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Hang Seng Bank 2013 Interim Results

5th Aug 2013 09:40

RNS Number : 9031K
HSBC Holdings PLC
05 August 2013
 



 

HANG SENG BANK LIMITED

2013 INTERIM RESULTS - HIGHLIGHTS

 

·; Attributable profit up 100% to HK$18,468m (HK$9,253m for the first half of 2012). Excluding the Industrial Bank reclassification, attributable profit up 27%.

 

·; Profit before tax up 77% to HK$18,773m (HK$10,600m for the first half of 2012). Excluding the Industrial Bank reclassification, profit before tax up 25%.

 

·; Operating profit up 12% to HK$8,934m (HK$7,975m for the first half of 2012).

 

·; Operating profit excluding loan impairment charges up 11% to HK$9,132m (HK$8,224m for

the first half of 2012).

 

·; Return on average shareholders' funds of 35.9% (22.8% for the first half of 2012). Excluding the Industrial Bank reclassification, return on average shareholders' funds of 19.0% (17.4% for the first half of 2012). 

 

·; Earnings per share up 100% to HK$9.66 per share (HK$4.84 per share for the first half of 2012).

 

·; Second interim dividend of HK$1.10 per share; total dividends of HK$2.20 per share for the first half of 2013 (HK$2.20 per share for the first half of 2012).

 

·; Total capital ratio of 15.8%, both Common Equity Tier 1 ('CET1') and Tier 1 capital ratios of 13.6% at 30 June 2013 under Basel III; (capital adequacy ratio of 14.0% and core capital ratio of 12.2% at 31 December 2012 under Basel II).

 

·; Cost efficiency ratio of 32.2% (33.5% for the first half of 2012).

 

Industrial Bank Co., Ltd. ('Industrial Bank') reclassification

 

Reported results for the first half of 2013 include a non-distributable accounting gain on reclassification of Industrial Bank from an associate to a financial investmentof HK$8,454m before tax, HK$9,517m attributable profit. Reported results for the first half of 2012, when the investment in Industrial Bank was equity accounted for, include HK$2,364m before tax and HK$2,209m attributable profit respectively. Amounts quoted 'excluding the Industrial Bank reclassification' adjust for the above items.

 

Comparative figures have been restated to reflect the adoption of the Hong Kong Accounting Standard 19 'Employee Benefits', details of which are set out on page 67.

 

Within this document, the Hong Kong Special Administrative Region of the People's

Republic of China has been referred to as 'Hong Kong'.

 

The abbreviations 'HK$m' and 'HK$bn' represent millions and billions of Hong Kong

dollars respectively.

 

 

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 ('the group') for the six months ended 30 June 2013.

 

Highlights of Results

Contents

Chairman's Comment

Chief Executive's Review

Results Summary

Segmental Analysis

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

Financial Review

Net interest income

Net fee income

Trading income

Net income/(loss) from financial instruments designated at fair value

Other operating income

Analysis of income from wealth management business

Analysis of insurance business income

Loan impairment charges

Operating expenses

Gains less losses from financial investments and fixed assets

Gain on reclassification of Industrial Bank

Gain on disposal of a subsidiary

Tax expense

Earnings per share

Dividends per share

Segmental analysis

Cash and balances with banks

Placings with and advances to banks

Trading assets

Financial assets designated at fair value

Loans and advances to customers

Loan impairment allowances against loans and advances to customers

Impaired loans and advances to customers and allowances

Overdue loans and advances to customers

Rescheduled loans and advances to customers

Segmental analysis of loans and advances to customers by geographical area

Gross loans and advances to customers by industry sector

Financial investments

Interest in associates

Intangible assets

Other assets

Current, savings and other deposit accounts

Certificates of deposit and other debt securities in issue

Trading liabilities

Other liabilities

Subordinated liabilities

Shareholders' funds

Capital management

Liquidity ratio

Reconciliation of cash flow statement

Contingent liabilities, commitments and derivatives

Statutory accounts and accounting policies

Comparative figures

Change in accounting treatment for Industrial Bank Co., Ltd. ('Industrial Bank')

Property revaluation

Foreign currency positions

Ultimate holding company

Register of shareholders

Proposed timetable for the remaining 2013 quarterly dividends

Code on corporate governance practices

Board of Directors

News release

 

 

 

 

 

Comment by Raymond Ch'ien, Chairman

 

With global economic uncertainty creating ongoing challenges in the first half of 2013, Hang Seng Bank's focus on delivering service excellence helped us maintain good growth momentum to return solid first-half results.

 

Leveraging the trusted Hang Seng brand, we expanded our range of products and services, enhanced our extensive cross-border distribution network and took further steps to improve efficiency and manage risk.

 

Profit attributable to shareholders was HK$18,468m - double that at the same period last year. Earnings per share rose by 100% to HK$9.66. Excluding the Industrial Bank reclassification, profit attributable to shareholders was up 27% at HK$8,951m and earnings per share increased by 27% to HK$4.68.

 

Return on average shareholders' funds was 35.9%, compared with 22.8% in the first half of 2012. Excluding the Industrial Bank reclassification, return on average shareholders' funds was 19.0%, compared with 17.4% in the first half of last year.

 

The Directors have declared a second interim dividend of HK$1.10 per share, bringing the total distribution for the first half of 2013 to HK$2.20 per share, the same as in the first half of 2012.

 

Economic Environment

 

Investment sentiment improved during the early part of 2013 - as reflected in the movements of major stock indices and the stabilisation of European sovereign bond yields - but economic fundamentals remained mixed. The US economy expanded at a moderate pace due to further recovery in labour and housing markets, but the eurozone remained in recession as governments continued with austerity measures designed to restore fiscal discipline.

 

Rises in employment and wages in Hong Kong sustained robust consumer spending, underpinning the 2.8% expansion in the local economy in the first quarter of the year. However, weak external demand continued to put downward pressure on overall growth. Private consumption will remain the key economic driver and we expect real GDP to expand by 3.0% for the year - up 1.5 percentage points compared with 2012.

 

Subdued export activity will also continue to constrain the mainland China economy, which grew by 7.6% in the first half, down from 7.8% in 2012. Nevertheless, domestic consumption and investment have remained resilient and should support solid economic growth to generate a full-year GDP growth rate of 7.5%.

 

With the US set to roll back quantitative easing measures, the economic outlook for the rest of 2013 remains uncertain. Interest rates are likely to remain low until 2015. However, Hong Kong's ongoing development as a leading centre for offshore renminbi financial services and primary gateway for cross-border trade will generate new opportunities for business expansion.

 

We will enhance our market position in key areas of business by continuing with strategic initiatives in line with our competitive strengths as well as through more effective resource allocation and enhancing efficiency. We remain firmly committed to our core values of service excellence and generating increasing value for customers and shareholders.

 

 

 

 

 

Review by Rose Lee, Vice-Chairman and Chief Executive

 

Hang Seng Bank achieved encouraging results for the first half of 2013 - recording growth in income and profit across all business segments.

 

With an economic slowdown in mainland China, greater market volatility and keen competition, the operating environment remained challenging.

 

Profit attributable to shareholders was HK$18,468m - double that for the same period last year - and a return on average shareholders' funds of 35.9% was achieved. Excluding the impact of the Industrial Bank reclassification, attributable profit was up 27% and return on average shareholders' funds rose by 1.6 percentage points to 19.0%.

 

Leveraging our brand and network, we continued to implement strategic initiatives that reinforce our position as the leading domestic bank in Hong Kong to drive sustainable growth in our core business.

 

Success in income diversification resulted in balanced growth of 8% in net interest income and 11% in non-funds income. Implementation of customer-focused initiatives drove wealth management income growth by 10%.

 

Hang Seng Bank (China) Limited ('Hang Seng China') enhanced its product suite and continued to invest in service delivery infrastructure and brand building. Our strong network in the Yangtze Delta Region and southern China placed us well to capture opportunities generated by increasing cross-border economic integration and renminbi internationalisation.

 

Our wholly owned subsidiary, Hang Seng Investment Management Limited, was the first non-mainland financial institution in Hong Kong to be granted RMB Qualified Foreign Institutional Investor status, enabling us to invest in mainland securities with renminbi raised in Hong Kong. We expect to launch an A-share exchange-traded fund in the second half of this year.

 

Profit before tax was up 77% at HK$18,773m. Excluding the Industrial Bank reclassification, profit before tax increased by 25% to HK$10,319m.

 

Operating profit excluding loan impairment charges rose by 11% to HK$9,132m. Operating profit grew by 12% to HK$8,934m. Compared with the second half of last year, operating profit excluding loan impairment charges and operating profit were both up 19%.

 

With the 9% growth in net operating income before loan impairment charges outpacing the 5% rise in operating expenses, our cost efficiency ratio improved to 32.2% - down 1.3 percentage points and 4.2 percentage points compared with the first and second halves of 2012 respectively.

 

Net interest income grew by HK$683m to HK$8,969m. Our in-depth knowledge of local markets and effective balance sheet management enabled us to expand lending by 8% while maintaining a high level of credit quality. Customer deposits increased by 2%.

 

Despite challenging conditions for the Treasury portfolio, we achieved a net interest margin of 1.84% - one basis point down and unchanged compared with the first and second halves of 2012 respectively.

 

Non-interest income was up by HK$434m at HK$4,508m.

 

Under the new Basel III rules, our total capital ratio at 30 June 2013 was 15.8% and our Common Equity Tier 1 ('CET1') and Tier 1 capital ratios were both 13.6%.

 

A Strategy for Sustainable Growth

 

Our business is rooted in an economically dynamic region that offers exciting opportunities for growth. At the same time, a rapidly changing regulatory environment and volatile market conditions prevail. We must remain proactive in building for long-term success, reinforce our status as Hong Kong's leading domestic bank and further enhance our strong cross-border capabilities to benefit from increasing economic integration.

 

We will continue to drive a customer need-focused strategy, further enhance efficiency and strategically deploy capital and other resources to develop our core business and maintain balanced growth. Our commitment to the personal and professional development of our staff saw us recognised as Hong Kong's most attractive employer in the banking and financial services sector in the 2013 Randstad Award.

 

We will maintain high standards of risk management and corporate governance. We remain committed to fulfilling our corporate social responsibility to promote the well-being of the communities to which we owe much of Hang Seng's success.

 

I would like to take this opportunity to thank our staff for their loyalty and dedication and our customers and shareholders for their unwavering support.

 

 

 

 

 

Results summary

 

Hang Seng Bank Limited ('the bank') and its subsidiaries ('the group') reported an unaudited profit attributable to shareholders of HK$18,468m for the first half of 2013, up 99.6% compared with the first half of 2012. Earnings per share were up 99.6% at HK$9.66. The profit for the first half of 2013 included the HK$9,517m non-distributable accounting gain on the reclassification of Industrial Bank Co., Ltd. ('Industrial Bank').

 

Operating profit excluding loan impairment charges grew by HK$908m, or 11.0%, to HK$9,132m, with encouraging growth in both net interest income and non-interest income. The bank's investment in its core business continued to generate good growth momentum to generate solid first-half results in an increasingly challenging market environment.

 

Net interest income rose by HK$683m, or 8.2%, to HK$8,969m compared with the first half of 2012, supported by the 11.7% growth in average customer advances and the 9.0% rise in average customer deposits. The insurance business also contributed to the rise in net interest income as the group continued to grow its life insurance investment portfolios. Net interest margin narrowed by one basis point to 1.84% while net interest spread was down to 1.73%. The compression of spreads on the Treasury Balance Sheet Management portfolio and deposits under the mainland China business segment outweighed the widening of loan spreads and stable deposit spread in Hong Kong created by the bank's effective funding cost management. Net interest income also registered an increase compared with the second half of 2012, supported by higher average interest-earning assets. The net interest margin compared with the second half of last year was unchanged at 1.84%.

 

Net fees and commissions increased across core business lines, up HK$528m, or 21.9%, to HK$2,936m. With increased retail investor activity early in the year, the bank generated a 70.7% rise in income related to the sale of retail investment funds. Income from stockbroking and related services grew by 15.3%, benefitting from the increase in stock market trading turnover. Insurance agency-related fee income grew by 65.2%, reflecting an increase in non-life insurance products distribution commission, with a decrease in non-life insurance underwriting profit, following the disposal of the general insurance manufacturing business in the second half of last year. The credit card business and trade services also performed well and their fees and commissions grew by 13.6% and 15.9% respectively.

 

Trading income increased by HK$34m, or 2.9%, to HK$1,204m. Foreign exchange income was broadly in line with the first half of 2012. Increased revenue from increased customer activity and higher customer demand for foreign exchange-linked structured treasury products was largely offset by the fall in net interest income from funding swap activities. Compared with the same period last year, income from securities, derivatives and other trading activities recorded a gain of HK$14m compared with a loss of HK$23m, reflecting higher income from interest rate-related derivatives and linked structured products which benefitted from a more favourable market interest rate environment. This was partly offset by the revaluation loss on equity options backing a life endowment product, arising from an unfavourable movement in the underlying equity indices.

 

Income from insurance business (included under 'net interest income', 'net fee income', 'trading income', 'net income/(loss) from financial instruments designated at fair value', 'net earned insurance premiums', 'movement in present value of in-force long-term insurance business and other' within 'other operating income', 'share of profits from associates' and after deducting 'net insurance claims incurred and movement in policyholders' liabilities') fell by HK$48m, or 2.6%, to HK$1,827m. Net interest income and fee income from the life insurance business grew by 9.3%, reflecting the increase in the size of the life insurance funds investment portfolio. The investment return on life insurance funds was adversely affected by the unfavourable movement in equity markets though this was partly offset by property revaluation gains. General insurance income decreased by 41%, due mainly to the disposal of the bank's general insurance business in the second half of 2012.

 

Operating expenses rose by HK$209m, or 5.1%, to HK$4,345m, compared with the first half of 2012, reflecting the bank's continued investment in new business platforms and mainland operations to support long-term growth. Staff costs increased by 3.4% as a result of the annual salary increment and an increase in headcount. General and administrative expenses rose by 9.1% as a result of an increase in rental expenses, marketing expenditure and processing charges. mainland-related operating expenses increased by 5.6%, reflecting the network expansion of Hang Seng China.

 

The cost efficiency ratio improved when compared with the first and second halves of 2012, as a result of the bank's effort to improve operational efficiency and maintain cost controls. With total operating income growing at a faster pace than operating expenses, the cost efficiency ratio improved to 32.2%.

 

Operating profit grew by HK$959m, or 12.0%, to HK$8,934m, due to the reduction of HK$51m in loan impairment charges.

 

Profit before tax increased by 77.1% to HK$18,773m after taking the following key items into account:

 

·; Anaccounting gain on reclassification of Industrial Bank of HK$8,454m arising from the reclassification of Industrial Bank as a financial investment on 7 January 2013;

·; An increase of HK$761m (or 319.7%) in net surplus on property revaluation, reflecting mainly the improved commercial property market in the first half of 2013;

·; An increase of HK$173m in net gains from financial investments and fixed assets, due mainly to property disposals; and

·; A decrease of HK$2,174m (or 91.1%) in share of profits from associates, mainly reflecting the reclassification of Industrial Bank as a financial investment.

 

 

Consolidated balance sheet and key ratios

 

Total assets rose by HK$29.6bn, or 2.7%, compared with last year-end to HK$1,106.7bn. The group continued to pursue a balanced growth strategy in managing its assets and liabilities and achieved solid increases in both loans and deposits. Customer loans and advances grew by HK$43.5bn, or 8.1%, to HK$579.7bn, driven by growth in lending to corporate and commercial and mainland China customers. Residential mortgage lending also increased, helped by the bank's diverse range of mortgage products, including an enhanced fixed-rate mortgage plan launched in April 2013. The increase in cross-border trade between Hong Kong and the Mainland supported a solid recovery in trade finance lending. Hang Seng China lending portfolios also increased, underpinned by the expansion of renminbi lending to corporate customers. Customer deposits, including certificates of deposit and other debt securities in issue, rose by HK$13.4bn, or 1.6%, to HK$832.2bn. At 30 June 2013, the advances-to-deposits ratio was 69.7%, compared with 65.5% at 31 December 2012.

 

At 30 June 2013, shareholders' funds (excluding proposed dividends) were HK$100.0bn, an increase of HK$11.5bn, or 13.0%, against last year-end. Retained profits grew by HK$17.0bn as a result of the growth in attributable profit (including the accounting gain on reclassification of Industrial Bank) after the appropriation of interim dividends. The premises revaluation reserve increased by HK$838m, or 6.1%, reflecting the increase in the fair value of the bank's premises. The available-for-sale investment reserve recorded a deficit of HK$2,884m, compared with a surplus of HK$227m at the end of 2012, primarily reflecting the unrealised revaluation deficit on the bank's investment in Industrial Bank. 

 

The return on average total assets was 3.4%, compared with 1.9% for both the first and second halves of 2012. The return on average shareholders' funds was 35.9%, compared with 22.8% in the first half of 2012 and 22.9% in the second half. Excluding the Industrial Bank reclassification, return on average total assets was 1.7%, compared with 1.4% for the first half of 2012. On the same basis, return on average shareholders' funds was 19.0%, compared with 17.4% for the first half of last year.

 

On 1 January 2013, the Hong Kong Monetary Authority ('HKMA') implemented the first phase of the Basel III capital framework in Hong Kong. The capital disclosures for June 2013 under Basel III are, therefore, not directly comparable with the disclosure for December 2012 which was prepared on Basel II basis. Under Basel III, the total capital ratio was 15.8% at 30 June 2013 and both Common Equity Tier 1 and Tier 1 capital ratios stood at 13.6%. For the year ended 31 December 2012, the total capital adequacy ratio and core capital ratio were 14.0% and 12.2% respectively calculated on Basel II basis.

 

The bank has been maintaining liquidity at a comfortable level. The average liquidity ratio for the first half of 2013 was 35.8% (calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance) compared with 36.9% for the first half of 2012.

 

Dividends

 

The Directors have declared a second interim dividend of HK$1.10 per share, which will be payable on 5 September 2013 to shareholders on the register of shareholders as of 21 August 2013. Together with the first interim dividend, the total distribution for the first half of 2013 will amount to HK$2.20 per share, the same as in the first half of 2012.

 

 

 

 

 

Segmental analysis

 

 

Hong Kong & other businesses

 

 

Retail Banking

Corporate and

Mainland

Inter-

 

and Wealth

Commercial

China

segment

Figures in HK$m

Management

Banking

Treasury

Other

Total

business

elimination

Total

Half-year ended

30 June 2013

Net interest income/(expense)

4,917

2,722

794

(113

)

8,320

649

__

8,969

Net fee income/(expense)

1,955

889

(13

)

66

2,897

39

__

2,936

Trading income/(loss)

89

326

690

(9

)

1,096

108

__

1,204

Net income/(loss) from financial

 

 

 

 

  instruments designated at fair

 

 

 

 

value

(108

)

(3

)

__

__

(111

)

__

__

(111

)

Dividend income

__

__

__

4

4

__

__

4

Net earned insurance premiums

5,761

39

__

__

5,800

__

__

5,800

Other operating income

956

25

__

140

1,121

__

(26

)

1,095

Total operating income

13,570

3,998

1,471

88

19,127

796

(26

)

19,897

Net insurance claims

incurred and movement

in policyholders' liabilities

(6,381

)

(39

)

__

__

(6,420

)

__

__

(6,420

)

Net operating income before

 

loan impairment charges

7,189

3,959

1,471

88

12,707

796

(26

)

13,477

Loan impairment (charges)/

 

releases

(280

)

65

__

__

(215

)

17

__

(198

)

Net operating income

6,909

4,024

1,471

88

12,492

813

(26

)

13,279

Operating expenses W

(2,615

)

(886

)

(151

)

(35

)

(3,687

)

(684

)

26

(4,345

)

Operating profit

4,294

3,138

1,320

53

8,805

129

__

8,934

Gains less losses from financial

investments and fixed assets

(1

)

1

__

173

173

__

__

173

Gain on reclassification of Industrial Bank

__

__

__

__

__

8,454

__

8,454

Net surplus on property

revaluation

__

__

__

999

999

__

__

999

Share of profits from associates

162

1

__

__

163

50

__

213

Profit before tax

4,455

3,140

1,320

1,225

10,140

8,633

__

18,773

Share of profit before tax

23.8

%

16.7

%

7.0

%

6.5

%

54.0

%

46.0

%

__

100.0

%

Share of profit before tax as a % of

Hong Kong & other businesses

43.9

%

31.0

%

13.0

%

12.1

%

100.0

%

Operating profit excluding loan

impairment charges

4,574

3,073

1,320

53

9,020

112

__

9,132

W Depreciation/amortisation

included in operating

 

expenses

(24

)

(13

)

(1

)

(345

)

(383

)

(50

)

__

(433

)

At 30 June 2013

 

Total assets

307,081

324,547

283,618

98,429

1,013,675

118,176

(25,194

)

1,106,657

Total liabilities

621,704

213,303

33,203

46,569

914,779

109,913

(20,116

)

1,004,576

Interest in associates

1,769

9

__

__

1,778

975

__

2,753

 

 

 

 

 

 

 

 

Hong Kong & other businesses

 

 

Retail Banking

Corporate and

Mainland

Inter-

 

and Wealth

Commercial

China

segment

Figures in HK$m

Management

Banking

Treasury

Other

Total

business

elimination

Total

Half-year ended

30 June 2012 (restated)

Net interest income/(expense)

4,232

2,479

852

(105

)

7,458

828

__

8,286

Net fee income/(expense)

1,545

770

(15

)

59

2,359

49

__

2,408

Trading income

216

278

609

4

1,107

63

__

1,170

Net income/(loss) from financial

 

 

 

 

  instruments designated at fair

 

 

 

 

  value

106

(4

)

__

__

102

__

__

102

Dividend income

__

__

__

4

4

__

__

4

Net earned insurance premiums

6,488

123

__

__

6,611

__

__

6,611

Other operating income

683

12

__

113

808

__

(24

)

784

Total operating income

13,270

3,658

1,446

75

18,449

940

(24

)

19,365

Net insurance claims

incurred and movement

in policyholders' liabilities

(6,931

)

(74

)

__

__

(7,005

)

__

__

(7,005

)

Net operating income before

 

loan impairment charges

6,339

3,584

1,446

75

11,444

940

(24

)

12,360

Loan impairment (charges)/

 

releases

(189

)

33

__

__

(156

)

(93

)

__

(249

)

Net operating income

6,150

3,617

1,446

75

11,288

847

(24

)

12,111

Operating expenses W

(2,373

)

(857

)

(135

)

(147

)

(3,512

)

(648

)

24

(4,136

)

Operating profit

3,777

2,760

1,311

(72

)

7,776

199

__

7,975

Gains less losses from financial

investments and fixed assets

__

__

__

1

1

(1

)

__

__

Gain on disposal of a subsidiary

__

__

__

__

__

__

__

__

Net surplus on property

revaluation

__

__

__

238

238

__

__

238

Share of profits from associates

119

1

__

__

120

2,267

__

2,387

Profit before tax

3,896

2,761

1,311

167

8,135

2,465

__

10,600

Share of profit before tax

36.7

%

26.0

%

12.4

%

1.6

%

76.7

%

23.3

%

__

100.0

%

Share of profit before tax as a % of

Hong Kong & other businesses

47.9

%

33.9

%

16.1

%

2.1

%

100.0

%

Operating profit excluding loan

impairment charges

3,966

2,727

1,311

(72

)

7,932

292

__

8,224

W Depreciation/amortisation

included in operating

 

expenses

(24

)

(13

)

(2

)

(347

)

(386

)

(56

)

__

(442

)

At 30 June 2012

 

Total assets

275,221

286,112

286,974

63,050

911,357

116,278

(21,767

)

1,005,868

Total liabilities

579,005

194,085

41,060

35,053

849,203

89,178

(16,758

)

921,623

Interest in associates

1,499

7

__

__

1,506

20,091

__

21,597

 

 

 

 

 

 

Hong Kong & other businesses

 

 

Retail Banking

Corporate and

Mainland

Inter-

 

and Wealth

Commercial

China

segment

Figures in HK$m

Management

Banking

Treasury

Other

Total

business

elimination

Total

Half-year ended

31 December 2012 (restated)

Net interest income/(expense)

4,529

2,810

824

(223

)

7,940

720

__

8,660

Net fee income/(expense)

1,765

796

(13

)

82

2,630

48

__

2,678

Trading income/(loss)

311

168

379

(16

)

842

51

__

893

Net income/(loss) from financial

 

 

 

 

instruments designated at fair

 

 

 

 

value

275

(1

)

__

__

274

__

__

274

Dividend income

__

7

__

6

13

__

__

13

Net earned insurance premiums

4,288

48

__

__

4,336

__

__

4,336

Other operating income

265

19

__

126

410

15

(28

)

397

Total operating income

11,433

3,847

1,190

(25

)

16,445

834

(28

)

17,251

Net insurance claims

incurred and movement

in policyholders' liabilities

(5,189

)

(41

)

__

__

(5,230

)

__

__

(5,230

)

Net operating income before

 

loan impairment charges

6,244

3,806

1,190

(25

)

11,215

834

(28

)

12,021

Loan impairment (charges)/

 

releases

(186

)

18

1

__

(167

)

30

__

(137

)

Net operating income

6,058

3,824

1,191

(25

)

11,048

864

(28

)

11,884

Operating expenses W

(2,462

)

(901

)

(141

)

(169

)

(3,673

)

(727

)

28

(4,372

)

Operating profit

3,596

2,923

1,050

(194

)

7,375

137

__

7,512

Gains less losses from financial

investments and fixed assets

__

(3

)

__

(2

)

(5

)

__

__

(5

)

Gain on disposal of a subsidiary

187

168

__

__

355

__

__

355

Net surplus on property

revaluation

__

__

__

538

538

__

__

538

Share of profits from associates

172

1

__

__

173

2,821

__

2,994

Profit before tax

3,955

3,089

1,050

342

8,436

2,958

__

11,394

Share of profit before tax

34.7

%

27.1

%

9.2

%

3.0

%

74.0

%

26.0

%

__

100.0

%

Share of profit before tax as a % of

Hong Kong & other businesses

46.9

%

36.6

%

12.4

%

4.1

%

100.0

%

Operating profit excluding loan

impairment charges

3,782

2,905

1,049

(194

)

7,542

107

__

7,649

W Depreciation/amortisation

included in operating

 

expenses

(21

)

(13

)

(2

)

(344

)

(380

)

(55

)

__

(435

)

At 31 December 2012

 

Total assets

292,217

289,667

326,257

63,480

971,621

125,232

(19,757

)

1,077,096

Total liabilities

621,266

197,590

47,163

38,295

904,314

95,146

(14,687

)

984,773

Interest in associates

1,644

8

__

__

1,652

23,003

__

24,655

 

 

 

 

 

 

 

Hong Kong and other businesses segment

 

Retail Banking and Wealth Management ('RBWM') in Hong Kong reported profit before tax of HK$4,455m in the first half of 2013, representing a 14.3% year-on-year increase. Operating profit excluding loan impairment charges grew by 15.3% to HK$4,574m.

 

We achieved good results by leveraging the trusted Hang Seng brand and employing a competitive pricing strategy. We continued to expand the affluent customer base in attracting new sources of funds to sustain our business growth. Along with solid growth in unsecured lending businesses, this helped support a 16.2% increase in net interest income to HK$4,917m.

 

Non-interest income rose by 7.8% year-on-year to HK$2,272m. With our continued focus on wealth management, net fee income increased by 26.5% to HK$1,955m. Overall wealth management income grew by 12.6% to HK$3,169m.

 

Mortgage business remained an important source of income growth. We expanded our range of products with the launch of an enhanced fixed-rate mortgage plan in April that is designed to help customers guard against fluctuations in market interest rates. Despite keen competition, we sustained good business momentum with a market share of 15.6% in terms of new mortgage registrations in the first half of 2013. The mortgage loans portfolio grew by 3.0% compared to 31 December 2012 with an improvement in yield.

 

Supported by effective marketing campaigns and our quality credit card customer base, card spending achieved double digit growth of 11.3% compared with same period last year. Total cards in circulation rose by 5.8% to 2.4m year-on-year and we were the third-largest card issuer of VISA and MasterCard in Hong Kong. The personal loan portfolio grew by 8.5% compared to 31 December 2012, with a total loan balance of HK$6,373m.

 

With improved investor sentiment in the early months of the year, total operating income from investment service business increased by 37.2% year-on-year, with sales of retail investment funds as the major growth driver. Retail investment funds turnover and income increased by 102.9% and 69.1% respectively. Securities turnover rose by 22.6% and related income grew by 13.4%. We broadened our product suite to capture market trends by launching the Hang Seng China A-Share FlexiPower Fund and the Hang Seng 'God of Wealth' gold bar.

 

Total operating income from insurance business decreased by 3.2% year-on-year. Leveraging our extensive distribution network and timely promotion offers, annualised new life insurance premiums grew by 8.5% year-on-year and total life insurance policies in-force rose by 8.1% compared with the same period last year. The good sales results were, however, offset by the lower returns on our investment portfolio as the investment climate changed towards the end of the second quarter.

 

We took additional steps to acquire new quality customers with wealth management needs to successfully increase the number of Prestige and Preferred Banking customers compared with the same time last year. We invested in the development of our Prestige and Preferred Banking Centres to enhance the customer experience. As at the end of June, we had nine such centres in strategic locations, with plans to open more in the pipeline. We expanded our team of relationship managers and put additional resources into their professional development so as to better serve our customers.

 

We invested in new technology to improve and upgrade our online and mobile wealth management channels to provide customers with fast, convenient and secure access to financial services. Our new online 'iPower' platform, launched in April, allows customers to manage their investment funds portfolio online and offers the option of a lower minimum subscription amount than traditional funds account services. With the introduction of our contactless mobile payment service in June 2013, customers who hold Hang Seng MasterCard credit cards can now link their compatible smartphone SIM to their credit card account to enjoy the convenience of using their mobile phones to make payments in a growing network of retail outlets in Hong Kong.

 

Corporate and Commercial Banking ('CNC') in Hong Kong achieved a 13.7% increase in profit before tax to HK$3,140m.

 

We have achieved a balanced growth in both customer advances and deposits, which increased by 10.6% and 8.4% respectively during the first half of 2013. Net interest income grew by 9.8% to HK$2,722m compared with the prior year.

 

We have stepped up portfolio management and increased the return on risk-weighted assets with more proactive cross-selling of non-interest income products and tailor-made propositions. Non-interest income was up 11.9% at HK$1,237m, underpinned by satisfactory growth on sales of investment funds, FX structured products and securities trading. Renminbi investment and hedging products were well-received by our corporate and commercial customers.

 

The credit portfolio remained healthy with HK$65m of net loan impairment released in the first half of 2013.

 

We have continued to attract and retain quality SME customers through our expanded network, enhanced mobile banking platform and new product offering. Two new Business Banking Centres were opened in Sheung Shui and Kwun Tong to enhance accessibility and services. Our Business Mobile Banking platform was upgraded in April 2013 with payment authorisation and fund transfer capability to registered third parties. We launched the 'UpBiz Integrated Account' supporting high-value customers with designated relationship managers and Trade Advisory Team. We continued to be one of the major market participants in the Hong Kong Mortgage Corporation's SME Financing Guarantee Scheme ('SFGS') and approved over HK$4.5bn of loan facilities since June 2012 when SFGS was enhanced with an 80% guarantee. We won the 'SME's Best Partner Award' from the Hong Kong General Chamber of Small and Medium Business for the eighth consecutive year in May 2013.

 

We have introduced innovative supply chain solutions to customers in the first half of 2013, including pre-delivery receivable financing under the vendor-managed inventory model. We were awarded 'Trade Finance Domestic Bank - Hong Kong' by the Asian Banking & Finance Magazine for the second consecutive year in June 2013. We shall continue to strengthen transaction banking (trade and cash management) core product capabilities and infrastructure to meet customers' needs in the fast-changing international trade landscape.

 

Treasury ('TRY')in Hong Kong recorded a 0.7% increase in profit before tax to HK$1,320m.

 

Net interest income declined by 6.8% to HK$794m, reflecting the reduction in the commercial surplus available for deployment, as well as the low interest rate environment and flattened yield curves - which limited opportunities for yield enhancement. The prevailing low interest rates also had an unfavourable impact on the reinvestment of funds arising from the maturing of debt securities in the balance sheet management portfolio.

 

Total trading income increased by HK$81m, or 13.3%, to HK$690m. Option income from foreign exchange structured products registered encouraging growth, boosted in part by rising demand for renminbi-denominated products following the further development of renminbi business in Hong Kong. An increase in trading activity, particularly during the second quarter of the year, helped drive a 77.1% year-on-year rise in foreign exchange trading income.

 

Front-line channels (including e-Banking) and trading systems were enhanced to facilitate straight-through processing, enabling better position management.

 

To enhance our strong position as a provider of physical gold and gold-related investment products, we collaborated with Retail Banking and Wealth Management to launch the Hang Seng 'God of Wealth' gold bar and a structured investment deposit linked to gold during the first half of the year.

 

To further diversify our revenue base, we increased the provision of treasury products to RBWM and CNC customers through closer collaboration and a segmentation study to identify potential new opportunities for fulfilling customer needs.

 

 

Mainland China business

 

Mainland China's economic growth momentum slowed during the first half of 2013, reflecting the effects of structural reforms introduced under the '12th Five-Year Plan' in 2011, the slowing of domestic investment and consumption and subdued external demand. Keen competition for deposits and volatility in the interbank market continued to put pressure on interest margins.

 

Hang Seng China continued with the development of its distribution and service platforms, including the commencement of operations at the Qianhai sub-branch in Shenzhen, to capture new cross-border business opportunities arising from the establishment of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. Shantou sub-branch is scheduled to open in the second half of 2013 to further strengthen Hang Seng China's foothold in the Closer Economic Partnership Arrangement ('CEPA') catchment area.

 

To further diversify the income base and in preparation for further liberalisation in the financial sector, Hang Seng China made additional investments in its people, e-banking platform, and product and service propositions. Close cooperation between the bank and its mainland subsidiary is enabling us to further leverage our unique strengths in serving customers who require seamless and sophisticated cross-border financial solutions and enhance awareness of the Hang Seng brand - particularly in the southern region of the Mainland.

 

Driven by an expansion in the customer base, overall advances to customers rose by 16.8%. Customer deposits were up 11.6%, compared with last year-end.

 

Total operating income was 15.3% lower than the first half of 2012, affected by a 21.6% decrease in net interest income. Operating profit fell by 35.2% compared with the same period last year, taking into account the 5.6% increase in operating expenses relating to further investment in future business development and a net release in loan impairment charges, compared with a net charge in the first half of 2012.

 

 

As reported

 

 

Constant currencyW

Half-year ended 30 June 2013

compared with 30 June 2012

Total operating income

-15.3

%

-15.9

%

Operating profit

-35.2

%

-36.7

%

 

At 30 June 2013

compared with 31 December 2012

 

Gross advances to customers

16.8

%

14.7

%

Customer deposits

11.6

%

9.6

%

 

The group has continued to cooperate closely with Industrial Bank as a strategic business partner in various business areas, including trade finance and retail banking business. Business collaboration between Hang Seng China and Industrial Bank has also been stepped up.

 

 

W Constant currency comparatives for 2012 referred to in the tables above are computed by translating into Hong Kong dollars the functional currency (renminbi) of Hang Seng's mainland China business:

- the income statement for the half year to 30 June 2012 at the average rates of exchange for the half year to 30 June 2013;and

- the balance sheet at 31 December 2012 at the prevailing rates of exchange on 30 June 2013.

 

 

 

Consolidated Income Statement (unaudited)

 

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

(restated)

(restated)

Interest income

11,459

10,780

11,081

Interest expense

(2,490

)

(2,494

)

(2,421

)

Net interest income

8,969

8,286

8,660

Fee income

3,637

2,977

3,321

Fee expense

(701

)

(569

)

(643

)

Net fee income

2,936

2,408

2,678

Trading income

1,204

1,170

893

Net income/(loss) from financial

instruments designated at fair value

(111

)

102

274

Dividend income

4

4

13

Net earned insurance premiums

5,800

6,611

4,336

Other operating income

1,095

784

397

Total operating income

19,897

19,365

17,251

Net insurance claims incurred and

movement in policyholders' liabilities

(6,420

)

(7,005

)

(5,230

)

Net operating income before loan

impairment charges

13,477

12,360

12,021

Loan impairment charges

(198

)

(249

)

(137

)

Net operating income

13,279

12,111

11,884

Employee compensation and benefits

(2,170

)

(2,098

)

(2,158

)

General and administrative expenses

(1,742

)

(1,596

)

(1,779

)

Depreciation of premises, plant

and equipment

(376

)

(381

)

(381

)

Amortisation of intangible assets

(57

)

(61

)

(54

)

Operating expenses

(4,345

)

(4,136

)

(4,372

)

Operating profit

8,934

7,975

7,512

Gains less losses from financial investments

and fixed assets

173

__

(5

)

Gain on reclassification of Industrial Bank

8,454

__

__

Gain on disposal of a subsidiary

__

__

355

Net surplus on property revaluation

999

238

538

Share of profits from associates

213

2,387

2,994

Profit before tax

18,773

10,600

11,394

Tax expense

(305

)

(1,347

)

(1,320

)

Profit for the period

18,468

9,253

10,074

Profit attributable to shareholders

18,468

9,253

10,074

Earnings per share (in HK$)

9.66

4.84

5.27

 

Details of dividends payable to shareholders of the bank attributable to the profit for the half year are set out on page 37.

 

 

 

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

2013

2012

2012

(restated)

(restated)

Profit for the period

18,468

9,253

10,074

Other comprehensive income

Items that will be reclassified subsequently

to the income statement when specific

conditions are met:

Available-for-sale investment reserve:

- fair value changes taken to equity:

-- on debt securities

(685

)

326

54

-- on equity shares

(3,458

)

54

36

- fair value changes transferred

to income statement:

-- on hedged items

461

(62

)

84

-- on disposal

__

(1

)

__

- share of changes in equity of associates:

-- fair value changes

4

471

(12

)

-- fair value changes transferred to income statement on reclassification of Industrial Bank

94

__

__

- deferred taxes

42

(156

)

(1

)

- exchange difference

431

__

(1

)

Cash flow hedging reserve:

- fair value changes taken to equity

498

33

308

- fair value changes transferred to

income statement

(516

)

(30

)

(298

)

- deferred taxes

3

__

(2

)

Exchange differences on translation of:

- financial statements of overseas

branches, subsidiaries and associates

338

(136

)

164

- cumulative foreign exchange reserve transferred to income statement on reclassification of Industrial Bank

(2,039

)

__

__

- retained profits

(3

)

1

(1

)

Share-based payments

(1

)

(7

)

__

Others

30

(25

)

(10

)

Items that will not be reclassified

subsequently to the income statement:

Premises:

- unrealised surplus on revaluation of

premises

1,526

839

1,383

- deferred taxes

(241

)

(128

)

(230

)

- exchange difference

2

(1

)

1

Defined benefit plans:

- actuarial gains/(losses) on defined

benefit plans

855

(137

)

861

- deferred taxes

(141

)

22

(142

)

Other comprehensive income for the

 

period, net of tax

(2,800

)

1,063

2,194

Total comprehensive income

for the period

15,668

10,316

12,268

Total comprehensive income

for the period attributable to

shareholders

15,668

10,316

12,268

 

 

 

Consolidated Balance Sheet (unaudited)

 

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

ASSETS

Cash and balances with banks

19,190

18,272

27,082

Placings with and advances to banks

135,999

137,948

 140,382

Trading assets

34,509

41,037

34,399

Financial assets designated at fair value

10,150

7,708

 

8,343

Derivative financial instruments

4,752

4,063

5,179

Loans and advances to customers

579,705

504,902

536,162

Financial investments

263,369

224,385

253,408

Interest in associates

2,753

21,597

24,655

Investment properties

10,547

4,583

4,860

Premises, plant and equipment

20,690

18,250

19,262

Intangible assets

7,403

6,603

6,783

Other assets

17,590

16,520

16,581

Total assets

1,106,657

1,005,868

1,077,096

LIABILITIES AND EQUITY

Liabilities

Current, savings and other deposit accounts

779,884

720,397

769,147

Deposits from banks

15,790

11,284

19,845

Trading liabilities

67,749

57,364

59,853

Financial liabilities designated at fair value

466

443

 

464

Derivative financial instruments

4,817

4,759

4,118

Certificates of deposit and other

debt securities in issue

11,022

12,662

11,291

Other liabilities

20,874

20,469

21,653

Liabilities to customers under

insurance contracts

86,584

77,347

81,670

Current tax liabilities

1,928

1,420

588

Deferred tax liabilities

3,633

3,651

4,323

Subordinated liabilities

11,829

11,827

 

11,821

Total liabilities

1,004,576

921,623

984,773

Equity

Share capital

9,559

9,559

9,559

Retained profits

76,633

54,623

59,683

Other reserves

13,786

17,960

19,257

Proposed dividends

2,103

2,103

3,824

Shareholders' funds

102,081

84,245

92,323

Total equity and liabilities

1,106,657

1,005,868

1,077,096

 

 

 

Consolidated Statement of Changes in Equity (unaudited)

 

 

Half-year ended

Half-year ended

Half-year ended

 

Figures in HK$m

30 June

 2013

30 June

 2012

31 December 2012

Share capital

At beginning and end of period

9,559

9,559

9,559

Retained profits (including

proposed dividends)

At beginning of period

63,507

53,152

56,726

Dividends to shareholders

- dividends approved in respect of the

previous year

(3,824

)

(3,633

)

__

- dividends declared in respect of the

current period

(2,103

)

(2,103

)

(4,206

)

Transfer

1,978

178

195

Total comprehensive income

for the period

19,178

9,132

10,792

78,736

56,726

63,507

Other reserves

Premises revaluation reserve

At beginning of period

13,790

12,280

12,811

Transfer

(449

)

(179

)

(175

)

Total comprehensive income

for the period

1,287

710

1,154

14,628

12,811

13,790

Available-for-sale investment reserve

At beginning of period

227

(561

)

71

Transfer

__

__

(4

)

Total comprehensive income

for the period

(3,111

)

632

160

(2,884

)

71

227

Cash flow hedging reserve

At beginning of period

17

6

9

Total comprehensive income

for the period

(15

)

3

8

2

9

17

Foreign exchange reserve

At beginning of period

3,071

3,043

2,907

Transfer

(64

)

__

__

Total comprehensive income

for the period

(1,701

)

(136

)

164

1,306

2,907

3,071

 

 

 

Half-year ended

Half-year ended

Half-year ended

Figures in HK$m

30 June

2013

30 June

 2012

31 December 2012

Other reserves

At beginning of period

2,152

2,155

2,162

Cost of share-based payment

arrangements

17

31

16

Transfer

(1,465

)

1

(16

)

Total comprehensive income

for the period

30

(25

)

(10

)

734

2,162

2,152

Total equity

At beginning of period

92,323

79,634

84,245

Dividends to shareholders

(5,927

)

(5,736

)

(4,206

)

Cost of share-based payment

arrangements

17

31

16

Total comprehensive income

for the period

15,668

10,316

12,268

102,081

84,245

92,323

 

 

 

Consolidated Cash Flow Statement (unaudited)

 

 

 

Half-year ended

Half-year ended

 

30 June

30 June

Figures in HK$m

2013

2012

Net cash inflow from operating activities

1,393

3,078

Cash flows from investing activities

Dividends received from associates

__

660

Purchase of an interest in an associate

__

(18

)

Purchase of available-for-sale investments

(23,729

)

(20,545

)

Purchase of held-to-maturity debt securities

(953

)

(502

)

Proceeds from sale or redemption of

available-for-sale investments

16,177

40,153

Proceeds from redemption of held-to-maturity

debt securities

55

305

Purchase of fixed assets and intangible assets

(3,229

)

(178

)

Proceeds from sale of fixed assets and

assets held for sale

910

26

Interest received from available-for-sale investments

826

1,272

Dividends received from available-for-sale investments

5

4

Net cash (outflow)/inflow from investing activities

(9,938

)

21,177

 

 

Cash flows from financing activities

 

 

Dividends paid

(5,927

)

(5,736

)

 

Interest paid for subordinated liabilities

(155

)

(126

)

 

Net cash outflow from financing activities

(6,082

)

(5,862

)

 

 

(Decrease)/increase in cash and cash equivalents

(14,627

)

18,393

 

 

Cash and cash equivalents at 1 January

125,034

120,469

 

Effect of foreign exchange rate changes

(2,557

)

(784

)

 

Cash and cash equivalents at 30 June

107,850

138,078

 

 

 

 

 

Financial Review

 

Net interest income

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

Net interest income/(expense) arising from:

- financial assets and liabilities that are

not at fair value through profit and loss

9,705

8,918

9,244

- trading assets and liabilities

(770

)

(656

)

(612

)

- financial instruments designated

at fair value

34

24

28

8,969

8,286

8,660

Average interest-earning assets

981,814

898,862

935,411

Net interest spread

1.73

%

1.74

%

1.73

%

Net interest margin

1.84

%

1.85

%

1.84

%

 

 

Net interest income rose by HK$683m, or 8.2%, to HK$8,969m, driven in part by the 9.2% increase in average interest-earning assets. The insurance business also contributed to the rise in net interest income, with the group recording solid growth in its life insurance investment portfolio.

 

Net interest margin and net interest spread both fell slightly by one basis point to 1.84% and 1.73% respectively compared with the same period last year. Income from the Treasury Balance Sheet Management portfolio declined, as yield curves continued to flatten and maturing available-for-sale debt securities were re-invested at prevailing lower interest rates. In mainland China, interbank market volatility and increasing competition for deposits placed significant downward pressure on spreads. These adverse factors were largely offset by the improved lending margins and the stable deposit spread in Hong Kong. The contribution from net free funds remained the same at 0.11%.

 

Compared with the second half of 2012, net interest income grew by HK$309m, or 3.6%, supported by higher average interest-earning assets, despite fewer days in the period. Net interest margin compared with the second half of 2012 was unchanged at 1.84%.

 

The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as 'Net trading income', while that 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 in the HSBC Group accounts:

 

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

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

Interest income

11,334

10,602

10,935

Interest expense

(1,629

)

(1,684

)

(1,691

)

Net interest income

9,705

8,918

9,244

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

(770

)

(656

)

(612

)

- Net interest income and expense reported as 'Net income from financial instruments designated at fair value'

34

24

28

Average interest-earning assets

944,273

835,783

895,641

Net interest spread

1.98

%

2.06

%

1.96

%

Net interest margin

2.07

%

2.15

%

2.05

%

 

 

Net fee income

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

- Stockbroking and related services

535

464

477

- Retail investment funds

845

495

635

- Insurance agency

223

135

232

- Account services

179

177

176

- Private banking service fee

53

54

39

- Remittances

158

144

157

- Cards

1,016

894

971

- Credit facilities

163

194

162

- Trade services

284

245

299

- Other

181

175

173

Fee income

3,637

2,977

3,321

Fee expense

(701

)

(569

)

(643

 )

2,936

2,408

2,678

 

Net fee income increased by HK$528m, or 21.9%, to HK$2,936m compared with the first half of 2012.

 

With the improved investor sentiment in the early part of the year, the bank used its strong wealth management platform to capture new business opportunities, driving a 70.7% increase in retail investment funds income. Stockbroking and related services income increased by 15.3%, due to higher transaction volumes in the more favourable market conditions.

 

Insurance-related fee income rose by 65.2%, benefitting from the increase in non-life insurance products distribution commission since the second half of last year as a result of the disposal of the bank's general insurance manufacturing business in the second half of 2012. This increase was offset by a corresponding fall in non-life insurance underwriting profit.

 

Supported by effective marketing campaigns, the credit card business sustained its growth momentum in the first half of 2013 in terms of card income and average card balances. Credit card income increased by 13.6%, underpinned by the 11.4% rise in cardholder spending and the 2.6% increase in the number of cards in circulation.

 

Fees from remittances and trade-related service income rose by 9.7% and 15.9% respectively, reflecting an increase in trade activity and the expansion of renminbi cross-border trade settlement volumes.

 

Compared with the second half of 2012, net fee income increased by 9.6%, mainly reflecting higher income from retail investment funds and stockbroking and related services.

 

 

 

Trading income

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

Trading income:

- foreign exchange

1,190

1,193

793

- securities, derivatives and

other trading activities

14

(23

)

100

1,204

1,170

893

 

Trading income grew by HK$34m, or 2.9%, to HK$1,204m compared with the first half of 2012. Foreign exchange income remained broadly unchanged when compared with the first half of 2012. Increased customer-driven business and higher customer demand for foreign exchange option-linked structured products, notably in renminbi, has resulted in an improvement in foreign exchange revenues. However, these favourable factors were offset by lower net interest income from funding swapsWactivities.

 

Income from securities, derivatives and other trading activities recorded a net gain of HK$14m, compared with a net loss of HK$23m for the same period last year, reflecting higher income on interest rate derivatives and linked structured products, caused by market interest rate movement, partly offset by the revaluation loss on equity options backing a life endowment product.

 

 

 

 

 

W 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 HKAS 39, 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.

 

 

 

Net income/(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

2013

2012

2012

Net income/(loss) on assets

designated at fair value which

back insurance and

investment contracts

(111

)

102

274

 

 

Net income from financial instruments designated at fair value recorded a net loss of HK$111m compared with a net income of HK$102m for the first half of 2012, mainly due to unfavourable equity movements during the first half of 2013. To the extent that the investment return is attributable to policyholders, there is an offsetting movement reported under 'net insurance claims incurred and movement in policyholders' liabilities' or 'movement in present value of in-force long-term insurance business ('PVIF')'.

 

 

 

Other operating income

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

Rental income from

investment properties

106

94

103

Movement in present value

of in-force long-term

insurance business

622

614

201

Other

367

76

93

1,095

784

397

 

Other operating income rose by HK$311m, or 39.7% compared with the first half of 2012, driven by a gain on a property held by the insurance business.

 

 

 

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

2013

2012

2012

(restated)

(restated)

Investment income:

- retail investment funds

845

495

635

- structured investment productsW

667

653

299

- private banking service feeWW

65

72

51

- stockbroking and related services

535

464

477

- margin trading and others

68

71

71

2,180

1,755

1,533

Insurance income:

- life insurance

1,722

1,697

1,319

- general insurance and others

105

178

132

1,827

1,875

1,451

Total

4,007

3,630

2,984

 

W Income from structured investment products includes income reported under net fee income on the sales of structured investment products issued by other providers. It also includes profit generated from the selling of structured investment products in issue, reported under trading income.

 

W W 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 income recorded growth of 10.4% compared with the first half of 2012. Investment income increased by 24.2%, driven by strong retail investment fund sales and a higher level of stock market trading activity. Insurance business income decreased slightly by 2.6%, mainly due to the fall in non-life insurance income.

 

 

 

Analysis of insurance business income

 

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

 

Figures in HK$m

2013

2012

2012

 

 

Life insurance:

 

- net interest income and fee income

1,509

1,381

1,464

 

- investment returns on life insurance

 

funds/share of associate's profit/surplus

on property revaluation backing

insurance contract

 

 

211

 

 

210

 

 

551

 

- net earned insurance premiums

5,800

6,446

4,328

 

- net insurance claims incurred and

 

movement in policyholders' liabilities

(6,420

)

(6,954

)

(5,225

)

 

- movement in present value of in-force

 

long-term insurance business

622

614

201

 

1,722

1,697

1,319

 

General insurance and others

105

178

132

 

Total

1,827

1,875

1,451

 

 

 

Life insurance income rose by HK$25m, or 1.5%, to HK$1,722m. Supported by our comprehensive range of life insurance products, the bank achieved an 8.5% increase in new annualised life insurance premiums when compared with the first half of 2012. The bank continued to enhance its strong position in providing retirement savings and protection products to its customers. In response to the low interest rate environment and to achieve stable growth in life insurance business income, part of the life insurance funds investment portfolio has been invested in commercial property, which recorded a revaluation gain during the first half of 2013.

 

Net interest income and fee income from the life insurance investment portfolio grew by 9.3%, as a result of the growth in the size of the portfolio. Investment returns on life insurance funds remained broadly unchanged. This reflected the net effect of the unfavourable movement in equity markets partly offset by the property revaluation gains on the assets portfolio supporting insurance contracts and reported under 'trading income', 'net income/(loss) from financial instruments designated at fair value' and 'other operating income'. To the extent that the investment return is attributable to policyholders, there is an offsetting movement reported under 'net insurance claims incurred and movement in policyholders' liabilities' or 'movement in present value of in-force long-term insurance business ('PVIF')'. The movement in PVIF was broadly the same as last year.

 

General insurance income decreased by 41.0% to HK$105m, mainly due to the disposal of the bank's general insurance subsidiary in the second half of 2012. The decrease in non-life insurance underwriting profit was offset by a corresponding increase in non-life insurance products distribution commission reported under 'Net fee income'.

 

 

 

Loan impairment charges

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

Net charge for impairment of loans

and advances to customers:

Individually assessed impairment

allowances:

- new allowances

(61

)

(213

)

(81

)

- releases

57

81

143

- recoveries

7

4

9

3

(128

)

71

Net charge for collectively assessed

impairment allowances

(201

)

(121

)

(208

)

Net charge for loan impairment

(198

)

(249

)

(137

)

 

Loan impairment charges fell by HK$51m, or 20.5%, year-on-year to HK$198m. Overall credit quality was relatively stable with loan impairment ratios remaining at a low level. We remain cautious on our credit outlook.

 

Individually assessed impairment charges recorded a net release of HK$3m compared with a net charge of HK$128m for the first half of 2012 due to lower impairment charges on corporate and commercial banking customers during the first half of 2013.

 

Collectively assessed charges increased by HK$80m, largely due to the increase in impairment charges for credit card and personal loan portfolios, reflecting a revision to collective impairment models. Impairment allowances for loans not individually identified as impaired recorded a higher release compared with the first half of 2012 as a result of improved average historical loss rate.

 

 

 

Operating expenses

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

2013

2012

2012

Figures in HK$m

(restated)

(restated)

Employee compensation and benefits:

- salaries and other costs

1,953

1,871

1,929

- retirement benefit costs

217

227

229

2,170

2,098

2,158

General and administrative expenses:

- rental expenses

315

275

284

- other premises and equipment

519

449

515

- marketing and advertising expenses

322

272

345

- other operating expenses

586

600

635

1,742

1,596

1,779

Depreciation of premises, plant

and equipment

376

381

381

Amortisation of intangible assets

57

61

54

4,345

4,136

4,372

Cost efficiency ratio

32.2

%

33.5

%

36.4

%

Full-time equivalent staff numbers

At 30 June

At 30 June

At 31 December

by region

2013

2012

2012

Hong Kong and others

8,014

7,863

7,797

Mainland

1,820

1,785

1,883

Total

9,834

9,648

9,680

 

 

Operating expenses rose by HK$209m, or 5.1%, compared with the first half of 2012, reflecting the bank's continued investment in new business platforms and mainland operations to support long-term business growth while continuing carefully to manage costs. Compared with the second half of 2012, operating expenses were broadly unchanged.

 

Compared with the first half of 2012, employee compensation and benefits increased by HK$72m, or 3.4%. Salaries and other costs rose by 4.4%, reflecting the annual salary increment and increased staff numbers. General and administrative expenses were up 9.1%, due to the increase in marketing expenditure as more branding and promotional activities were conducted to support business growth. Rental expenses rose due to higher rents for branches in Hong Kong. Other premises and equipment expenses also increased as a result of continued investment in information technology infrastructure.

 

At 30 June 2013, the group's number of full-time equivalent staff rose by 154 compared with the 2012 year-end.

 

With the increase in net operating income before loan impairment charges outpacing the growth in operating expenses, the cost efficiency ratio for the first half of 2013 reduced by 1.3 percentage points to 32.2%, compared with 33.5% for the first half of 2012. Compared with the second half of 2012, the cost efficiency ratio fell by 4.2 percentage points.

 

 

 

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

2013

2012

2012

Net gains from disposal of

available-for-sale equity securities

__

1

__

Gains less losses on disposal of

assets held for sale

175

__

__

Gains less losses on disposal of loans

and advances

1

__

(4

)

Losses on disposal of fixed assets

(3

)

(1

)

(1

)

173

__

(5

)

 

Gains less losses from financial investments and fixed assets rose by HK$173m compared with the first half of 2012. The HK$175m net gain on disposal of assets held for sale was from the disposal of certain properties.

 

 

 

Gain on reclassification of Industrial Bank

 

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

Gain on reclassification of

Industrial Bank

8,454

__

__

 

On 7 January 2013, Industrial Bank completed a private placement of additional share capital to a number of third parties, thereby diluting the group's equity holding from 12.8% to 10.9%. As a result of this and other factors, the group considers it is no longer in a position to exercise significant influence over Industrial Bank and ceased to account for the investment as an associate from that date, giving rise to an accounting gain of HK$8,454m.

 

 

 

Gain on disposal of a subsidiary

Half-year ended

Half-year ended

Half-year ended

30 June

30 June

31 December

Figures in HK$m

2013

2012

2012

Net gains from disposal of a

subsidiary

__

__

355

 

The HK$355m gain from disposal of a subsidiary in the second half of 2012 represented the disposal of the group's general insurance business in the second half of 2012. 

 

 

 

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

2013

2012

(restated)

2012

(restated)

Current tax - provision for

Hong Kong profits tax

Tax for the period

1,298

1,104

1,121

Adjustment in respect of

prior periods

__

18

(93

)

Current tax - taxation outside

Hong Kong

Tax for the period

52

92

__

Adjustment in respect of

 

prior periods

7

__

(2

)

Deferred tax

Origination and reversal of

temporary differences

(1,052

)

133

294

Total tax expense

305

1,347

1,320

 

The current tax provision is based on the estimated assessable profit for the first half of 2013, and is determined for the bank and its subsidiaries operating in Hong Kong by using the Hong Kong profits tax rate of 16.5% (the same as in 2012). 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. The release in deferred tax was mainly related to the reclassification of Industrial Bank as a financial investment in the first half of 2013.

 

 

 

Earnings per share

 

The calculation of earnings per share for the first half of 2013 is based on earnings of HK$18,468m (HK$9,253m and HK$10,074m for the first and second halves of 2012 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 2012).

 

 

 

Dividends per share

 

Half-year ended

Half-year ended

Half-year ended

 

30 June

30 June

31 December

 

2013

2012

2012

 

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

__

__

__

__

2.00

3,824

2.20

4,206

2.20

4,206

3.10

5,927

 

 

 

 

Segmental analysis

 

Hong Kong Financial Reporting Standard 8 ('HKFRS 8') requires segmental disclosure to be based on the way that the group's chief operating decision maker regards and manages the group, with the amounts reported for each reportable segment being the measures reported to the group's chief operating decision maker for the purpose of assessing segmental performance and making decisions about operating matters. To align with the information reported internally to the group's most senior executive management for the purposes of resources allocation and performance assessment, the group has presented the following five reportable segments. Consolidation adjustments made in preparing the group's financial statements and inter-segment elimination of income or expenses upon consolidation are included in the 'Inter-segment elimination'.

 

Hong Kong and other businesses segment

·; Retail Banking and Wealth Management activities offer a broad range of products and services to meet the personal banking, consumer lending and wealth management needs of individual customers. Personal banking products typically include current and savings accounts, mortgages and personal loans, credit cards, insurance and wealth management;

·; Corporate and Commercial Bankingactivities include the provision of financial services, payments and cash management, international trade finance, insurance, wealth management and tailored financial solutions to corporate and commercial customers;

·; Treasury activities are mainly the provision of treasury operation services in credit, interest rates, foreign exchange, money markets and securities services. 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, equity shares and subordinated debt funding;

 

Mainland China business segment

·; Mainland China business segment comprises the business of Hang Seng Bank (China) Limited and our share of profits from mainland associates.

 

(a) Segmental result

 

For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the business segments by way of internal capital allocation and fund transfer-pricing mechanisms. Cost allocation is based on the direct costs incurred by the respective business segments and apportionment of management overheads. Bank-owned premises are reported under Other segment. When these premises are utilised by Global Businesses, notional rent will be charged to respective business segments based on the market rate.

 

Profit before tax contributed by the business segments for the periods stated is set out in the table below. More business segment analysis and discussion is set out in the 'Segmental analysis' section on page 11.

 

 

Hong Kong & other businesses

 

 

 

 

Retail Banking

Corporate and

Mainland

 

 

and Wealth

Commercial

China

 

Figures in HK$m

Management

Banking

Treasury

Other

Total

business

Total

 

 

Half-year ended

30 June 2013

 

 

Profit before tax

4,455

3,140

1,320

1,225

10,140

8,633

18,773

 

Share of profit before tax

23.8

%

16.7

%

7.0

%

6.5

%

54.0

%

46.0

%

100.0

%

 

Share of profit before tax as a

% of Hong Kong & other

businesses

 43.9

%

31.0

%

13.0

%

12.1

%

100.0

%

 

 

Half-year ended

30 June 2012 (restated)

 

 

Profit before tax

3,896

2,761

1,311

167

8,135

2,465

10,600

 

Share of profit before tax

36.7

%

26.0

%

12.4

%

1.6

%

76.7

%

23.3

%

100.0

%

 

Share of profit before tax as a

% of Hong Kong & other

businesses

47.9

%

33.9

%

16.1

%

2.1

%

100.0

%

 

Half-year ended

31 December 2012 (restated)

 

Profit before tax

3,955

3,089

1,050

342

8,436

2,958

11,394

Share of profit before tax

34.7

%

27.1

%

9.2

%

3.0

%

74.0

%

26.0

%

100.0

%

Share of profit before tax as a

% of Hong Kong & other

businesses

46.9

%

36.6

%

12.4

%

4.1

%

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.

 

 

Inter-segment

Figures in HK$m

Hong Kong

Mainland

Americas

Others

elimination

Total

Half-year ended 30 June 2013

Income and expense

Total operating income

18,640

796

421

81

(41

)

19,897

Profit before tax

9,683

8,633

404

53

__

18,773

 

At 30 June 2013

Total assets

1,008,809

118,176

57,583

10,996

(88,907

)

1,106,657

Total liabilities

911,782

109,913

56,008

10,703

(83,830

)

1,004,576

Interest in associates

1,778

975

__

__

__

2,753

Non-current assetsW

37,556

1,083

__

1

__

38,640

 

Half-year ended 30 June 2012 (restated)

Income and expense

Total operating income

17,801

940

595

69

(40

)

19,365

Profit before tax

7,512

2,465

579

44

__

10,600

 

At 30 June 2012 (restated)

Total assets

905,808

116,278

60,163

11,393

(87,774

)

1,005,868

Total liabilities

844,866

89,178

59,086

11,182

(82,689

)

921,623

Interest in associates

1,506

20,091

__

__

__

21,597

Non-current assetsW

28,384

1,051

__

1

__

29,436

 

Half-year ended 31 December 2012 (restated)

Income and expense

Total operating income

15,881

834

502

75

(41

)

17,251

Profit before tax

7,916

2,958

468

52

__

11,394

 

At 31 December 2012

Total assets

967,288

125,232

61,296

11,768

(88,488

)

1,077,096

Total liabilities

901,369

95,146

60,129

11,523

(83,394

)

984,773

Interest in associates

1,652

23,003

__

__

__

24,655

Non-current assetsW

29,872

1,032

__

1

__

30,905

W  Non-current assets consist of properties, plant and equipment, goodwill and other intangible assets.

 

 

 

Cash and balances with banks

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Cash in hand

10,161

9,933

11,041

Balances with central banks

4,016

1,523

8,973

Balances with banks

5,013

6,816

7,068

19,190

18,272

27,082

 

 

 

Placings with and advances to banks

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Placings with and advances to banks

maturing within one month

80,620

63,727

77,367

Placings with and advances to banks

maturing after one month

but less than one year

53,392

72,558

61,316

Placings with and advances to banks

maturing after one year

1,987

1,663

1,699

135,999

137,948

140,382

 

 

 

Trading assets

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Treasury bills

28,206

33,972

26,808

Certificates of deposit

__

430

400

Other debt securities

5,935

5,815

6,106

Debt securities

34,141

40,217

33,314

Investment funds

25

22

30

Total trading securities

34,166

40,239

33,344

OtherW

343

798

1,055

Total trading assets

34,509

41,037

34,399

Debt securities:

- listed in Hong Kong

4,322

3,330

3,046

- listed outside Hong Kong

232

262

238

4,554

3,592

3,284

- unlisted

29,587

36,625

30,030

34,141

40,217

33,314

Investment funds:

- listed in Hong Kong

25

22

30

Total trading securities

34,166

40,239

33,344

Debt securities:

Issued by public bodies:

- central governments and central banks

33,077

38,016

31,105

- other public sector entities

69

81

80

33,146

38,097

31,185

Issued by other bodies:

- banks

581

909

934

- corporate entities

414

1,211

1,195

995

2,120

2,129

34,141

40,217

33,314

Investment funds:

Issued by corporate entities

25

22

30

Total trading securities

34,166

40,239

33,344

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

 

 

Trading assets remained broadly at the same level as at the end of 2012. The trading securities currently held by the bank are mostly Hong Kong Exchange Fund bills with short tenors.

 

 

 

Financial assets designated at fair value

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Certificates of deposit

__

1

__

Other debt securities

4,228

3,831

4,047

Debt securities

4,228

3,832

4,047

Equity shares

2,990

1,356

1,632

Investment funds

2,932

2,520

2,664

10,150

7,708

8,343

Debt securities:

- listed in Hong Kong

87

15

38

- listed outside Hong Kong

465

44

336

552

59

374

- unlisted

3,676

3,773

3,673

4,228

3,832

4,047

Equity shares:

- listed in Hong Kong

1,554

1,356

1,632

- listed outside Hong Kong

1,408

__

__

2,962

1,356

1,632

- unlisted

28

__

__

2,990

1,356

1,632

Investment funds:

- listed in Hong Kong

27

24

30

- listed outside Hong Kong

741

476

599

768

500

629

- unlisted

2,164

2,020

2,035

2,932

2,520

2,664

10,150

7,708

8,343

Debt securities:

Issued by public bodies:

- central governments and central banks

313

__

181

- other public sector entities

46

4

1

359

4

182

Issued by other bodies:

- banks

3,664

3,745

3,687

- corporate entities

205

83

178

3,869

3,828

3,865

4,228

3,832

4,047

Equity shares:

Issued by banks

499

265

370

Issued by public sector entities

12

__

13

Issued by corporate entities

2,479

1,091

1,249

2,990

1,356

1,632

Investment funds:

Issued by banks

__

341

400

Issued by corporate entities

2,932

2,179

2,264

2,932

2,520

2,664

10,150

7,708

8,343

 

 

 

Loans and advances to customers

 

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Gross loans and advances to

customers

581,080

506,583

537,571

Less:

Loan impairment allowances:

- individually assessed

(666

)

(966

)

(681

)

- collectively assessed

(709

)

(715

)

(728

)

579,705

504,902

536,162

 

 

 

Loan impairment allowances against loans and advances to customers

 

 

Individually

Collectively

 

Figures in HK$m

 

assessed

assessed

Total

 

 

At 1 January 2013

681

728

1,409

 

Amounts written off

(18

)

(246

)

(264

)

 

Recoveries of loans and advances

written off in previous years

7

24

31

 

New impairment allowances

 

charged to income statement

 

61

324

385

 

Impairment allowances released

 

 

 

 

 

 

to income statement

 

(64

)

(123

)

(187

)

 

Unwinding of discount of loan

 

 

 

 

 

 

impairment allowances

 

 

 

recognised as 'interest income'

 

(3

)

 

(1

)

(4

)

 

Exchange

2

3

5

 

At 30 June 2013

666

709

1,375

 

 

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

 

At 30 June

At 30 June

At 31 December

2013

2012

2012

%

%

%

Loan impairment allowances:

- individually assessed

0.11

0.19

0.13

- collectively assessed

0.12

0.14

0.13

Total loan impairment allowances

0.23

0.33

0.26

 

Total loan impairment allowances as a percentage of gross loans and advances to customers was 0.23% at 30 June 2013 compared with 0.26% at the end of 2012. Individually assessed allowances as a percentage of gross loans and advances improved by two basis points to 0.11% as overall asset quality remained sound. Collectively assessed allowances as a percentage of gross loans and advances fell by one basis point to 0.12%.

 

 

 

Impaired loans and advances to customers and allowances

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Gross impaired loans and

advances

1,289

1,691

1,340

Individually assessed allowances

(666

)

(966

)

(681

)

623

725

659

Individually assessed allowances

as a percentage of gross

impaired loans and advances

51.7

%

57.1

%

50.8

%

Gross impaired loans and

advances as a percentage of

gross loans and advances to

customers

0.22

%

0.33

%

0.25

%

 

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

 

Gross impaired loans and advances decreased by HK$51m, or 3.8%, to HK$1,289m compared with the year-end of 2012, due to repayments by corporate and commercial banking customers. Gross impaired loans and advances as a percentage of gross loans and advances to customers stood at 0.22% compared with 0.25% at the year-end of 2012.

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Gross individually assessed

impaired loans and advances

1,131

1,568

1,190

Individually assessed allowances

(666

)

(966

)

(681

)

465

602

509

Gross individually assessed

impaired loans and advances

as a percentage of

gross loans and advances to

customers

0.19

%

0.31

%

0.22

%

Amount of collateral which

has been taken into account

 

in respect of individually assessed

impaired loans and advances to

customers

407

569

498

 

 

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 loans and advances to customers, only the amount of collateral up to the gross loans and advances is included.

 

 

 

Overdue loans and advances to customers

 

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

 

At 30 June

At 30 June

At 31 December

2013

2012

2012

HK$m

%

HK$m

%

HK$m

%

Gross loans and advances which

have been overdue with respect

to either principal or interest

for periods of:

- more than three months but

not more than six months

- more than six months but

not more than one year

- more than one year

140

__

200

__

114

__

50

__

252

0.1

143

__

681

0.1

700

0.1

662

0.2

871

0.1

1,152

0.2

919

0.2

 

Loans and advances with a specific repayment date are classified as overdue when the principal or interest is overdue and remains unpaid at the period-end. Loans and advances repayable by regular instalments are treated as overdue when an instalment payment is overdue and remains unpaid at the period-end. Loans and 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 loans and advances have remained continuously outside the approved limit advised to the borrower for more than the overdue period in question.

 

Overdue loans and advances decreased by HK$48m, or 5.2%, to HK$871m compared with the last year-end. Overdue loans and advances as a percentage of gross loans and advances to customers stood at 0.1%.

 

 

 

Rescheduled loans and advances to customers

 

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

At 30 June

At 30 June

At 31 December

2013

2012

2012

HK$m

%

HK$m

%

HK$m

%

Rescheduled loans and

advances to customers

167

__

161

__

196

__

 

Rescheduled loans and advances to customers are those loans and 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 loan and 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 loans and advances to customers which have been overdue for more than three months under the rescheduled terms are reported as overdue loans and advances.

 

Rescheduled loans and advances stood at HK$167m at 30 June 2013, a fall of HK$29m, or 14.8% compared with last year-end, representing 0.03% of gross loans and advances to customers.

 

 

 

Segmental analysis of loans and advances to customers by geographical area

 

Loans and 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 a loan is guaranteed by a party located in an area that is different from that of the counterparty.

 

Figures in HK$m

At 30 June 2013

 

Gross loans and advances

Individually

 impaired

loans and advances

Overdue

loans and advances

Individually assessed allowances

Collectively assessed allowances

 

Hong Kong

467,327

886

715

498

545

 

Rest of Asia-Pacific

106,461

212

150

163

153

 

Others

7,292

33

6

5

11

 

581,080

1,131

871

666

709

 

 

Figures in HK$m

At 30 June 2012 (restated)

Gross loans and advances

Individually

 impaired

loans and advances

Overdue loans and

advances

Individually assessed allowances

Collectively assessed allowances

 

Hong Kong

428,752

1,292

973

752

560

 

Rest of Asia-Pacific

72,304

252

133

211

144

 

Others

5,527

24

46

3

11

 

506,583

1,568

1,152

966

715

 

 

Figures in HK$m

At 31 December 2012

Gross loans and advances

Individually

impaired

loans and advances

Overdue loans and

advances

Individually assessed allowances

Collectively assessed allowances

 

Hong Kong

447,310

948

718

503

561

 

Rest of Asia-Pacific

84,428

218

201

177

156

 

Others

5,833

24

-

1

11

 

537,571

1,190

919

681

728

 

 

 

 

Gross loans and advances to customers by industry sector

 

The analysis of gross loans and advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority ('HKMA') is as follows:

 

 

At 30 June

At 30 June

At 31 December

 

2013

2012

2012

Figures in HK$m

Gross loans and advances to

customers for use in Hong Kong

Industrial, commercial and

financial sectors

Property development

28,551

27,927

29,771

Property investment

99,722

103,178

103,675

Financial concerns

4,566

3,944

3,595

Stockbrokers

402

227

325

Wholesale and retail trade

19,850

15,952

16,445

Manufacturing

17,252

13,792

15,212

Transport and transport equipment

6,072

6,082

5,774

Recreational activities

224

233

244

Information technology

1,968

1,680

1,430

Other

32,751

23,102

26,766

211,358

196,117

203,237

Individuals

Loans and advances for the purchase of

flats under the Government Home

Ownership Scheme, Private Sector

Participation Scheme and Tenants

Purchase Scheme

13,619

13,962

13,886

Loans and advances for the purchase of

other residential properties

129,733

115,731

125,176

Credit card advances

20,081

18,392

20,389

Other

14,333

13,814

13,514

177,766

161,899

172,965

Total gross loans and

advances for use in Hong Kong

389,124

358,016

376,202

Trade finance

62,892

42,917

47,555

Gross loans and advances

for use outside Hong Kong

129,064

105,650

113,814

Gross loans and advances

to customers

581,080

506,583

537,571

 

 

Gross loans and advances to customers grew by HK$43.5bn, or 8.1%, to HK$581.1bn compared with the end of 2012.

 

Loans and advances for use in Hong Kong increased by HK$12.9bn, or 3.4%. Lending to the industrial, commercial and financial sectors grew by 4.0%. Lending to property development and property investment declined by 4.1% and 3.8% respectively, due mainly to repayments of certain existing loans. Lending to financial concerns remained active and grew by 27.0%. The bank remained major market participant in the Hong Kong Government-organised schemes to support SMEs, and recorded growth of 20.7% in the wholesale and retail trade sector and 13.4% in the manufacturing sector. Growth in lending to 'Other' was mainly due to certain new working capital financing facilities for large corporate customers.

 

Lending to individuals increased by 2.8% compared with the last year-end. The property market remained fairly active early this year but began to slow after the government implemented new prudential measures. The bank was able to sustain a leading position for the mortgage business based on diversified mortgage products, a competitive pricing strategy and premium service. Residential mortgage lending to individuals rose by 3.6% compared with the end of 2012. Credit card advances were broadly the same level as last year-end. Other loans to individuals grew by 6.1%, reflecting the success of the group in expanding its consumer finance business.

 

Trade finance regained momentum and recorded strong growth against last year, reflecting Corporate and Commercial Banking's achievement in expanding trade finance business by maintaining close relationship with its business partners to support cross-border renminbi trade business on the Mainland.

 

Loans and advances for use outside Hong Kong rose by 13.4%, compared with the end of 2012, driven largely by lending on the Mainland. The mainland loan portfolio increased by 16.8% to HK$60.2bn, underpinned by the expansion of renminbi lending to corporate and commercial customers. The group employed a cautious approach to lending on the Mainland and will continue to strengthen its prudent credit policies in light of the more difficult operating conditions for mainland businesses.

 

 

 

Financial investments

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Available-for-sale at fair value:

- debt securities

166,288

159,231

185,443

- equity shares

26,103

255

295

- investment funds

43

42

39

Held-to-maturity debt securities

at amortised cost

70,935

64,857

67,631

263,369

224,385

253,408

Fair value of held-to-maturity debt securities

72,386

68,931

72,716

Treasury bills

75,014

72,101

98,262

Certificates of deposit

10,980

12,425

11,228

Other debt securities

151,229

139,562

143,584

Debt securities

237,223

224,088

253,074

Equity shares

26,103

255

295

Investment funds

43

42

39

263,369

224,385

253,408

Debt securities:

- listed in Hong Kong

12,676

19,127

16,625

- listed outside Hong Kong

46,430

37,866

48,166

59,106

56,993

64,791

- unlisted

178,117

167,095

188,283

237,223

224,088

253,074

Equity shares:

- listed in Hong Kong

65

52

65

- listed outside Hong Kong

25,753

5

6

25,818

57

71

- unlisted

285

198

224

26,103

255

295

Investment funds:

- unlisted

43

42

39

263,369

224,385

253,408

Fair value of listed financial investments

85,235

58,105

66,270

Debt securities:

Issued by public bodies:

- central governments and central banks

110,094

102,507

128,587

- other public sector entities

27,655

22,157

23,638

137,749

124,664

152,225

Issued by other bodies:

- banks

70,860

77,433

76,854

- corporate entities

28,614

21,991

23,995

99,474

99,424

100,849

237,223

224,088

253,074

Equity shares:

Issued by banks

25,753

5

6

Issued by corporate entities

350

250

289

26,103

255

295

Investment funds:

Issued by corporate entities

43

42

39

263,369

224,385

253,408

 

 

 

Debt securities by rating agency designation

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

AA- to AAA

184,183

170,992

183,420

A- to A+

43,799

43,052

61,001

B+ to BBB+

6,872

7,571

6,161

Unrated

2,369

2,473

2,492

237,223

224,088

253,074

 

 

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 financial 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 premiums or discounts, the carrying value of the securities are adjusted to reflect the effective interest rate of the debt securities taking into account such premiums and discounts.

 

Financial investments rose by HK$10.0bn, or 3.9%, compared with the last year-end. Debt securities investment decreased by HK$15.9bn while equity shares increased by HK$25.8bn due to the reclassification of the bank's investment in Industrial Bank from associated company to available-for-sale financial investment.

 

Investments were primarily in high-quality debt securities or debt securities guaranteed by governments, reflecting the bank's strategy of identifying quality investment opportunities that enable it to optimise returns while prudently managing risk. At 30 June 2013, about 99% of the group's holdings of debt securities were assigned 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 equally with all of the respective guarantors' 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.

 

 

 

Interest in associates

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Share of net assets

2,597

21,082

24,151

Intangible assets

15

43

29

Goodwill

141

472

475

2,753

21,597

24,655

 

Interest in associates fell by HK$21,902m compared with last year-end, mainly due to the reclassification of Industrial Bank as a financial investment on 7 January 2013.

 

 

 

Intangible assets

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Present value of in-force long-term

insurance business

6,625

5,802

6,003

Internally developed software

390

426

400

Acquired software

59

46

51

Goodwill

329

329

329

7,403

6,603

6,783

 

 

 

Other assets

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Items in the course of collection

from other banks

5,540

5,333

5,642

Prepayments and accrued income

3,245

2,975

2,999

Assets held for sale

- repossessed assets

4

23

16

- assets of disposal groups held for sale

__

686

__

- other assets held for sale

__

250

593

Acceptances and endorsements

6,057

5,076

5,264

Retirement benefit assets

42

30

31

Other accounts

2,702

2,147

2,036

17,590

16,520

16,581

 

 

 

Current, savings and other deposit accounts

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Current, savings and

other deposit accounts:

- as stated in consolidated

balance sheet

779,884

720,397

769,147

- structured deposits reported as

trading liabilities

39,990

37,764

38,113

819,874

758,161

807,260

By type:

- demand and current accounts

68,142

59,187

68,071

- savings accounts

483,341

453,716

495,880

- time and other deposits

268,391

245,258

243,309

819,874

758,161

807,260

 

 

 

Certificates of deposit and other debt securities in issue

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Certificates of deposit and

other debt securities in issue:

- as stated in consolidated

balance sheet

11,022

12,662

11,291

- structured certificates of deposit

and other debt securities in issue

reported as trading liabilities

1,312

1,009

248

12,334

13,671

11,539

By type:

- certificates of deposit in issue

11,022

12,662

11,291

- other debt securities in issue

1,312

1,009

248

12,334

13,671

11,539

Customer deposits, including current, savings and other deposits accounts, certificates of deposit and other debt securities in issue stood at HK$832.2bn at 30 June 2013 - a rise of 1.6% from the end of 2012. Structured deposits, certificates of deposit and other debt securities in issue increased as instruments with yield enhancement features gained popularity. Deposits with Hang Seng China also rose by 11.6%, driven mainly by renminbi deposits.

 

At 30 June 2013, the advances-to-deposits ratio was 69.7%, compared with 65.5% at 31 December 2012.

 

 

 

Trading liabilities

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Structured certificates of deposit and

other debt securities in issue

1,312

1,009

248

Structured deposits

39,990

37,764

38,113

Short positions in securities and others

26,447

18,591

21,492

67,749

57,364

59,853

 

 

 

Other liabilities

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Items in the course of transmission

to other banks

8,034

6,538

8,153

Accruals

3,052

2,404

3,248

Acceptances and endorsements

6,057

5,076

5,264

Retirement benefit liabilities

1,682

3,494

2,449

Liabilities of disposal groups held for sale

__

646

__

Other

2,049

2,311

2,539

20,874

20,469

21,653

 

 

 

Subordinated liabilities

 

 

At 30 June

At 30 June

At 31 December

 

 

Figures in HK$m

2013

2012

2012

 

 

 

 

Nominal value

Description

 

 

 

Amount owed to third parties

 

 

 

US$300m

Callable floating rate

 

 

subordinated notes

 

 

due July 2017W

__

2,326

__

 

 

 

 

Amount owed to HSBC Group undertakings

 

 

 

 

US$775m

Floating rate

 

 

subordinated loan debt

6,011

6,011

6,007

 

 

due December 2020

 

 

 

 

 

 

US$450m

Floating rate

 

 

 

subordinated loan debt

 

 

 

due July 2021

3,491

3,490

3,488

 

 

 

 

US$300m

Floating rate

 

 

subordinated loan debt

 

 

due July 2022W

2,327

__

2,326

 

 

11,829

11,827

11,821

 

 

 

 

Representing:

 

 

- measured at amortised cost

11,829

11,827

11,821

 

 

 

W  The bank exercised its option to redeem these subordinated notes at par of US$300m and replenished them with a new issue of US$300m subordinated loan debt in July 2012.

 

The outstanding subordinated loan debt, which qualifies as supplementary capital, serves to help the bank maintain a balanced capital structure and support business growth.

 

 

 

Shareholders' funds

 

At 30 June

At 30 June

At 31 December

Figures in HK$m

2013

2012

2012

Share capital

9,559

9,559

9,559

Retained profits

76,633

54,623

59,683

Premises revaluation reserve

14,628

12,811

13,790

Cash flow hedging reserve

2

9

17

Available-for-sale investment reserve

- on debt securities

(141

)

(176

)

(57

)

- on equity securities

(2,743

)

247

284

Capital redemption reserve

99

99

99

Other reserves

1,941

4,970

5,124

Total reserves

90,419

72,583

78,940

99,978

82,142

88,499

Proposed dividends

2,103

2,103

3,824

Shareholders' funds

102,081

84,245

92,323

Return on average shareholders' funds

35.9

%

22.8

%

22.9

%

Shareholders' funds (excluding proposed dividends) grew by HK$11,479m, or 13.0%, to HK$99,978m at 30 June 2013. Retained profits rose by HK$16,950m, mainly reflecting the growth in attributable profit (including the accounting gain on Industrial Bank) after the appropriation of interim dividends during the period.

 

The premises revaluation reserve increased by HK$838m, reflecting mainly the improved commercial property market during the first half of 2013.

 

The available-for-sale investment reserve for equity securities recorded a deficit of HK$2,743m compared with a surplus of HK$284m at year-end 2012, mainly caused by the share price of Industrial Bank being lower at 30 June 2013 than on reclassification as a financial investment on 7 January 2013. Changes in the fair value of the bank's investment in Industrial Bank are recognised in the available-for-sale investment reserve unless the investment becomes impaired. If the investment becomes impaired, the cumulative revaluation deficit would be reclassified from the available-for-sale investment reserve to the income statement. The group will continue to perform an impairment review of its investment in Industrial Bank at each balance sheet date in accordance with the group's accounting policy on impairment of available-for-sale financial assets.

 

Other reserves decreased by HK$3,183m compared with last year-end, reflecting the recycling of the Industrial Bank-related cumulative foreign exchange and other reserves to retained profits as a result of the reclassification.

 

The return on average shareholders' funds was 35.9%, compared with 22.8% for the first half of 2012. Excluding the Industrial Bank reclassification, the return on average shareholders' funds was 19.0%, compared with 17.4% for the first half of 2012.

 

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 2013.

 

 

 

Capital management

 

The Banking (Capital) (Amendment) Rules 2012, effective on 1 January 2013, signified the first phase of Basel III requirements in Hong Kong. The definition of regulatory capital under Basel III is different from that under Basel II which was used at 31 December 2012. The capital disclosures for June 2013 under Basel III are, therefore, not directly comparable with the disclosures for December 2012 prepared under Basel II basis. Certain comparative figures have not been provided where the current year is the first year of disclosure.

 

The group uses the advanced internal ratings-based approach to calculate its credit risk for the majority of its non-securitisation exposures. For market risk, the group uses an internal models approach to calculate its general market risk for the risk categories of interest rate and foreign exchange (including gold) exposures and the standardised (market risk) approach for calculating other market risk positions. For operational risk, the group uses the standardised (operational risk) approach to calculate its operational risk.

 

The basis of consolidation for the calculation of capital ratios under the Banking (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 Banking (Capital) Rules. Accordingly, the investment cost of these unconsolidated regulated financial entities is deducted from the capital base.

 

The tables overleaf show the capital ratios, risk-weighted assets and capital base as contained in the 'Capital Adequacy Ratio' return required to be submitted to the HKMA by Hang Seng Bank on a consolidated basis as specified by the HKMA under the requirements of section 3C(1) of the Banking (Capital) Rules.

 

The bank and its subsidiaries maintain a regulatory reserve to satisfy the provisions of the Banking Ordinance and local regulatory requirements for prudential supervision purposes.

At 30 June 2013, the effect of this requirement is to restrict the amount of reserves which can be distributed to shareholders by HK$5,213m (31 December 2012: HK$4,866m).

 

There are no relevant capital shortfalls in any of the group's subsidiaries as at 30 June 2013

(31 December 2012: nil) which are not included in the group's consolidation for regulatory purposes.

 

 

 

(a) Capital structure

 

Figures in HK$m

At 30 June 2013

Common Equity Tier 1 ('CET1') Capital

Shareholders' equity

93,464

- Shareholders' equity per balance sheet

102,081

- Unconsolidated subsidiaries

(8,617

)

Regulatory deductions to CET1 capital

(40,027

)

- Cash flow hedging reserve

(3

)

- Changes in own credit risk on fair valued liabilities

(109

)

- Goodwill and intangible assets

(565

)

- Regulatory reserve

(5,213

)

- Reserves arising from revaluation of property1

(20,019

)

- Valuation adjustments

(219

)

- Excess AT1 deductions

(13,899

)

Total CET1 Capital

53,437

Additional Tier 1 ('AT1') Capital

Total AT1 capital before regulatory deductions

__

Regulatory deductions to AT1 capital

__

- Significant capital investments in unconsolidated financial sector entities

(13,899

)

- Excess AT1 deductions

13,899

Total AT1 Capital

__

Total Tier 1 ('T1') Capital

53,437

Tier 2 ('T2') Capital

Total T2 capital before regulatory deductions

22,344

- Term subordinated debt

10,880

- Property revaluation reserves1

9,009

- Impairment allowances and regulatory reserve eligible for inclusion in T2 capital

2,455

Regulatory deductions to T2 capital

(13,899

)

- Significant capital investments in unconsolidated financial sector entities

(13,899

)

 

Total T2 Capital

8,445

 

Total Capital

61,882

 

1 Includes the revaluation surplus on investment properties which is reported as part of retained profits and related adjustments made in accordance with the Banking (Capital) Rules issued by the HKMA.

 

 

(b) Risk-weighted assets by risk type 

 

Figures in HK$m

At 30 June 2013

Credit risk

350,616

Market risk

2,534

Operational risk

39,361

Total

392,511

 

 

(c) Capital ratios (as a percentage of risk-weighted assets) 

 

The capital ratios on consolidated basis calculated in accordance with the Banking (Capital) Rules are as follows:

At 30 June 2013

CET1 capital ratio

13.6%

Tier 1 capital ratio

13.6%

Total capital ratio

15.8%

 

 

(d) Capital instruments

 

The following is a summary of the group's CET1 and Tier 2 capital instruments:

 

At 30 June 2013

CET1 capital instruments issued by the bank

Ordinary shares:

1,911,842,736 issued and fully paid ordinary shares of HK$5 each

HK$9,559m

Tier 2 capital instruments

Issued by the bank:

Subordinated loan due 2020 (nominal value: US$775m)

HK$6,011m

Subordinated loan due 2021 (nominal value: US$450m)

HK$3,491m

Subordinated loan due 2022 (nominal value: US$300m)

HK$2,327m

 

 

(e) Additional information

 

To comply with the Banking (Disclosure) Rules ('BDR'), the group will establish a new section 'Regulatory Disclosure' on its website to house all the information relating to the disclosure of regulatory capital instruments and the reconciliation to the group's published financial statements.

 

The disclosure will be published before 30 September 2013 according to the BDR and will include the following information:

 

·; A description of the main features and the full terms and conditions of the group's capital instruments can be viewed on our website: www.hangseng.com .

 

·; A detailed breakdown of the group's CET1 capital, AT1 capital, T2 capital and regulatory deductions, using the standard template as specified by the HKMA, can be viewed on our website: www.hangseng.com .

 

·; A full reconciliation between the group's accounting and regulatory balance sheets, using the standard template as specified by the HKMA, can be viewed on our website: www.hangseng.com .

 

 

 

Capital base and risk-weighted assets

 

At 30 June

At 31 December

Figures in HK$m

2012

2012

Core capital:

Paid-up ordinary share capital

9,559

9,559

- Reserves per balance sheet

72,583

78,940

- Unconsolidated subsidiaries

(8,359

)

(8,872

)

- Cash flow hedging reserve

(9

)

(17

)

- Regulatory reserve

(4,639

)

(4,866

)

- Reserves arising from revaluation of

property and unrealised gains on

available-for-sale equities and debt securities

(17,347

)

(18,936

)

Total reserves included in core capital

42,229

46,249

- Goodwill and intangible assets

(987

)

(965

)

- 50% of unconsolidated investments

(12,395

)

(13,683

)

- 50% of securitisation positions and

other deductions

(158

)

(158

)

Deductions

(13,540

)

(14,806

)

Total core capital

38,248

41,002

 

 

Supplementary capital:

 

 

- Term subordinated debt

 

11,827

11,821

- Property revaluation reserves 1

5,894

5,894

- Available-for-sale investments

revaluation reserves 2

155

183

- Regulatory reserve 3

325

303

- Collective impairment allowances 3

50

46

- Excess impairment allowances over

expected losses 4

1,651

1,727

Supplementary capital before deductions

19,902

19,974

- 50% of unconsolidated investments

(12,395

)

(13,683

)

- 50% of securitisation positions and

other deductions

(158

)

(158

)

Deductions

(12,553

)

(13,841

)

Total supplementary capital

7,349

6,133

Capital base

45,597

47,135

Risk-weighted assets

- Credit risk

286,786

295,743

- Market risk

4,003

2,447

- Operational risk

36,502

37,827

327,291

336,017

Capital adequacy ratio

13.9

%

14.0

%

Core capital ratio

11.7

%

12.2

%

 

Reserves and deductible items

At 30 June

At 31 December

Figures in HK$m

2012

2012

 

 

 

 

Published reserves

38,275

39,152

Profit and loss account

3,954

7,097

Total reserves included in core capital

 

42,229

46,249

Total of items deductible 50% from core capital

and 50% from supplementary capital

25,106

27,682

 

1 Includes the revaluation surplus on investment properties which is reported as part of retained profits and adjustments made in accordance with the Banking (Capital) rules.

2 Includes adjustments made in accordance with the Banking (Capital) rules.

3 Total regulatory reserve and collective impairment allowances are apportioned between the standardised approach and internal ratings-based approach in accordance with the Banking (Capital) rules. Those apportioned to the standardised approach are included in supplementary capital. Those apportioned to the internal ratings-based approach are excluded from supplementary capital.

4 Excess impairment allowances over expected losses are applicable to non-securitisation exposures calculated by using the internal ratings-based approach.

 

Capital ratios at 30 June 2012 and 31 December 2012 on Basel II basis were compiled in accordance with the Banking (Capital) Rules under the Hong Kong Banking Ordinance.

 

 

 

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

2013

2012

2012

The bank and its subsidiaries

designated by the HKMA

35.8

%

36.9

%

36.8

%

 

 

 

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

2013

2012

 

(restated)

Operating profit

8,934

7,975

Net interest income

(8,969

)

(8,286

)

Dividend income

(4

)

(4

)

Loan impairment charges

198

249

Depreciation

376

381

Amortisation of intangible assets

57

61

Amortisation of available-for-sale investments

49

(23

)

Loans and advances written off net of recoveries

(233

)

(228

)

Movement in present value of in-force long-term insurance

business

(622

)

(614

))

Interest received

10,794

9,553

Interest paid

(2,306

)

(2,128

)

Operating profit before changes in working capital

8,274

6,936

Change in treasury bills and certificates of deposit

with original maturity more than three months

7,728

8,317

Change in placings with and advances to banks

maturing after one month

7,923

(23,232

)

Change in trading assets

2,537

15,510

Change in financial assets designated at fair value

__

140

Change in derivative financial instruments

1,126

558

Change in loans and advances to customers

(43,428

)

(24,345

)

Change in other assets

(6,020

)

(5,583

)

Change in current, savings and other deposit accounts

10,737

20,540

Change in deposits from banks

(4,101

)

(3,123

)

Change in trading liabilities

7,896

(2,348

)

Change in certificates of deposit and other debt securities in issue

(269

)

3,378

Change in other liabilities

3,541

5,109

Elimination of exchange differences and other non-cash items

5,444

1,294

Cash generated from operating activities

1,388

3,151

Taxation recovered/(paid)

5

(73

)

Net cash inflow from operating activities

1,393

3,078

 

 

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

 

 

At 30 June

At 30 June

Figures in HK$m

2013

2012

Cash and balances with banks

19,190

18,272

Placings with and advances to banks

maturing within one month

78,729

61,347

Treasury bills

9,931

57,494

Certificates of deposit

__

965

107,850

138,078

 

 

 

Contingent liabilities, commitments and derivatives

 

Credit

Risk-

Contract

equivalent

weighted

Figures in HK$m

amounts

amounts

amounts

At 30 June 2013

Direct credit substitutes

6,973

6,747

3,253

Transaction-related contingencies

1,546

156

58

Trade-related contingencies

14,443

1,514

796

Forward asset purchases

32

32

32

Undrawn formal standby facilities, credit lines

and other commitments to lend:

- not unconditionally cancellable W

34,121

15,346

6,489

- unconditionally cancellable

247,537

81,705

22,708

304,652

105,500

33,336

Exchange rate contracts:

Spot and forward foreign exchange

449,358

2,740

777

Other exchange rate contracts

177,483

6,718

5,654

626,841

9,458

6,431

Interest rate contracts:

Interest rate swaps

251,150

1,802

555

Other interest rate contracts

194

__

__

251,344

1,802

555

Other derivative contracts

5,198

391

182

 

W  The contract amounts for undrawn formal standby facilities, credit lines and other commitments to lend with original maturity of 'up to one year' and 'over one year' were HK$6,652m and HK$27,469m respectively.

 

 

 

Credit

Risk-

Contract

equivalent

weighted

Figures in HK$m

amounts

amounts

amounts

At 30 June 2012

Direct credit substitutes

6,548

6,390

3,858

Transaction-related contingencies

1,402

140

57

Trade-related contingencies

11,339

1,136

677

Forward asset purchases

27

27

27

Undrawn formal standby facilities, credit lines

and other commitments to lend:

- not unconditionally cancellable

36,652

16,448

7,233

- unconditionally cancellable

251,487

81,094

25,160

307,455

105,235

37,012

Exchange rate contracts:

Spot and forward foreign exchange

565,496

2,376

651

Other exchange rate contracts

136,220

3,303

2,576

701,716

5,679

3,227

Interest rate contracts:

Interest rate swaps

267,734

2,378

529

267,734

2,378

529

Other derivative contracts

5,488

375

121

 

 

 

Credit

Risk-

Contract

equivalent

weighted

Figures in HK$m

amounts

amounts

amounts

At 31 December 2012

Direct credit substitutes

7,259

7,041

3,805

Transaction-related contingencies

1,250

128

54

Trade-related contingencies

11,548

1,181

696

Forward asset purchases

51

51

51

Undrawn formal standby facilities, credit lines

and other commitments to lend:

- not unconditionally cancellable

33,261

15,258

6,189

- unconditionally cancellable

247,891

82,049

24,909

301,260

105,708

35,704

Exchange rate contracts:

Spot and forward foreign exchange

544,790

4,197

728

Other exchange rate contracts

111,945

2,355

1,545

656,735

6,552

2,273

Interest rate contracts:

Interest rate swaps

230,032

2,121

472

230,032

2,121

472

Other derivative contracts

4,856

452

143

 

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 purpose 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.

 

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 management 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 financial instruments designated at fair value, 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 2013

At 30 June 2012

At 31 December 2012

Figures in HK$m

Trading

Hedging

Trading

Hedging

Trading

Hedging

Contract amounts:

Interest rate contracts

215,933

35,799

211,899

55,836

192,421

37,739

Exchange rate contracts

888,359

4,992

927,014

3,276

826,210

4,263

Other derivative contracts

15,617

-

18,054

-

17,614

-

1,119,909

40,791

1,156,967

59,112

1,036,245

42,002

Derivative assets:

Interest rate contracts

1,257

94

1,688

116

1,438

59

Exchange rate contracts

2,505

793

2,095

-

3,024

280

Other derivative contracts

103

-

164

-

378

-

3,865

887

3,947

116

4,840

339

Derivative liabilities:

Interest rate contracts

1,061

956

1,525

1,448

1,292

1,352

Exchange rate contracts

2,451

38

1,647

3

1,419

3

Other derivative contracts

311

-

136

-

52

-

3,823

994

3,308

1,451

2,763

1,355

 

 

The above derivative assets and liabilities, being the positive or negative marked-to-market value of the respective derivative contracts, represent gross replacement costs.

 

 

 

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 2012 ('2012 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 4 March 2013.

 

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 Hong Kong Exchanges and Clearing Limited and the bank on the date of the issue of this news release.

 

Except as described below, the accounting policies and methods of computation adopted by the group for this news release are consistent with those described on pages 84 to 103 of the 2012 accounts.

 

During the period, the group has adopted the following new standards and amendments to standards which had insignificant or no effect on the consolidated financial statements:

 

- HKAS 27 (2011) 'Separate Financial Statements'

- HKAS 28 (2011) 'Investments in Associates and Joint Ventures'

- HKFRS 10 'Consolidated Financial Statements'

- HKFRS 11 'Joint Arrangements'

- HKFRS 12 'Disclosure of Interests in Other Entities'

- Amendments to HKFRS 7 'Disclosures - Offsetting Financial Assets and Financial Liabilities'

- Annual Improvements to HKFRSs 2009-2011 Cycle

 

The impact of the rest of the newly adopted standard and amendments is illustrated below.

 

Amendments to HKAS 1 'Presentation of financial statements' require grouping of items presented in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss subsequently. The group's presentation of other comprehensive income has been modified accordingly with comparative information re-presented.

 

Since the amendments to HKAS 19 'Employee Benefits' became effective, the group has replaced the interest cost and expected return on plan assets by a finance cost component comprising the net interest on the net defined benefit liability or asset. This finance cost component is determined by applying the same discount rate used to measure the defined benefit obligation to the net defined benefit liability or asset. The difference between the actual return on plan assets and the return included in the finance cost component in the income statement will be presented in other comprehensive income. The amendments have been applied retrospectively with comparative figures adjusted accordingly.

 

The major lines of the financial statements that have been affected are as follows:

 

Figures in HK$m As reported Adjustment Restated

 

Half-year ended 30 June 2012

Consolidated income statement:

Employee compensation and benefits (2,039) (59) (2,098)

Profit before tax 10,659 (59) 10,600

Tax expense (1,357) 10 (1,347)

Profit attributable to shareholders 9,302 (49) 9,253

Earnings per share (HK$) 4.87 (0.03) 4.84

Return on average shareholders' funds (%) 22.9 (0.1) 22.8

 

Consolidated statement of comprehensive income:

Defined benefit plans:

- actuarial losses on defined benefit plans (196) 59 (137)

- deferred taxes 32 (10) 22

Other comprehensive income for the period, net of tax 1,014 49 1,063

 

Certain key ratios for comparative periods have also been restated to conform with the current period presentation.

 

In addition, Hong Kong Financial Reporting Standard ('HKFRS') 13 'Fair Value Measurement' establishes a single source of guidance for all fair value measurements required or permitted by HKFRSs and with prospective application. It clarifies the definition of fair value as an exit price - a price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. It also contains extensive disclosure requirements about fair value measurements. Some of the disclosures are specifically required for financial instruments in the interim financial reports. The group has adopted the new standard this year and provided those disclosures in the notes to the financial statements. Comparative disclosures are not required in the first period of adoption of the standard.

 

 

 

 

 

2. Comparative figures

 

As a result of the adoption of the amendments to HKAS 19 'Employee Benefits', certain comparative figures have been adjusted to conform with the current year's presentation and to provide comparative amounts in respect of items disclosed for the first time in 2013.

 

 

 

3. Change in accounting treatment for Industrial Bank Co., Ltd. ('Industrial Bank')

 

On 7 January 2013, Industrial Bank completed a private placement of additional share capital to a number of third parties, thereby diluting the group's equity holding from 12.8% to 10.9%. As a result of this and other factors, the group considered it was no longer in a position to exercise significant influence over Industrial Bank and ceased to account for the investment as an associate from that date, giving rise to an accounting gain on reclassification of Industrial Bank of HK$9,517m for the first half of 2013. The accounting gain included the deemed disposal profit on reclassification of Industrial Bank of HK$8,454m and the release of deferred tax amounted to HK$1,063m.

 

Thereafter, the holding in Industrial Bank is being recognised as a financial investment in the balance sheet of the group with any subsequent movement in its fair value reflected in accordance with current applicable Hong Kong Financial Reporting Standards. At 30 June 2013, there was a revaluation deficit on the investment in Industrial Bank recorded in the 'available-for-sale investment reserve', reflecting the decline in its fair value below the deemed cost upon reclassification based on the share price on 4 January 2013. The change in fair value of the bank's investment in Industrial Bank is recognised in the available-for-sale investment reserve unless the investment becomes impaired. If the investment becomes impaired, the cumulative revaluation deficit would be reclassified from the available-for-sale investment reserve to the income statement.

 

The group will continue to perform an impairment review of its investment in Industrial Bank at each balance sheet date in accordance with the group's accounting policy on impairment of available-for-sale financial assets. Dividends from Industrial Bank are recognised in the group's consolidated income statement. This change has been incorporated and reflected in the group's 2013 interim results.

 

Financial implication of change in accounting treatment on Industrial Bank:

 

From 2013 onwards, the reclassification of Industrial Bank and the change in accounting treatment will result in an increase in the group's dividend income, subject to the amount of dividend to be declared by Industrial Bank and a decrease in the share of profit from associates. The share of profit from Industrial Bank was HK$2,364m in the first half of 2012.

 

Since there are significant financial implications as a result of the change in accounting treatment for Industrial Bank, the key financial results and performance metrics are not directly comparable when comparing the first half of 2013 with 2012. For the sake of comparison, we have prepared the following key financial results and performance metrics by excluding the non-distributable accounting gain in the first half of 2013 and the share of Industrial Bank's profit in the first half of 2012.

 

 

 

As reported

Excluding Industrial Bank reclassification

Half-year ended 30 June 2013

Half-year ended 30 June 2012

ChangeW

Half-year ended 30 June 2013

Half-year ended 30 June 2012

ChangeW

Attributable profit

18,468

9,253

99.6%

8,951

7,044

27.1%

Profit before tax

18,773

10,600

77.1%

10,319

8,236

25.3%

Return on average

shareholders' funds (%)

35.9

22.8

13.1pp

19.0

17.4

1.6pp

Return on average total

assets (%)

3.4

1.9

1.5pp

1.7

1.4

0.3pp

Earnings per share (HK$)

9.66

4.84

99.6%

4.68

3.68

27.2%

W Change in 'pp' represents change in percentage points.

 

 

 

4. Property revaluation

 

The group's premises and investment properties were revalued at 30 June 2013 by DTZ Debenham Tie Leung Limited. The valuation was carried out by qualified persons who are members of the Hong Kong Institute of Surveyors. The basis of the valuation of property was market value which is consistent with the definition of fair value under HKFRS 13 Fair Value Measurement and taken into account the highest and best use of the property from the perspective of market participants. The highest and best use takes into account the use of the property that is physically possible, legally permissible and financially feasible as described in HKFRS 13. The net revaluation surplus for group premises amounted to HK$1,523m, of which HK$1,526m was credited to the premises revaluation reserve and HK$3m was debited to the income statement. Revaluation gains of HK$1,147m on investment properties were recognised through the income statement. The related deferred tax provisions for group premises was HK$253m.

 

The revaluation exercise also covered business premises and investment properties reclassified as properties held for sale. The revaluation gain of HK$136m was recognised through the income statement.

 

 

 

5. Foreign currency positions

 

The group's foreign exchange exposures mainly comprise foreign exchange dealing by Treasury and currency exposures originated by its banking business. The latter are transferred to Treasury where they are centrally managed within foreign exchange position limits approved by the Risk Management Committee. The net options position is calculated on the basis of delta-weighted positions of all foreign exchange options contracts. Structural foreign exchange positions arising from capital investment in associates, subsidiaries and branches and the fair value of the group's long-term foreign currency equity investment, mainly in US dollar and Chinese renminbi as set out below, are managed by the Asset and Liability Management Committee ('ALCO').

 

At 30 June 2013, the US dollar ('US$'), Chinese renminbi ('RMB'), Australian dollar ('AUD') and Japanese Yen ('JPY') were the currencies in which the group had non-structural foreign currency positions that were not less than 10% of the total net position in all foreign currencies. The group also had a RMB structural foreign currency position, which was not less than 10% of the total net structural position in all foreign currencies.

 

Figures in HK$m

US$

RMB

AUD

JPY

Other foreign currencies

Total foreign currencies

 

 

 

 

 

At 30 June 2013

 

 

 

 

 

 

 

 

 

 

Non-structural position

 

 

 

 

 

Spot assets

173,526

 147,750

 44,328

 6,417

51,559

423,580

Spot liabilities

(154,308

)

(128,555

)

(49,486

)

(3,194

)

(55,661

)

(391,204

)

Forward purchases

271,887

113,794

10,107

11,096

20,646

427,530

Forward sales

(292,423

)

(129,830

)

(5,115

)

(13,937

)

(16,482

)

(457,787

)

Net options position

753

(156

)

(209

)

(48

)

(375

)

(35

)

Net long/(short)

non-structural position

(565

)

3,003

(375

)

334

(313

)

2,084

Structural position

205

34,011

 

__

 

__

 

478

34,694

 

 

 

 

Figures in HK$m

US$

RMB

AUD

JPY

Other foreign currencies

Total foreign currencies

 

 

 

 

 

At 30 June 2012

 

 

 

 

 

 

Non-structural position

 

 

 

Spot assets

169,003

102,668

47,817

40,998

56,680

417,166

 

 

Spot liabilities

(136,120

)

(104,599

)

(51,536

)

(5,404

)

(58,663

)

(356,322

)

 

 

Forward purchases

319,178

87,915

10,458

15,039

21,044

453,634

 

 

Forward sales

(351,333

)

(84,961

)

(6,601

)

(50,658

)

(19,078

)

(512,631

)

 

 

Net options position

142

(114

)

(24

)

__

 

(7

)

(3

)

 

 

Net long/(short)

 

 

non-structural position

870

909

114

(25

)

(24

)

1,844

 

 

 

 

Structural position

205

26,935

 

__

 

__

 

387

27,527

 

 

Figures in HK$m

US$

RMB

AUD

JPY

Other foreign currencies

Total foreign currencies

 

 

 

 

 

At 31 December 2012

 

 

 

 

 

 

Non-structural position

 

 

 

Spot assets

160,217

119,957

50,739

23,957

69,491

424,361

 

 

Spot liabilities

(144,015

)

(112,827

)

(50,157

)

(2,141

)

(56,493

)

(365,633

)

 

 

Forward purchases

301,222

83,737

8,503

11,182

14,889

419,533

 

 

Forward sales

(313,787

)

(90,096

)

(9,028

)

(33,069

)

(27,827

)

(473,807

)

 

 

Net options position

160

(142

)

82

(19

)

(55

)

26

 

 

Net long/(short)

 

 

non-structural position

3,797

629

139

(90

)

5

4,480

 

 

 

 

Structural position

205

30,375

 

__

 

__

 

434

31,014

 

 

 

 

6. Ultimate holding company

 

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

 

 

 

7. Register of shareholders

 

The register of shareholders of the bank will be closed on Wednesday, 21 August 2013, during which time 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 registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration no later than 4:30 pm on Tuesday, 20 August 2013. The second interim dividend will be payable on Thursday, 5 September 2013, to shareholders whose names appear on the register of shareholders of the bank on Wednesday, 21 August 2013. Shares of the bank will be traded ex-dividend as from Monday, 19 August 2013.

 

 

 

8. Proposed timetable for the remaining 2013 quarterly dividends

 

Third

Fourth

interim dividend

interim dividend

Announcement

7 October 2013

24 February 2014

Book close and record date

24 October 2013

12 March 2014

Payment date

7 November 2013

27 March 2014

 

 

 

9. Code on corporate governance practices

 

The bank is committed to high standards of corporate governance with a view to safeguarding the interests of shareholders, customers, staff and other stakeholders. The bank has followed the module on 'Corporate Governance of Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the HKMA and has fully complied with all the code provisions and most of the recommended best practices as set out in the Corporate Governance Code 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 2013.

 

The Audit Committee of the bank has reviewed the results of the bank for the six months ended 30 June 2013.

 

 

 

10. Board of Directors

 

At 5 August 2013 , the Board of Directors of the bank comprises Dr Raymond K F Ch'ien* (Chairman), Ms Rose W M Lee (Vice-Chairman and Chief Executive), Dr John C C Chan*, Dr Marvin K T Cheung*, Ms L Y Chiang*, Mr Andrew H C Fung, Ms Anita Y M Fung#, Dr Fred Zuliu Hu*, Ms Sarah C Legg#, Dr Eric K C Li*, Dr Vincent H S Lo#, Mrs Dorothy K Y P Sit#, Mr Richard Y S Tang*, Mr Peter T S Wong# and Mr Michael W K Wu*.

 

* Independent non-executive Directors

# Non-executive Directors

 

 

 

11. News release

 

This news release is available on the bank's website www.hangseng.com.

 

The Interim Report 2013, which contains all disclosures required by the Banking (Disclosure) Rules issued by the HKMA, will be published on the websites of Hong Kong Exchanges and Clearing Limited and the bank on the date of the issue of this news release. Printed copies of the Interim Report 2013 will be sent to shareholders in late August 2013.

 

Media enquiries to:

Walter Cheung Telephone: (852) 2198 4020

Ruby Chan Telephone: (852) 2198 4236

 

 

 

 

This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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