People's Republic of China has been referred to as 'Hong Kong'.

 

Comment by Raymond Ch'ien, Chairman 

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

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

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

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

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

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

Financial Performance

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

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

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

Net operating income before loan impairment charges and other credit risk provisions fell by 16.2 per cent to HK$10,576 million. Further emphasis on cost control saw us achieve a 3.2 per cent reduction in operating expenses to HK$3,215 million. Our cost efficiency ratio was 30.4 per cent.

 

Return on average shareholders' funds was 25.1 per cent, compared with 32.8 per cent and 18.7 per cent for the first and second halves of 2008 respectively. Return on average total assets was 1.7 per cent - down 0.7 percentage points compared with the first half of last year but up 0.4 percentage points on the second half.

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

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

Outlook

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

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

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

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

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

 

Review by Margaret Leung, Vice-Chairman and Chief Executive 

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

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

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

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

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

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

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

Customer Groups

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

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

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

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

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

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

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

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

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

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

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

Commercial Banking's profit before tax was down 36.6 per cent at HK$1,080 million, due mainly to higher loan impairment charges in the difficult economic environment. With continued vigilance in risk management, asset quality overall remained within our expectations. Much improved market conditions in the first half of this year led to a 66.4 per cent reduction in loan impairment charges compared with the second half of 2008, reflected in the 40.8 per cent increase in profit before tax compared with the second half of last year.

 

Corporate Banking recorded an operating profit excluding loan impairment charges of HK$517 million - a 41.6 per cent increase compared with the first half of 2008 and a 14.9 per cent increase compared with the second half. At HK$449 million, profit before tax was up 23.0 per cent and 60.4 per cent compared with the first and second halves of last year respectively.

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

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

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

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

Mainland Business

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

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

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

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

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

We continued to work with Industrial Bank to good effect. Our dual-branded credit card is now one of the favoured cards on the Mainland among younger generations and we are stepping up collaboration in areas such as wealth management and trade services.

 

Our cooperation with new strategic partner Yantai Bank Co., Ltd moved forward with the launch of its updated corporate image and tagline. 

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

Looking Ahead

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

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

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

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

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

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

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

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

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

 

Results summary

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

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

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

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

- Trading income improved by HK$276 million, or 36.4 per cent, to HK$1,035 million. Foreign exchange income registered significant growth of HK$395 million, or 73.8 per cent, attributable partly to increased trading net interest income from funding swaps and the continued strong customer demand for foreign exchanged-linked structured products. The rise was also driven by the reduced losses on the revaluation of certain US dollar capital funds - maintained in the bank's mainland subsidiary bank and subject to regulatory controls - against the renminbi. Securities, derivatives and other trading income dropped by HK$119 million, or 53.1 per cent, resulting from the shrinking demand for equity-linked investment products.

 

- Income from insurance business, including net earned insurance premiums, net interest income, net fee income and net income from financial instruments designated at fair value, the change in present value of in-force business, and after deducting net insurance claims incurred and movement in policyholders' liabilities, grew by HK$242 million, or 24.0 per cent, to HK$1,251 million. Life insurance business was ranked No. 2 in Hong Kong in terms of direct new business, with a market share of 16.3 per cent for the first quarter of 2009. To cater for the increase in customer concerns about health issues, more emphasis was placed on products offering greater protection and medical coverage. Net interest income and fee income from life insurance business grew by 58.2 per cent, attributable mainly to the increase in the size of the investment portfolio. Investment returns on life insurance funds also improved significantly from a loss of HK$1,030 million in the first half of 2008 to a loss of HK$133 million in the first half of 2009. 

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

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

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

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

a 77.6 per cent (or HK$191 million) fall in gains less losses from financial investments and fixed assets;

a 73.8 per cent (or HK$169 million) decrease in net surplus on property revaluation; and

a 19.1 per cent (or HK$180 million) drop in share of profits from associates, mainly Industrial Bank Co., Ltd. ('Industrial Bank') and a property investment associated company.

Consolidated financial positions and key ratios

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

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

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

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

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

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

Dividends

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

 

Customer group performance

	Personal										Total			Inter-
	Financial	Commercial		Corporate							Reportable	segment
Figures in HK$m	Services		Banking		Banking		Treasury		Other		Segment	elimination				Total
Half-year ended
30 June 2009
Net interest income	4,015		987		583		1,353		337		7,275		__			7,275
Net fee income/(expense)	1,294		524		79		(19	)	48		1,926		__			1,926
Trading income/(loss)	317		115		10		616		(23	)	1,035		__			1,035
Net loss from financial
instruments designated at
fair value	(170	)	__		__		(9	)	(16	)	(195	)	__			(195	)
Dividend income	1		__		__		__		4		5		__			5
Net earned insurance premiums	6,549		108		1		__		__		6,658		__			6,658
Other operating income	264		15		1		__		307		587		(237		)	350
Total operating income	12,270		1,749		674		1,941		657		17,291		(237		)	17,054
Net insurance claims
incurred and movement in
policyholders' liabilities	(6,413	)	(65	)	__		__		__		(6,478	)	__			(6,478	)
Net operating income
before loan impairment
charges and other credit
risk provisions	5,857		1,684		674		1,941		657		10,813		(237		)	10,576
Loan impairment charges
and other credit risk provisions	(274	)	(263	)	(82	)	(2	)	__		(621	)	__			(621	)
Net operating income	5,583		1,421		592		1,939		657		10,192		(237		)	9,955
Total operating expenses ^	(2,278	)	(733	)	(157	)	(137	)	(147	)	(3,452	)	237			(3,215	)
Operating profit	3,305		688		435		1,802		510		6,740		__			6,740
Gains less losses from
financial investments and fixed assets	96		53		14		(95	)	(13	)	55		__			55
Net surplus on property
revaluation	__		__		__		__		60		60		__			60
Share of profits from associates	66		339		__		310		48		763		__			763
Profit before tax	3,467		1,080		449		2,017		605		7,618		__			7,618
Share of profit before tax	45.5	%	14.2	%	5.9	%	26.5	%	7.9	%	100.0	%	__			100.0	%
Operating profit excluding
loan impairment charges
and other credit risk provisions	3,579		951		517		1,804		510		7,361		__			7,361
^ Depreciation/amortisation
included in total operating
expenses	(82	)	(15	)	(4	)	(2	)	(162	)	(265	)	__			(265	)
At 30 June 2009
Total assets	218,251		84,180		90,115		366,245		31,330		790,121		__			790,121
Total liabilities	542,284		106,419		32,593		27,141		28,423		736,860		__			736,860
Investments in associates	683		3,608		__		2,666		2,372		9,329		__			9,329

 

	Personal										Total			Inter-
	Financial	Commercial		Corporate							Reportable	segment
Figures in HK$m	Services		Banking		Banking		Treasury		Other		Segment	elimination				Total
Half-year ended
30 June 2008
Net interest income	4,295		1,211		442		1,536		768		8,252		__			8,252
Net fee income/(expense)	2,380		547		61		(17	)	56		3,027		__			3,027
Trading income/(loss)	485		125		8		294		(153	)	759		__			759
Net (loss)/income from
financial instruments
designated at fair value	(1,029	)	(1	)	__		6		__		(1,024	)	__			(1,024	)
Dividend income	17		5		__		__		32		54		__			54
Net earned insurance premiums	6,832		96		2		__		__		6,930		__			6,930
Other operating income/(loss)	435		24		__		(1	)	300		758		(233		)	525
Total operating income	13,415		2,007		513		1,818		1,003		18,756		(233		)	18,523
Net insurance claims
incurred and movement
in policyholders' liabilities	(5,843	)	(59	)	(1	)	__		__		(5,903	)	__			(5,903	)
Net operating income
before loan impairment
charges and other credit
risk Provisions	7,572		1,948		512		1,818		1,003		12,853		(233		)	12,620
Loan impairment charges
and other credit risk provisions	(86	)	(71	)	(31	)	__		__		(188	)	__			(188	)
Net operating income	7,486		1,877		481		1,818		1,003		12,665		(233		)	12,432
Total operating expenses ^	(2,431	)	(729	)	(147	)	(120	)	(126	)	(3,553	)	233			(3,320	)
Operating profit	5,055		1,148		334		1,698		877		9,112		__			9,112
Gains less losses from
financial investments and  fixed assets	175		96		31		__		(56	)	246		__			246
Net surplus on property
revaluation	__		__		__		__		229		229		__			229
Share of profits from  associates	54		459		__		285		145		943		__			943
Profit before tax	5,284		1,703		365		1,983		1,195		10,530		__			10,530
Share of profit before tax	50.2	%	16.2	%	3.5	%	18.8	%	11.3	%	100.0	%	__			100.0	%
Operating profit excluding
loan impairment charges
and other credit risk provisions	5,141		1,219		365		1,698		877		9,300		__			9,300
^ Depreciation/amortisation
included in total operating
expenses	(64	)	(11	)	(3	)	(2	)	(148	)	(228	)	__			(228	)
At 30 June 2008
Total assets	210,593		93,416		85,595		320,004		38,308		747,916		__			747,916
Total liabilities	473,224		96,559		46,288		37,937		38,300		692,308		__			692,308
Investments in associates	379		2,412		__		1,923		2,435		7,149		__			7,149

	Personal										Total			Inter-
	Financial	Commercial		Corporate							Reportable	segment
Figures in HK$m	Services		Banking		Banking		Treasury		Other		Segment	elimination				Total
Half-year ended
31 December 2008
Net interest income	4,405		1,200		546		1,146		683		7,980		__			7,980
Net fee income/(expense)	1,316		519		66		(16	)	57		1,942		__			1,942
Trading income/(loss)	258		120		10		347		(39	)	696		__			696
Net (loss)/income from
financial instruments
designated at fair value	(14	)	(1	)	__		(16	)	24		(7	)	__			(7	)
Dividend income	8		5		__		__		15		28		__			28
Net earned insurance premiums	5,303		117		1		__		__		5,421		__			5,421
Other operating income	4		30		2		5		371		412		(236		)	176
Total operating income	11,280		1,990		625		1,466		1,111		16,472		(236		)	16,236
Net insurance claims
incurred and movement
in policyholders' liabilities	(5,506	)	(54	)	__		__		__		(5,560	)	__			(5,560	)
Net operating income
before loan impairment
charges and other credit
risk Provisions	5,774		1,936		625		1,466		1,111		10,912		(236		)	10,676
Loan impairment charges
and other credit risk provisions	(261	)	(782	)	(170	)	(1,375	)	__		(2,588	)	__			(2,588	)
Net operating income	5,513		1,154		455		91		1,111		8,324		(236		)	8,088
Total operating expenses ^	(2,448	)	(801	)	(175	)	(127	)	(160	)	(3,711	)	236			(3,475	)
Operating profit/(loss)	3,065		353		280		(36	)	951		4,613		__			4,613
Gains less losses from
financial investments and fixed assets	(19	)	(11	)	__		(84	)	135		21		__			21
Net surplus/(deficit) on
property revaluation	__		__		__		__		(150	)	(150	)	__			(150	)
Share of profits/(losses) from associates	80		425		__		416		(57	)	864		__			864
Profit before tax	3,126		767		280		296		879		5,348		__			5,348
Share of profit before tax	58.5	%	14.4	%	5.2	%	5.5	%	16.4	%	100.0	%	__			100.0	%
Operating profit excluding
loan impairment charges
and other credit risk provisions	3,326		1,135		450		1,339		951		7,201		__			7,201
^ Depreciation/amortisation
included in total operating
expenses	(76	)	(13	)	(4	)	(1	)	(170	)	(264	)	__			(264	)
At 31 December 2008
Total assets	211,092		85,791		93,570		345,920		25,795		762,168		__			762,168
Total liabilities	508,596		96,905		41,981		34,575		28,485		710,542		__			710,542
Investments in associates	501		3,194		__		2,784		2,391		8,870		__			8,870

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Throughout the first half of 2009, CIB supported customers with new or renewed facilities while adjusting pricing in line with the credit environment. Net interest income from advances grew by 66.2 per cent.

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

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

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

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

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

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

 

 

Mainland business

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

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

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

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

The bank remains firmly committed to developing its mainland business, both through its own presence and long-term strategic relationships within strategic mainland partners. The bank's newest mainland associate, Yantai Bank Co., Ltd, began to contribute profit during the first half of 2009. Including the bank's share of profit from Industrial Bank Co., Ltd, mainland business contributed 11.7 per cent of total profit before tax, compared with 9.4 per cent for the first half of 2008.

  

Contents

 

The financial information in this news release is based on the unaudited consolidated financial statements of Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the group') for the six months ended 30 June 2009.

1 Highlights of Results

2 Chairman's Comment

4 Chief Executive's Review

9 Results Summary

13 Customer Group Performance

19 Mainland Business

20 Contents

22 Consolidated Income Statement

23 Consolidated Statement of Comprehensive Income

24 Consolidated Statement of Financial Position

25 Consolidated Statement of Changes in Equity

27 Consolidated Cash Flow Statement

28 Financial Review

28 Net interest income

30 Net fee income

31 Trading income

32 Net loss from financial instruments designated at fair value

32 Other operating income

33 Analysis of income from wealth management business

35 Loan impairment charges and other credit risk provisions

36 Operating expenses

37 Gains less losses from financial investments and fixed assets

38 Tax expense

39 Earnings per share

39 Dividends per share

39 Segmental analysis

42 Cash and balances with banks and other financial institutions

42 Placings with and advances to banks and other financial institutions

43 Trading assets

44 Financial assets designated at fair value

45 Advances to customers

46 Loan impairment allowances against advances to customers

47 Impaired advances and allowances

48 Overdue advances

49 Rescheduled advances

49 Segmental analysis of advances to customers by geographical area

50 Gross advances to customers by industry sector

52 Financial investments

54 Investments in associates

54 Other assets

54 Current, savings and other deposit accounts

55 Certificates of deposit and other debt securities in issue

55 Trading liabilities

56 Other liabilities

57 Subordinated liabilities

58 Shareholders' funds

59 Capital resources management

60 Liquidity ratio

61 Reconciliation of cash flow statement

62 Contingent liabilities, commitments and derivatives

66 Statutory accounts and accounting policies

67 Comparative figures

67 Property revaluation

67 Foreign currency positions

68 Ultimate holding company

68 Register of shareholders

68 Proposed timetable for the remaining 2009 quarterly dividends

69 Code on corporate governance practices

69 Board of directors

69 News release

  

Consolidated Income Statement (unaudited)

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Interest income		8,775			13,665			12,507
Interest expense		(1,500	)		(5,413	)		(4,527	)
Net interest income		7,275			8,252			7,980
Fee income		2,327			3,368			2,336
Fee expense		(401	)		(341	)		(394	)
Net fee income		1,926			3,027			1,942
Trading income		1,035			759			696
Net loss from financial
instruments designated at fair value		(195	)		(1,024	)		(7	)
Dividend income		5			54			28
Net earned insurance premiums		6,658			6,930			5,421
Other operating income		350			525			176
Total operating income		17,054			18,523			16,236
Net insurance claims incurred and
movement in policyholders' liabilities		(6,478	)		(5,903	)		(5,560	)
Net operating income before loan
impairment charges and
other credit risk provisions		10,576			12,620			10,676
Loan impairment charges and
other credit risk provisions		(621	)		(188	)		(2,588	)
Net operating income		9,955			12,432			8,088
Employee compensation and benefits		(1,669	)		(1,736	)		(1,716	)
General and administrative expenses		(1,281	)		(1,356	)		(1,495	)
Depreciation of premises, plant
and equipment		(225	)		(201	)		(231	)
Amortisation of intangible assets		(40	)		(27	)		(33	)
Total operating expenses		(3,215	)		(3,320	)		(3,475	)
Operating profit		6,740			9,112			4,613
Gains less losses from financial investments
and fixed assets		55			246			21
Net surplus/(deficit) on property revaluation		60			229			(150	)
Share of profits from associates		763			943			864
Profit before tax		7,618			10,530			5,348
Tax expense		(1,167	)		(1,466	)		(313	)
Profit for the period		6,451			9,064			5,035
Profit attributable to shareholders		6,451			9,064			5,035
Earnings per share (in HK$)		3.37			4.74			2.63

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

The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as 'Net trading income' and arising from financial instruments designated at fair value through profit and loss as 'Net income from financial instruments designated at fair value' (other than for debt securities in issue and subordinated liabilities, together with derivatives managed in conjunction with them).

The table below presents the interest income and interest expense of Hang Seng, as included within the HSBC Group accounts:

		Half-year ended			Half-year ended			Half-year ended
Figures in HK$m		30 June 2009			30 June 2008			31 December 2008
Interest income		8,545			13,376			12,223
Interest expense		(1,124	)		(4,679	)		(3,687	)
Net interest income		7,421			8,697			8,536
Net interest income and expense reported as 'Net trading income'		(196	)		(551	)		(660	)
Net interest income and expense reported as 'Net income
from financial instruments designated at fair value'		50			106			104

 

Consolidated Statement of Comprehensive Income (unaudited)

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m	2009			2008			2008
Profit for the period	6,451			9,064			5,035
Other comprehensive income
Premises:
- unrealised surplus/(deficit) on
revaluation of premises	244			559			(388	)
- deferred taxes	(40	)		(90	)		66
Available-for-sale investments reserve:
- fair value changes taken to equity:
-- on debt securities	1,934			(1,448	)		(2,179	)
-- on equity shares	28			(1,095	)		(842	)
- fair value changes transferred
from/(to) income statement:
-- on impairment	4			67			488
-- on hedged items	114			(22	)		(474	)
-- on disposal	(64	)		(369	)		(194	)
- share of changes in equity of associates
-- fair value changes	73			(56	)		(7	)
- deferred taxes	(270	)		170			247
Cash flow hedging reserve:
- fair value changes taken to equity	194			49			821
- fair value changes transferred to
income statement	(511	)		(234	)		(142	)
- deferred taxes	48			30			(106	)
Defined benefit plans:
- Actuarial gains/(losses) on defined
benefit plans	1,520			(506	)		(2,510	)
- deferred taxes	(251	)		83			414
Exchange differences on translation of:
- financial statements of overseas
branches, subsidiaries and associates	(12	)		677			(55	)
- others	5			5			__
Effect of decrease in tax rate on
deferred tax balance at 1 January 2008	__			30			__
Other comprehensive income for the
period, net of tax	3,016			(2,150	)		(4,861	)
Total comprehensive income
for the period	9,467			6,914			174
Total comprehensive income
for the period attributable to
shareholders	9,467			6,914			174
	9,467			6,914			174

 

Consolidated Statement of Financial Position (unaudited)

 

		At 30 June			At 30 June			At 31 December
Figures in HK$m			2009			2008			2008
ASSETS
Cash and balances with banks and
other financial institutions			51,065			19,755			24,822
Placings with and advances to banks and
other financial institutions			55,223			136,534			69,579
Trading assets			84,517			13,689			108,389
Financial assets designated at fair value			6,025			12,607			7,798
Derivative financial instruments			4,927			6,043			7,104
Advances to customers			325,371			337,157			329,121
Financial investments			225,338			184,654			181,159
Investments in associates			9,329			7,149			8,870
Investment properties			2,716			2,776			2,593
Premises, plant and equipment			6,887			7,487			7,090
Interest in leasehold land held for own use
under operating lease			543			558			551
Intangible assets			3,621			3,297			3,385
Other assets			14,534			16,205			11,506
Deferred tax assets			25			5			201
Total assets			790,121			747,916			762,168
LIABILITIES AND EQUITY
Liabilities
Current, savings and other deposit accounts			591,267			535,148			562,183
Deposits from banks			4,603			19,247			11,556
Trading liabilities			53,387			53,767			48,282
Financial liabilities designated at fair value			1,452			1,431			1,407
Derivative financial instruments			8,778			8,882			14,945
Certificates of deposit and other
debt securities in issue			2,294			4,026			2,772
Other liabilities			14,328			17,629			15,448
Liabilities to customers under
insurance contracts			49,479			38,737			43,835
Current tax liabilities			739			2,902			94
Deferred tax liabilities			1,221			1,184			711
Subordinated liabilities			9,312			9,355			9,309
Total liabilities			736,860			692,308			710,542
Equity
Share capital			9,559			9,559			9,559
Retained profits			36,082			37,358			32,518
Other reserves			5,517			6,588			3,813
Proposed dividends			2,103			2,103			5,736
Shareholders' funds			53,261			55,608			51,626
Total equity and liabilities			790,121			747,916			762,168

Consolidated Statement of Changes in Equity (unaudited) 

 

 

		Half­year to		Half-year to		Half­year to
		30 June  2009		30 June  2008		31 December 2008
Figures in HK$m
Share capital
At beginning and end of period		9,559		9,559		9,559
Retained profits (including proposed dividends)
At beginning of period		38,254		38,609		39,461
Dividends to shareholders
- Dividends approved in respect of the previous year		(5,736	)	(5,736	)	__
- Dividends declared in respect of the current period		(2,103	)	(2,103	)	(4,206	)
Transfer		45		59		62
Total comprehensive income  for the period		7,725		8,632		2,937
		38,185		39,461		38,254
Other reserves
Premises revaluation reserve
At beginning of period		3,711		3,639		4,094
Transfer		(45	)	(59	)	(62	)
Total comprehensive income  for the period		204		514		(321	)
		3,870		4,094		3,711
Available­for­sale investment reserve
At beginning of period		(3,823	)	1,892		(862	)
Total comprehensive income  for the period		1,819		(2,754	)	(2,961	)
		(2,004	)	(862	)	(3,823	)
Cash flow hedging reserve
At beginning of period		562		144		(11	)
Total comprehensive income  for the period		(269	)	(155	)	573
		293		(11	)	562
Foreign exchange reserve
At beginning of period		1,379		757		1,434
Total comprehensive income  for the period		(12	)	677		(55	)
		1,367		1,434		1,379

 

		Half­year to		Half-year to		Half­year to
		30 June  2009		30 June  2008		31 December 2008
Figures in HK$m
Other reserve
At beginning of period		1,984		1,856		1,933
Cost of share-based payment arrangements		7		77		50
Total comprehensive income  for the period		__		__		1
		1,991		1,933		1,984
Total equity
At beginning of period		51,626		56,456		55,608
Dividends to shareholders		(7,839	)	(7,839	)	(4,206	)
Cost of share-based payment arrangements		7		77		50
Total comprehensive income  for the period		9,467		6,914		174
		53,261		55,608		51,626

Consolidated Cash Flow Statement (unaudited)

 

	Half-year ended			Half-year ended
		30 June			30 June
Figures in HK$m		2009			2008
Net cash inflow/(outflow) from operating activities		102,831			(44,918	)
Cash flows from investing activities
Dividends received from associates		358			258
Purchase of available-for-sale investments		(35,448	)		(27,368	)
Purchase of held-to-maturity debt securities		(130	)		(134	)
Proceeds from sale or redemption of
available-for-sale investments		26,397			84,669
Proceeds from redemption of held-to-maturity
debt securities		132			71
Purchase of fixed assets and intangible assets		(157	)		(367	)
Proceeds from sale of fixed assets and asset held for  sale		__			233
Interest received from available-for-sale investments		2,142			5,218
Dividends received from available-for-sale investments		4			54
Net cash (outflow)/inflow from investing activities		(6,702	)		62,634
Cash flows from financing activities
Dividends paid		(7,839	)		(7,839	)
Interest paid for subordinated liabilities		(86	)		(205	)
Net cash outflow from financing activities		(7,925	)		(8,044	)
Increase in cash and cash equivalents		88,204			9,672
Cash and cash equivalents at 1 January		76,116			113,474
Effect of foreign exchange rate changes		1,895			988
Cash and cash equivalents at 30 June		166,215			124,134

Financial Review

 

Net interest income

Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m	2009			2008			2008
Net interest income/(expense) arising from:
- financial assets and liabilities that are
not at fair value through profit and loss	7,431			8,717			8,560
- trading assets and liabilities	(196	)		(551	)		(660	)
- financial instruments designated
at fair value	40			86			80
	7,275			8,252			7,980
Average interest-earning assets	711,253			682,728			693,716
Net interest spread	1.99	%		2.20	%		2.10	%
Net interest margin	2.06	%		2.43	%		2.29	%

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

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

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

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

 

The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as 'Net trading income' and arising from financial instruments designated at fair value through profit and loss is reported as 'Net income from financial instruments designated at fair value' (other than for debt securities in issue and subordinated liabilities, together with derivatives managed in conjunction with them).

The table below presents the net interest income of Hang Seng, as included within the HSBC Group accounts:

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Net interest income		7,421			8,697			8,536
Average interest-earning assets		653,655			664,892			664,610
Net interest spread		2.23	%		2.33	%		2.34	%
Net interest margin		2.29	%		2.63	%		2.55	%

 

 

Net fee income

Half-year ended					Half-year ended				Half-year ended
	30 June				30 June				31 December
Figures in HK$m		2009				2008				2008
- Stockbroking and related services		689				808				551
- Retail investment funds		226				773				311
- Structured investment products		5				297				44
- Insurance		103				54				44
- Account services		143				141				141
- Private banking		46				177				57
- Remittances		101				107				105
- Cards		659				623				681
- Credit facilities		67				60				72
- Trade services		173				199				210
- Other		115				129				120
Fee income		2,327				3,368				2,336
Fee expense		(401)				(341	)			(394	)
		1,926				3,027				1,942

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

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

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

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

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

 

Trading income

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Trading income:
- foreign exchange		930			535			849
- securities, derivatives and
other trading activities		105			224			(153	)
		1,035			759			696

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

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

 

Net loss from financial instruments designated at fair value

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Net loss on assets designated at fair value which back insurance and investment contracts		(170	)		(1,030	)		(15	)
Net change in fair value of  other financial instruments designated at fair value		(25	)		6			8
		(195	)		(1,024	)		(7	)

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

 

 

Other operating income

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Rental income from
investment properties		73			66			72
Movement in present value
of in-force long-term
insurance business		202			363			19
Other		75			96			85
		350			525			176

Analysis of income from wealth management business

Half-year ended				Half-year ended					Half-year ended
	30 June					30 June				31 December
Figures in HK$m			2009				2008				2008
Investment income:
- retail investment funds			226				773				311
- structured investment products^			204				689				193
- private banking^^			58				187				61
- securities broking and related services			689				808				551
- margin trading and others			76				52				67
			1,253				2,509				1,183
Insurance income:
- life insurance			1,089				862				521
- general insurance and others			162				147				167
			1,251				1,009				688
Total			2,504				3,518				1,871

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

^^ Income from private banking includes income reported under net fee income on investment services and profit generated from selling of structured investment products in issue, reported under trading income.

 

Wealth management business remained muted during the first half of 2009, recording a 28.8 per cent decline in income. To cater for changing customer demands in the turbulent financial markets environment, the group rapidly shifted its focus to highly defensive products including life insurance. This resulted in an encouraging growth of 24.0 per cent in insurance income which partly offset the 50.1 per cent decline in investment income. 

Income from retail investment funds and structured products has been adversely affected by the unfavourable investment climate and volatility in equity markets since the second half of 2008. The bank focused on offering a diverse variety of products with a focus on lower-risk yield enhancement but continuing investor caution saw investment funds turnover fall by 84.2 per cent and investment funds income decline by 70.8 per cent year on year. Structured investment products income dropped by 70.4 per cent compared with same period last year. 

 

Following the stock market rebound in the second quarter of 2009, the bank's securities business gained momentum and grew its market share. Securities broking and related services income recorded a rebound as compared to the second half of 2008 - rising by 25.0 per cent but was down 14.7 per cent year on year. Securities turnover declined by 5.3 per cent compared with the same period last year. The bank also captured additional sales opportunities via its recently opened Securities Select Customer Trading Centre.

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

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

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

Half-year ended			Half-year ended								Half-year ended
	30 June				30 June				31 December
Figures in HK$m		2009				2008						2008
Life insurance:
- net interest income and fee income		951				601						799
- investment returns on life insurance
funds		(133	)			(1,030	)					(35	)
- net earned insurance premiums		6,502				6,774						5,249
- claims, benefits and surrenders paid		(948	)			(300	)					(376	)
- movement in policyholders' liabilities^		(5,496	)			(5,555	)					(5,148	)
- reinsurers' share of claims incurred and
movement in policyholders' liabilities		11				9						13
- movement in present value of in-force
long-term insurance business		202				363						19
		1,089				862						521
General insurance and others		162				147						167
Total		1,251				1,009						688

^ Including premium and investment reserves

Loan impairment charges and other credit risk provisions

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Loan impairment charges:
- individually assessed		(288	)		(56	)		(869	)
- collectively assessed		(333	)		(132	)		(344	)
		(621	)		(188	)		(1,213	)
Of which:
- new and additional		(709	)		(278	)		(1,245	)
- releases		61			60			6
- recoveries		27			30			26
		(621	)		(188	)		(1,213	)
Other credit risk provisions		-			-			(1,375	)
Loan impairment charges and other
credit risk provisions		(621	)		(188	)		(2,588	)

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

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

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

 

Operating expenses

	Half-year ended		Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Employee compensation and benefits:
- salaries and other costs		1,401			1,351			1,466
- performance-related pay		123			301			161
- retirement benefit costs		145			84			89
		1,669			1,736			1,716
General and administrative expenses:
- rental expenses		218			203			220
- other premises and equipment		442			422			504
- marketing and advertising expenses		174			242			274
- other operating expenses		447			489			497
		1,281			1,356			1,495
Depreciation of business premises
and equipment		225			201			231
Amortisation of intangible assets		40			27			33
		3,215			3,320			3,475
Cost efficiency ratio		30.4	%		26.3	%		32.5	%
	At 30 June			At 30 June		At 31 December
Staff numbers^ by region		2009			2008			2008
Hong Kong		7,972			8,240			8,256
Mainland		1,411			1,312			1,450
Others		55			58			58
Total		9,438			9,610			9,764

^ Full-time equivalent

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

Employee compensation and benefits decreased by HK$67 million, or 3.9 per cent. Salaries and other costs increased by 3.7 per cent, reflecting the increase in average headcount and other staff-related costs. Performance-related pay expenses declined substantially by 59.1 per cent while retirement benefit costs increased due to a reduction in the assumed investment return at the end of 2008. General and administrative expenses decreased by 5.5 per cent, attributable to close cost management in marketing and advertising, although this was partly offset by rising rental expenses and other premises and equipment costs. Rental expenses rose due to increased rents for branches in Hong Kong as well as new branches on the Mainland and the bank's large office premises in Kowloon Bay. Depreciation charges rose by 11.9 per cent, reflecting the acquisition of equipment, fixtures and fittings for the bank's Kowloon Bay office and Head Office in Central.

 

The group's number of full-time equivalent staff dropped by 326 compared with 2008 year-end - mainly from Hong Kong operations. The headcount number was closely monitored and gradually reduced through natural attrition. Headcount for mainland operations remained static when compared with last year-end.

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

Gains less losses from financial investments and fixed assets

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Net gains from disposal of
available-for-sale equity securities		159			369			277
Net losses from disposal of
available-for-sale debt securities		(95	)		__			(83	)
Impairment of available-for-sale
equity securities		(4	)		(118	)		(166	)
Gains less losses on disposal of
fixed assets		(5	)		(5	)		(7	)
		55			246			21

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

 

Tax expense

Taxation in the consolidated income statement represents:

	Half-year ended			Half-year ended			Half-year ended
	30 June			30 June			31 December
Figures in HK$m		2009			2008			2008
Current tax - provision for
Hong Kong profits tax
Tax for the period		977			1,447			720
Adjustment in respect of
prior periods		(3	)		(13	)		(337	)
Current tax - taxation  outside Hong Kong
Tax for the period		3			5			(26	)
Deferred tax
Origination and reversal of
temporary differences		190			75			(44	)
Effect of decrease in tax rate
on deferred tax balances
at 1 January 2008		__			(48	)		__
Total tax expenses		1,167			1,466			313

The current tax provision is based on the estimated assessable profit for the first half of 2009, and is determined for the bank and its subsidiaries operating in Hong Kong by using the Hong Kong profits tax rate of 16.5 per cent (same as 2008). For subsidiaries and branches operating in other jurisdictions, the appropriate tax rates prevailing in the relevant countries are used. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.

 

Earnings per share

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

Dividends per share

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

Segmental analysis 

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

Personal Financial Services provides banking (including deposits, credit cards, mortgages and other retail lending) and wealth management services (including private banking, investment and insurance) to personal customers. Commercial Banking manages middle market and smaller corporate relationships and specialises in trade-related financial services. Corporate Banking handles relationships with large corporate and institutional customers. Treasury engages in balance sheet management and proprietary trading. Treasury also manages the funding and liquidity positions of the group and other market risk positions arising from banking activities. 'Other' mainly represents management of shareholders' funds and investments in premises, investment properties and equity shares.

(a) Segment result

For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the customer groups by way of internal capital allocation and fund transfer-pricing mechanisms. Cost allocation is based on the direct costs incurred by the respective customer groups and apportionment of management overheads. Rental charges at market rates for usage of premises are reflected in other operating income for the 'Other' customer group and total operating expenses for the respective customer groups.

 

Profit before tax contributed by the customer groups for the periods stated is set out in the table below. More customer group analysis and discussions are set out in the 'Customer group performance' section on page 13.

	Personal																															Total
	Financial		Commercial					Corporate																				Reportable
Figures in HK$m	Services			Banking						Banking						Treasury								Other				Segment
Half-year ended 30 June 2009
Profit before tax	3,467			1,080						449						2,017								605							7,618
Share of profit before tax	45.5		%	14.2				%		5.9				%		26.5					%			7.9				%			100.0						%
Half-year ended 30 June 2008
Profit before tax	5,284				1,703					365						1,983							1,195							10,530
Share of profit before tax	50.2		%		16.2			%		3.5				%		18.8				%			11.3				%			100.0						%
Half-year ended 31 December 2008
Profit before tax	3,126				767					280						296							879							5,348
Share of profit before tax	58.5		%		14.4			%		5.2				%		5.5				%			16.4				%			100.0						%

 

(b) Geographic information

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

						Mainland
Figures in HK$m	Hong Kong		Americas			and other		Total
Half-year ended 30 June 2009
Income and expense
Total operating income		16,058		499		497		17,054
Profit before tax		6,391		449		778		7,618
At 30 June 2009
Total assets		680,589		60,265		49,267		790,121
Total liabilities		707,734		1,169		27,957		736,860
Contingent liabilities and commitments		193,094		__		15,786		208,880
Half-year ended 30 June 2008
Income and expense
Total operating income		16,789		1,296		438		18,523
Profit before tax		8,410		1,273		847		10,530
At 30 June 2008
Total assets		620,326		74,177		53,413		747,916
Total liabilities		658,663		3,453		30,192		692,308
Contingent liabilities and commitments		207,082		__		12,417		219,499
Half-year ended 31 December 2008
Income and expense
Total operating income		14,592		1,082		562		16,236
Profit before tax		4,424		498		426		5,348
At 31 December 2008
Total assets		656,411		55,365		50,392		762,168
Total liabilities		680,296		1,238		29,008		710,542
Contingent liabilities and commitments		196,778		__		13,464		210,242

  

Cash and balances with banks and other financial institutions

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Cash in hand		3,621			3,099			3,696
Balances with central banks		31,637			2,049			2,426
Balances with banks and
other financial institutions		15,807			14,607			18,700
		51,065			19,755			24,822

Placings with and advances to banks and other financial institutions 

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Placings with and advances to
banks and other financial institutions
maturing within one month		28,456			99,200			47,025
Placings with and advances to banks
and other financial institutions
maturing after one month		26,767			37,334			22,554
		55,223			136,534			69,579

 

Trading assets 

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Treasury bills		79,426			6,732			103,621
Other debt securities		4,340			5,413			4,750
Debt securities		83,766			12,145			108,371
Equity shares		1			6			__
Total trading securities		83,767			12,151			108,371
Other^		750			1,538			18
Total trading assets		84,517			13,689			108,389
Debt securities:
- listed in Hong Kong		2,872			4,454			3,631
- listed outside Hong Kong		153			431			269
		3,025			4,885			3,900
- unlisted		80,741			7,260			104,471
		83,766			12,145			108,371
Equity shares:
- listed in Hong Kong		1			6			__
Total trading securities		83,767			12,151			108,371
Debt securities:
Issued by public bodies:
- central governments and central  banks		83,168			11,049			107,428
- other public sector entities		373			379			378
		83,541			11,428			107,806
Issued by other bodies:
- banks and other financial institutions		80			401			306
- corporate entities		145			316			259
		225			717			565
		83,766			12,145			108,371
Equity shares:
Issued by corporate entities		1			6			__
Total trading securities		83,767			12,151			108,371

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

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

Financial assets designated at fair value

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Certificates of deposit		139			190			163
Other debt securities		5,481			9,813			7,273
Debt securities		5,620			10,003			7,436
Equity shares		405			2,604			362
		6,025			12,607			7,798
Debt securities:
- listed in Hong Kong		559			1,233			834
- listed outside Hong Kong		271			2,006			1,004
		830			3,239			1,838
- unlisted		4,790			6,764			5,598
		5,620			10,003			7,436
Equity shares:
- listed in Hong Kong		34			1,759			26
- listed outside Hong Kong		54			115			57
		88			1,874			83
- unlisted		317			730			279
		405			2,604			362
		6,025			12,607			7,798
Debt securities:
Issued by public bodies:
- central governments and central banks		556			2,298			924
- other public sector entities		409			623			564
		965			2,921			1,488
Issued by other bodies:
- banks and other financial institutions		4,441			5,589			5,317
- corporate entities		214			1,493			631
		4,655			7,082			5,948
		5,620			10,003			7,436
Equity shares:
Issued by corporate entities		405			2,604			362
		6,025			12,607			7,798

 

Advances to customers

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Gross advances to customers		327,731			338,202			331,164
Less:
Loan impairment allowances:
- individually assessed		(1,492	)		(415	)		(1,241	)
- collectively assessed		(868	)		(630	)		(802	)
		325,371			337,157			329,121
Included in advances to customers are:
- Trade bills		2,773			3,676			2,899
Less: loan impairment allowances		(39	)		(12	)		(30	)
		2,734			3,664			2,869

 

Loan impairment allowances against advances to customers

		Individually		Collectively
Figures in HK$m		assessed		assessed					Total
At 1 January 2009		1,241			802				2,043
Amounts written off		(29	)		(283		)		(312	)
Recoveries of advances
written off in previous years		9			18				27
New impairment allowances
charged to income statement		358			351				709
Impairment allowances released
to income statement		(70	)		(18		)		(88	)
Unwinding of discount of loan
impairment allowances
recognised as 'interest income'		(17	)		(2		)		(19	)
At 30 June 2009		1,492			868				2,360

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

	At 30 June			At 30 June			At 31 December
		2009			2008			2008
		%			%			%
Loan impairment allowances:
- individually assessed		0.46			0.12			0.37
- collectively assessed		0.26			0.19			0.24
Total loan impairment allowances		0.72			0.31			0.61

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

 

Impaired advances and allowances

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Gross impaired advances		3,742			1,391			3,404
Individually assessed allowances		(1,492	)		(415	)		(1,241	)
		2,250			976			2,163
Individually assessed allowances
as a percentage of
gross impaired advances		39.9	%		29.8	%		36.5	%
Gross impaired advances
as a percentage of gross
advances to customers		1.1	%		0.4	%		1.0	%

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

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

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
								(restated)
Gross individually assessed
impaired advances		3,650			1,300			3,297
Individually assessed allowances		(1,492	)		(415	)		(1,241	)
		2,158			885			2,056
Gross individually assessed
impaired advances
as a percentage of
gross advances to customers		1.1	%		0.4	%		1.0	%
Amount of collateral which
has been taken into account
in respect of individually assessed
impaired advances to customers		2,105			848			1,927

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

Overdue advances 

Advances to customers that are more than three months overdue and their expression as a percentage of gross advances to customers are as follows:

	At 30 June				At 30 June				At 31 December
			2009				2008				2008
	HK$m		%		HK$m		%		HK$m		%
Gross advances to   customers which have
been overdue with
respect to either principal
or interest for periods of:
- more than three months but not more than six
months	628		0.2		217		0.1		340		0.1
- more than six months but not more than one
year	830		0.3		164		__		419		0.1
- more than one year	500		0.1		336		0.1		311		0.1
	1,958		0.6		717		0.2		1,070		0.3

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

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

 

Rescheduled advances 

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

	At 30 June				At 30 June				At 31 December
			2009				2008				2008
	HK$m		%		HK$m		%		HK$m		%
Rescheduled advances
to customers	666		0.2		272		0.1		281		0.1

Rescheduled advances are those advances that have been rescheduled or renegotiated for reasons related to the borrower's financial difficulties. This will normally involve the granting of concessionary terms and resetting the overdue account to non-overdue status. A rescheduled advance will continue to be disclosed as such unless the debt has been performing in accordance with the rescheduled terms for a period of six to 12 months. Rescheduled advances that have been overdue for more than three months under the rescheduled terms are reported as overdue advances (page 48).

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

Segmental analysis of advances to customers by geographical area

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

 

Gross advances to customers by industry sector 

The analysis of gross advances to customers by industry sector based on categories and definitions used by the HKMA is as follows:

	At 30 June			At 30 June			At 31 December
		2009			2008			2008
Figures in HK$m
Gross advances to customers for
use in Hong Kong
Industrial, commercial and
financial sectors
Property development		22,865			20,658			25,314
Property investment		66,060			62,251			66,179
Financial concerns		2,130			2,468			3,146
Stockbrokers		2,736			313			526
Wholesale and retail trade		6,489			6,875			6,183
Manufacturing		11,350			13,767			12,828
Transport and transport equipment		8,031			8,837			8,400
Recreational activities		28			235			26
Information technology		1,265			1,051			1,075
Other		25,348			20,380			21,553
		146,302			136,835			145,230
Individuals
Advances for the purchase of flats under
the Government Home Ownership
Scheme, Private Sector Participation
Scheme and Tenants Purchase Scheme		15,740			17,934			16,739
Advances for the purchase of other
residential properties		91,656			94,792			89,669
Credit card advances		12,780			11,685			12,841
Other		10,992			13,698			11,892
		131,168			138,109			131,141
Total gross advances for
use in Hong Kong		277,470			274,944			276,371
Trade finance		18,878			25,206			19,039
Gross advances for
use outside Hong Kong		31,383			38,052			35,754
Gross advances to customers		327,731			338,202			331,164

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

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

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

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

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

Financial investments

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Available-for-sale at fair value:
- debt securities		180,413			156,464			144,520
- equity shares		295			2,987			434
Held-to-maturity debt securities
at amortised cost		44,630			25,203			36,205
		225,338			184,654			181,159
Fair value of held-to-maturity debt securities		44,823			24,720			39,315
Treasury bills		35,778			3,796			9,927
Certificates of deposit		9,469			21,694			12,871
Other debt securities		179,796			156,177			157,927
Debt securities		225,043			181,667			180,725
Equity shares		295			2,987			434
		225,338			184,654			181,159
Debt securities:
- listed in Hong Kong		5,526			5,084			5,604
- listed outside Hong Kong		65,791			60,382			67,018
		71,317			65,466			72,622
- unlisted		153,726			116,201			108,103
		225,043			181,667			180,725
Equity shares:
- listed in Hong Kong		48			2,273			37
- listed outside Hong Kong		64			128			68
		112			2,401			105
- unlisted		183			586			329
		295			2,987			434
		225,338			184,654			181,159
Fair value of listed financial investments		71,398			67,798			73,048
Debt securities:
Issued by public bodies:
- central governments and central banks		44,478			8,617			16,643
- other public sector entities		9,463			3,902			4,353
		53,941			12,519			20,996
Issued by other bodies:
- banks and other financial institutions		154,640			156,105			144,167
- corporate entities		16,462			13,043			15,562
		171,102			169,148			159,729
		225,043			181,667			180,725
Equity shares:
Issued by corporate entities		295			2,987			434
		225,338			184,654			181,159

Debt securities by rating agency designation

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
AAA		86,125			14,753			40,775
AA- to AA+		67,826			91,449			71,511
A- to A+		58,544			62,230			56,296
B+ to BBB+		7,978			9,058			7,572
B and lower		151			-			160
Unrated		4,419			4,177			4,411
		225,043			181,667			180,725

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

Available-for-sale investments may be sold in response to needs for liquidity or changes in the market environment, and are carried at fair value with the gains and losses from changes in fair value recognised through equity reserves. Held-to-maturity debt securities are stated at amortised cost. Where debt securities have been purchased at a premium or discount, the carrying value of the security is adjusted to reflect the effective interest rate of the debt security taking into account such premium or discount. 

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

 

Investments in associates

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Share of net assets		8,782			6,848			8,314
Intangibles		119			__			157
Goodwill		428			301			399
		9,329			7,149			8,870

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

Other assets

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Items in the course of collection
from other banks		7,059			6,856			4,028
Prepayments and accrued income		2,263			3,072			2,711
Assets held for sale
- Repossessed assets		59			99			136
- Other assets held for sale		254			62			16
Acceptances and endorsements		3,388			3,834			3,090
Retirement benefit assets		64			88			30
Other accounts		1,447			2,194			1,495
		14,534			16,205			11,506

 

Current, savings and other deposit accounts

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Current, savings and
other deposit accounts:
- as stated in consolidated statement of
financial position		591,267			535,148			562,183
- structured deposits reported as
trading liabilities		28,306			31,067			29,785
		619,573			566,215			591,968
By type:
- demand and current accounts		43,594			37,674			36,321
- savings accounts		380,090			259,058			294,556
- time and other deposits		195,889			269,483			261,091
		619,573			566,215			591,968

Certificates of deposit and other debt securities in issue

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Certificates of deposit and
other debt securities in issue:
- as stated in consolidated statement of
financial position		2,294			4,026			2,772
- structured certificates of deposit
and other debt securities in issue
reported as trading liabilities		7,329			9,867			9,716
		9,623			13,893			12,488
By type:
- certificates of deposit in issue		3,206			4,660			6,633
- other debt securities in issue		6,417			9,233			5,855
		9,623			13,893			12,488

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

Trading liabilities

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Structured certificates of deposit and
other debt securities in issue		7,329			9,867			9,716
Structured deposits		28,306			31,067			29,785
Short positions in securities and other		17,752			12,833			8,781
		53,387			53,767			48,282

 

Other liabilities

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Items in the course of transmission
to other banks		5,644			7,951			4,583
Accruals		2,106			2,775			2,924
Acceptances and endorsements		3,388			3,834			3,090
Retirement benefit liabilities		2,071			1,098			3,532
Other		1,119			1,971			1,319
		14,328			17,629			15,448

 

Subordinated liabilities

		At 30 June			At 30 June			At 31 December
Figures in HK$m			2009			2008			2008
Nominal value	Description
Amount owed to third parties
HK$1,500 million	Callable floating rate
	subordinated notes
	due June 2015		1,499			1,497			1,498
HK$1,000 million	4.125 per cent callable
	fixed rate subordinated
	notes due June 2015		1,017			979			994
US$450 million	Callable floating rate
	subordinated notes
	due July 2016		3,479			3,498			3,478
US$300 million	Callable floating rate
	subordinated notes
	due July 2017		2,319			2,332			2,318
Amount owed to HSBC Group undertakings
US$260 million	Callable floating rate
	subordinated loan debt
	due December 2015		2,015			2,028			2,015
			10,329			10,334			10,303
Representing:
- measured at amortised cost			9,312			9,355			9,309
- designated at fair value			1,017			979			994
			10,329			10,334			10,303

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

Shareholders' funds 

	At 30 June			At 30 June		At 31 December
Figures in HK$m		2009			2008			2008
Share capital		9,559			9,559			9,559
Retained profits		36,082			37,358			32,518
Premises revaluation reserve		3,870			4,094			3,711
Cash flow hedging reserve		293			(11	)		562
Available-for-sale investments reserve
- on debt securities		(2,191	)		(2,214	)		(4,137	)
- on equity securities		187			1,352			314
Capital redemption reserve		99			99			99
Other reserves		3,259			3,268			3,264
Total reserves		41,599			43,946			36,331
		51,158			53,505			45,890
Proposed dividends		2,103			2,103			5,736
Shareholders' funds		53,261			55,608			51,626
Return on average shareholders' funds		25.1	%		32.8	%		18.7	%

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

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

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

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

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

 

Capital resources management 

Analysis of capital base and risk-weighted assets

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2009			2008			2008
Capital base
Core capital:
- Share capital		9,559			9,559			9,559
- Retained profits		28,799			33,262			24,290
- Classified as regulatory reserve		(770	)		(1,061	)		(854	)
- Less: deductible of core capital		(547	)		(301	)		(557	)
- Less: 50 per cent of total
unconsolidated investments and
other deductions		(6,709	)		(6,430	)		(6,330	)
- Total core capital		30,332			35,029			26,108
Supplementary capital:
- Fair value gains on the revaluation
of property		3,608			3,750			3,465
- Fair value gains on the revaluation of available-for-sale
investment
and equity		612			507			649
- Collective impairment allowances		85			68			78
- Regulatory reserve		85			127			94
- Surplus provision		-			-			101
- Term subordinated debt		10,367			10,354			10,357
- Less: 50 per cent of total
unconsolidated investments and
other deductions		(6,709	)		(6,430	)		(6,330	)
- Total supplementary capital		8,048			8,376			8,414
Total capital base after deductions		38,380			43,405			34,522
Risk-weighted assets
- Credit risk		191,308			272,701			235,576
- Market risk		1,476			2,333			1,684
- Operational risk		38,863			36,314			38,104
		231,647			311,348			275,364
Capital adequacy ratio		16.6	%		13.9	%		12.5	%
Core capital ratio		13.1	%		11.3	%		9.5	%

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

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

In accordance with the HKMA guideline Impact of the New Hong Kong Accounting Standards on Authorised Institutions' Capital Base and Regulatory Reporting, the group has earmarked a 'regulatory reserve' of HK$770 million (HK$1,061 million and HK$854 million at 30 June 2008 and 31 December 2008 respectively) from retained profits. 

Liquidity ratio

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

	Half-year ended			Half-year ended			Half-year ended
		30 June			30 June		31 December
		2009			2008			2008
The bank and its subsidiaries
designated by the HKMA		47.5	%		47.3	%		45.5	%

Reconciliation of cash flow statement 

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

	Half year ended			Half year ended
		30 June			30 June
Figures in HK$m		2009			2008
Operating profit		6,740			9,112
Net interest income		(7,275	)		(8,252	)
Dividend income		(5	)		(54	))
Loan impairment charges and other
credit risk provisions		621			188
Impairment of available-for-sale equity securities		4			118
Depreciation		225			201
Amortisation of intangible assets		40			27
Amortisation of available-for-sale investments		19			(333	)
Amortisation of held-to-maturity debt securities		1			__
Advances written off net of recoveries		(285	)		(192	)
Interest received		6,132			7,021
Interest paid		(769	)		(4,818	)
Operating profit before changes in working capital		5,448			3,018
Change in treasury bills and certificates of deposit
with original maturity more than three months		(10,310	)		9,223
Change in placings with and advances to banks
maturing after one month		(4,213	)		(17,675	)
Change in trading assets		92,246			(2,881	))
Change in financial assets designated at fair value		37			(125	)
Change in derivative financial instruments		(3,990	)		3,069
Change in advances to customers		3,415			(28,797	)
Change in other assets		(7,063	)		(3,354	)
Change in financial liabilities designated at fair value		22			(10	)
Change in current, savings and other deposit accounts		29,084			(11,505	)
Change in deposits from banks		(6,833	)		(1,101	))
Change in trading liabilities		5,105			5,616
Change in certificates of deposit and
other debt securities in issue		(478	)		(1,659	)
Change in other liabilities		3,161			4,724
Elimination of exchange differences
and other non-cash items		(2,489	)		(3,435	)
Cash generated from/(used in) operating activities		103,142			(44,892	))
Taxation paid		(311	)		(26	)
Net cash inflow/(outflow) from operating activities		102,831			(44,918	))

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

	At 30 June			At 30 June
Figures in HK$m		2009			2008
Cash and balances with banks and
other financial institutions		51,065			19,755
Placings with and advances to banks and other
financial institutions maturing within one month		27,539			96,126
Treasury bills		87,611			5,371
Certificates of deposit		__			2,882
		166,215			124,134

Contingent liabilities, commitments and derivatives

				Credit		Risk-
	Contract		equivalent		weighted
Figures in HK$m		amount		amount		amount
At 30 June 2009
Direct credit substitutes		3,063		3,063		1,659
Transaction-related contingencies		570		347		161
Trade-related contingencies		8,905		2,195		1,415
Forward asset purchases		27		27		27
Undrawn formal standby facilities, credit lines
and other commitments to lend:
- not unconditionally cancellable ^		30,624		16,776		7,399
- unconditionally cancellable		149,008		51,948		12,208
		192,197		74,356		22,869
Exchange rate contracts:
Spot and forward foreign exchange		408,031		5,633		597
Other exchange rate contracts		36,469		1,390		371
		444,500		7,023		968
Interest rate contracts:
Interest rate swaps		219,022		3,121		402
Other interest rate contracts		142		1		__
		219,164		3,122		402
Other derivative contracts		13,090		852		86

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

				Credit		Risk-
	Contract		equivalent		weighted
Figures in HK$m		amount		amount		amount
At 30 June 2008
Direct credit substitutes		3,554		3,554		1,775
Transaction-related contingencies		1,233		616		555
Trade-related contingencies		11,203		2,241		1,460
Forward asset purchases		196		196		196
Undrawn formal standby facilities, credit lines
and other commitments to lend:
- not unconditionally cancellable		33,121		23,389		8,318
- unconditionally cancellable		147,070		28,786		5,527
		196,377		58,782		17,831
Exchange rate contracts:
Spot and forward foreign exchange		487,800		7,351		1,852
Other exchange rate contracts		80,674		1,777		870
		568,474		9,128		2,722
Interest rate contracts:
Interest rate swaps		226,277		2,078		406
Other interest rate contracts		262		1		__
		226,539		2,079		406
Other derivative contracts		29,714		2,948		1,678

				Credit		Risk-
	Contract		equivalent		weighted
Figures in HK$m		amount		amount		amount
At 31 December 2008
Direct credit substitutes		4,174		4,174		2,132
Transaction-related contingencies		1,016		507		418
Trade-related contingencies		7,046		1,409		922
Forward asset purchases		59		59		59
Undrawn formal standby facilities, credit lines
and other commitments to lend:
- not unconditionally cancellable		23,708		15,992		6,389
- unconditionally cancellable		155,505		30,971		3,586
		191,508		53,112		13,506
Exchange rate contracts:
Spot and forward foreign exchange		500,166		7,364		1,872
Other exchange rate contracts		51,226		1,836		778
		551,392		9,200		2,650
Interest rate contracts:
Interest rate swaps		248,758		4,144		1,117
Other interest rate contracts		142		1		__
		248,900		4,145		1,117
Other derivative contracts		15,705		1,141		343

The tables above give the nominal contract, credit equivalent and risk-weighted amounts of off-balance-sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted amounts. The nominal contract amounts, credit equivalent amounts, risk-weighted amounts and the consolidation basis for the periods indicated were calculated in accordance with the Banking (Capital) Rules issued by the HKMA, which came into effect on 1 January 2007. 

For the above analysis, contingent liabilities and commitments are credit-related instruments that include acceptances and endorsements, letters of credit, guarantees and commitments to extend credit. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers. These transactions are, therefore, subject to the same credit origination, portfolio maintenance and collateral requirements as for customers applying for loans. As the facilities may expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements.

 Derivative financial instruments are held for trading or designated as either fair value hedges or cash flow hedges. The following table shows the nominal contract amounts and marked-to-market value of assets and liabilities by class of derivatives. 

	At 30 June 2009						At 30 June 2008						At 31 December 2008
Figures in HK$m	Trading		Designated at fair value		Hedging		Trading		Designated at fair value		Hedging		Trading		Designated at fair value		Hedging
Contract amounts:
Interest rate contracts	161,346		1,683		60,966		147,990		1,929		77,233		161,519		1,797		85,942
Exchange rate contracts	544,640		70		-		728,581		-		-		655,777		-		-
Other derivative contracts	16,728		-		-		49,454		747		-		21,168		-		-
	722,714		1,753		60,966		926,025		2,676		77,233		838,464		1,797		85,942
Derivative assets:
Interest rate contracts	1,780		29		724		981		6		562		2,121		31		1,410
Exchange rate contracts	2,132		-		-		2,873		-		-		3,300		-		-
Other derivative contracts	262		-		-		1,398		223		-		242		-		-
	4,174		29		724		5,252		229		562		5,663		31		1,410
Derivative liabilities:
Interest rate contracts	1,841		23		606		1,022		19		256		2,249		30		569
Exchange rate contracts	1,940		-		-		2,649		-		-		5,717		-		-
Other derivative contracts	4,368		-		-		4,924		12		-		6,380		-		-
	8,149		23		606		8,595		31		256		14,346		30		569

The above derivative assets and liabilities, being the positive or negative marked-to-market value of the respective derivative contracts, represent gross replacement costs, as none of these contracts are subject to any bilateral netting arrangements.

 

Additional information

 

1.  Statutory accounts and accounting policies

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

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

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

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

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

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

the presentation of all items of income and expenditure in two financial statements, the 'Income statement' and 'Statement of comprehensive income'; 

the presentation of the 'Statement of changes in equity' as a financial statement, which replaces the 'Reserves' note on the financial statements; and

the adoption of revised title 'Statement of financial position' for the 'Balance sheet'.

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

2. Comparative figures

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

3. Property revaluation

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

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

4. Foreign currency positions 

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

	At 30 June				At 30 June				At 31 December
Figures in HK$m			2009				2008				2008
	US$		RMB		US$		RMB		US$		RMB
Non-structural position
Spot assets	220,606		36,442		211,580		41,181		240,624		37,665
Spot liabilities	(189,501	)	(36,031	)	(195,205	)	(42,101	)	(200,971	)	(37,568	)
Forward purchases	227,596		27,145		284,711		44,852		269,935		26,549
Forward sales	(251,599	)	(27,633	)	(298,470	)	(45,877	)	(303,047	)	(27,082	)
Net option position	2		__		(29	)	__		(1	)	__
Net long/(short) non-structural position	7,104		(77	)	2,587		(1,945	)	6,540		(436	)

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

	At 30 June				At 30 June				At 31 December
			2009				2008				2008
			% of				% of				% of
			total net				total net				total net
			structural				structural				structural
	HK$m		position		HK$m		position		HK$m		position
Structural positions
US dollar	285		2.0		287		2.2		285		2.0
Renminbi	13,589		96.3		12,265		96.0		13,343		96.5

5. Ultimate holding company

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

6. Register of shareholders

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

7. Proposed timetable for the remaining 2009 quarterly dividends 

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

 

8.  Code on Corporate Governance Practices

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

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

9.  Board of Directors

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

* Independent non-executive Directors

# Non-executive Directors

10. News release

Copies of this news release may be obtained from Legal and Company Secretarial Services Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from the bank's website www.hangseng.com.

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

Media enquiries to:

Walter Cheung  Telephone: (852) 2198 4020

Michelle Chan Telephone: (852) 2198 4236

 

ENDIR KGGGRKZDGLZM

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