Hang Seng Bank FY2012 results

HANG SENG BANK LIMITED

2012 RESULTS - HIGHLIGHTS

·; Attributable profit up 15% to HK$19,426m (HK$16,885m in 2011).

·; Profit before tax up 15% to HK$22,113m (HK$19,255m in 2011).

·; Operating profit up 10% to HK$15,606m (HK$14,181m in 2011).

·; Operating profit excluding loan impairment charges up 9% to HK$15,992m

(HK$14,621m in 2011).

·; Return on average shareholders' funds of 22.9% (22.7% in 2011).

·; Assets up 10% to HK$1,077.1bn (HK$975.7bn at 31 December 2011).

·; Earnings per share up 15% to HK$10.16 per share (HK$8.83 per share in 2011).

·; Fourth interim dividend of HK$2.00 per share; total dividends of HK$5.30 per

share for 2012 (HK$5.20 per share in 2011).

·; Capital adequacy ratio of 14.0% (14.3% at 31 December 2011);

core capital ratio of 12.2% (11.6% at 31 December 2011).

·; Cost efficiency ratio of 34.4% (35.0% in 2011).

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

… 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

… Loan impairment charges

… Operating expenses

… Gains less losses from financial investments and fixed assets

… Gain on disposal of a subsidiary

… Tax expense

… Earnings per share

… Dividends per share

… Segmental analysis

… Analysis of assets and liabilities by remaining maturity

… 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

… Amounts due from/to immediate holding company and fellow subsidiary

companies

… 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 resources management

… Liquidity ratio

… Reconciliation of cash flow statement

… Contingent liabilities, commitments and derivatives

… Non-adjusting post balance sheet event

… Statutory accounts and accounting policies

… Comparative figures

… Property revaluation

… Foreign currency positions

… Ultimate holding company

… Register of shareholders

… Proposed timetable for 2013 quarterly dividends

… Code on corporate governance practices

… Board of Directors

… News release

Comment by Raymond Ch'ien, Chairman

Amid continuing uncertainty in the global economic environment, Hang Seng remained focused on its long-term strategy for enhancing its position as the leading domestic bank in Hong Kong and achieved good results in 2012.

Our excellent time-to-market capabilities, extensive distribution network and solid financial fundamentals were effective in supporting customers facing challenging market conditions while strengthening our platform for growth.

Assisted by our trusted brand, we increased our penetration of market segments with good long-term business potential and won more clients among target groups with the timely launch of new wealth management and trade-related products. The resulting increase in the customer base helped drive solid growth in deposits.

Innovative services and our tightly interconnected network across Hong Kong and mainland China enhanced our position as a preferred bank in the rapidly developing cross-border trade and renminbi-related sectors.

We continued to expand Hang Seng Bank (China) Limited's service proposition by adding outlets and leveraging our strong Hong Kong franchise - leading to increases in the number of customers and deposits.

Profit attributable to shareholders rose by 15% to HK$19,426m. Earnings per share were up 15% at HK$10.16.

Return on average shareholders' funds was 22.9%, compared with 22.7% in 2011.

The Directors have declared a fourth interim dividend of HK$2.00 per share. This brings the total distribution for 2012 to HK$5.30 per share - up from HK$5.20 in 2011. We remain committed to a dividend policy that strikes a good balance between annual distributions and investment in future growth.

Economic outlook

Concerns over the continuing financial difficulties in the eurozone and the US fiscal cliff in the second half of 2012 put significant downward pressure on international economic activity.

Weak global export demand constrained Hong Kong's externally oriented economy, resulting in total GDP growth of just 1% for the first three quarters of the year - the lowest level since 2009. Buoyed by investment in large-scale public projects, the favourable employment market and vibrant property sector, robust consumer and investment spending cushioned the impact of subdued international trade, driving a solid rebound in economic expansion during the fourth quarter, resulting in overall growth of 1.4% in 2012.

 GDP growth on the Mainland was 7.8% in 2012 - the slowest rate since 1999. External conditions remain a significant obstacle, but Central Government investment in infrastructure and other stimulus measures are driving domestic sector activity. Recent signs indicate that the economy may have bottomed out. GDP growth in the fourth quarter was 7.9% - up from 7.4% in the preceding quarter. We expect further recovery to 8% in 2013, given the moderating effects of global economic headwinds and government concerns over speculation in the property sector.

With the eurozone debt crisis still unresolved and the fragile state of economic recovery in the US, challenging operating conditions will persist in 2013. However, the Mainland is likely to maintain a steady pace of growth. Increasing economic integration in the Greater China region and Hong Kong's continuing development as a leading centre for offshore renminbi financial services will boost business expansion.

We will take full advantage of these opportunities by further leveraging our competitive strengths - including our well-respected brand, diverse range of service channels and excellent cross-border capabilities - to enhance our strong position in key areas of business and acquire new customers to support sustainable growth.

This year sees Hang Seng reach its 80th anniversary. As we celebrate this major milestone, we are more determined than ever to uphold our core principles and build on the good progress we have made in our dedicated efforts to provide increasing value for shareholders.

Review by Rose Lee, Vice-Chairman and Chief Executive

Under challenging operating conditions, Hang Seng achieved resilient results in 2012 while investing in our core businesses to drive sustainable growth. Profit attributable to shareholders increased by 15% on the prior year with return on equity reaching 22.9%.

Our balanced growth strategy drove double-digit increases in both deposits and lending, while effective funding cost management contributed to the widening of our net interest margin to 1.85%.

Successful revenue diversification and product cross-sell initiatives contributed to an 8% increase in non-funds income. We achieved revenue growth in life insurance and retail investment fund sales of 49% and 25% respectively, and our overall wealth management income grew by 14%.

Our cost efficiency ratio improved by 0.6 percentage points to 34.4% as a result of revenue growing faster than operating expenses.

The credit quality of our loan portfolio remained sound, with a reduction in loan impairment charges.

Leveraging our good China connectivity and product development strength, we continued to lead the market with innovative offshore renminbi products, including the first renminbi-denominated gold exchange-traded fund to be introduced to the market.

In mainland China, Hang Seng Bank (China) Limited continued to invest in network expansion and leverage the deepening connectivity between the Mainland and Hong Kong. We opened seven new outlets and enhanced cross-border business referral mechanisms. We also established the first joint venture securities investment advisory company in Guangdong province under the Closer Economic Partnership Arrangement ('CEPA').

Profit before tax was up 15% at HK$22,113m, reflecting an increase in return from Industrial Bank Co., Ltd. ('Industrial Bank') and the disposal gain arising from the sale of our general insurance business in July.

Operating profit rose by 10% to HK$15,606m compared with 2011. Operating profit excluding loan impairment charges increased by 9% to HK$15,992m.

Following our continuing investment for business expansion, operating expenses rose by 6% to HK$8,389m, due mainly to increases in staff compensation and benefits, increased marketing expenditure, and higher rental and depreciation costs.

With the 8% rise in net operating income before loan impairment charges outpacing the increase in operating expenses, our cost efficiency ratio improved to 34.4% - down 0.6 percentage points compared with 2011.

Financial performance

Total assets grew by HK$101bn, or 10%, to reach HK$1,077bn. Customer advances were up HK$56bn, or 12%, at HK$536bn, due mainly to increases in corporate and commercial lending and residential mortgage loans. Success with acquiring new personal and business customers in target segments helped drive the HK$76bn, or 10%, rise in customer deposits (including certificates of deposit and other debt securities in issue) to HK$819bn.

The return on average total assets was 1.9% - up 0.1 percentage point year-on-year.

The expansion in customer deposits and lending underpinned a 4% rise in average interest-earning assets. Improved deposit and loan spreads and increased return on the life insurance investment funds portfolio drove the 8% growth in net interest income to HK$16,946m. Net interest margin was 1.85% - an increase of seven basis points.

Net fee income rose by 5% to HK$5,086m. Growth in fee-related revenue from retail investment fund sales as well as credit card, insurance agency and trade-related services business more than offset the drop in fee income from stockbroking and related services.

Trading income was up 15% at HK$2,063m. We recorded a net revenue gain from securities, derivatives and other trading activities compared with a net loss in 2011. Increased net income from funding swaps supported the 8% growth in foreign exchange income.

Loan impairment charges were down HK$54m, or 12%, at HK$386m. Loan impairment charges in the second half of 2012 fell by 45% compared with the first half.

Effective credit risk management ensured we maintained good asset quality, resulting in an eight-basis-point improvement in impaired loans as a percentage of gross advances to 0.25%.

Our share of profits from associates rose by 33%, driven largely by the increase in contribution from Industrial Bank. On 8 January, we announced that we will no longer account for Industrial Bank as an associate following its completion of a private placement on 7 January. We will now recognise our holding as a financial investment and will therefore not account for our proportionate share of results and net assets.

On a Basel II basis, our capital adequacy ratio at 31 December 2012 was 14.0%, compared with 14.3% a year earlier. Our core capital ratio was up 0.6 percentage points at 12.2%.

Positioning for growth

While global macroeconomic uncertainties will persist in 2013, we expect stable economic growth on the Mainland and favourable policy development under CEPA and the Qianhai initiatives. Hong Kong's economy will be underpinned by firm domestic consumption, strong trade and capital flows from the Mainland, and will continue to benefit from initiatives to further promote the internationalisation of the renminbi.

As the leading domestic bank in Hong Kong supported by a strong brand, extensive branch network and a loyal customer base, Hang Seng is well positioned to benefit from China's economic transformation. We will maintain balanced growth in our core businesses, invest in our branch network, delivery channels and product propositions to increase target customer intake and drive wealth management revenues. We will increase connectivity to maximise cross-border opportunities from the closer integration of the Mainland and Hong Kong economies.

In 2013, Hang Seng celebrates its 80th anniversary. Throughout our history, we have upheld the principles of service excellence, integrity and sound business management established by our founders.

True to our roots, we remain committed to the community we serve through ongoing support for sports promotion, education and care for the aged and disabled, partnering with charitable organisations, and engaging staff volunteers.

We will adhere to a high standard of corporate governance while embracing a proactive approach to business and client management to deliver quality and sustainable growth in the best interests of customers and shareholders.

Results summary

Hang Seng Bank Limited ('the bank') and its subsidiaries ('the group') reported a profit attributable to shareholders of HK$19,426m for 2012, up 15.0% compared with 2011. Earnings per share were up by 15.1% to HK$10.16. Profit attributable to shareholders for the second half of 2012 increased by HK$822m, or 8.8%, compared with the first half.

Operating profit excluding loan impairment charges grew by HK$1,371m, or 9.4%, to HK$15,992m. This was underpinned by asset and deposit growth, increases in both net interest income and non-interest income, partly offset by the rise in operating expenses.

Net interest income grew by HK$1,210m, or 7.7%, to HK$16,946m, with an increase of 3.5% in average interest-earning assets. The bank's successful efforts to expand and diversify lending and attract new deposits drove an increase in both average loans and deposits. Liability spreads have improved reflecting the increased value of core funding while asset spreads have narrowed as a result of an increase in cost of funds. The increase in net interest income also benefited from the increased returns from the life insurance investment funds portfolio. However, there was a decline in balance sheet management income, as yield curves continued to flatten and interest rates remained low. The net interest margin improved by seven basis points to 1.85% compared with last year.

Net fee income grew by HK$250m, or 5.2%, to HK$5,086m. The bank continued to offer a wide range of retail investment funds to meet different investor risk appetites and launched the first renminbi-denominated gold exchange-traded fund ('ETF'), the Hang Seng RMB Gold ETF that caters for the growing demand for renminbi wealth management products. Income from retail investment fund grew encouragingly by 24.9%. Insurance-related fee income rose by 51.7%, reflecting the increase in non-life insurance products distribution commission in the second half of the year following the disposal of the general insurance manufacturing business to a third party insurance services provider. The increase in non-life insurance products distribution commission will be offset by a corresponding decrease in non-life insurance underwriting profit. Growth in cardholder spending, receivables and the card base helped support an 11.3% rise in card services fees. Credit facilities fee income rose by 40.7%, due mainly to higher fees from increased corporate lending. Fees from remittances and trade services increased by 10.3% and 18.0% respectively, on the back of growing trade activities and the expansion of renminbi cross-border trade settlement volumes. However, income from stockbroking and related services decreased by 26.8%, reflecting the decline in stock market trading turnover.

Trading income reached HK$2,063m, a rise of HK$267m, or 14.9%, over last year. Foreign exchange income increased by HK$143m, or 7.8%, attributable partly to increased net interest income from funding swaps and continued strong customer activity, notably in renminbi foreign exchange-linked structured products. Income from securities, derivatives and other trading activities registered a gain of HK$77m compared with a loss of HK$47m last year, mainly contributed by the gains on equity options backing a life endowment product on the back of favourable movements in the underlying equity indices in the latter part of the year, which resulted in a corresponding increase in 'Net insurance claims incurred and movement in policyholder liabilities'. This was partly offset by the losses on other derivatives trading which was affected by unfavourable interest rate movements and other securities trading.

Income from the insurance business (included under 'net interest income', 'net fee income', 'trading income', 'net income from financial instruments designated at fair value', 'net earned insurance premiums', 'movement in present value of in-force long-term insurance business' within 'other operating income', 'share of profits from associates', and after deducting 'net insurance claims incurred and movement in policyholders' liabilities') rose significantly by HK$944m, or 39.6%, to HK$3,326m. Diversification of the product range with the launch of new plans that offer a diverse range of retirement savings and protection products proved effective in driving sales. Total policies in-force and total annualised life insurance new premiums rose by 8.6% and 13.1% respectively. Net interest income and fee income from the life insurance business grew by 10.4% benefiting from higher life insurance sales volume and the increase in the size of the life insurance funds investment portfolio. The investment return on the life insurance funds investment portfolio improved strongly, benefiting from the recovering equities market and the upward commercial property market during 2012. To the extent that this fair value gain was attributed to policyholders of unit-linked life insurance policies, there was a corresponding increase in 'net insurance claims incurred and movement in policyholders' liabilities'.

Operating expenses rose by HK$491m, or 6.2%, to HK$8,389m. While carefully managing costs, the bank continued to make investments for business development in Hong Kong and Mainland to support long-term business growth. The operating expenses of our Hong Kong operations rose by 4.7%, reflecting wage inflation, processing costs, rental and marketing expenditure. Mainland-related operating expenses rose by 15.3%, attributable mainly to the ongoing business expansion of Hang Seng China. Despite the increase in costs, the bank's cost efficiency ratio remains one of the lowest in the industry. The bank continues to focus on improving operational efficiency while maintaining growth momentum and market leadership.

Loan impairment charges decreased by HK$54m, or 12.3%, to HK$386m. Individually assessed impairment charges fell by HK$46m, or 44.7%, reflecting lower charges for corporate and commercial banking customers for Hong Kong operations in 2012. The charges for individually assessed impairments for mainland customers were higher, due mainly to the downgrading of certain commercial banking customers. Collectively assessed impairment charges dropped by HK$8m, or 2.4%, to HK$329m. Impairment charges on the credit card and personal loans portfolios increased, which reflected growth in the portfolios. Impairment allowances for loans not individually identified as impaired recorded a net release compared with a net charge in 2011, mainly due to improved historical loss rates.

Operating profit rose by HK$1,425m, or 10.0%, to HK$15,606m.

Profit before tax recorded growth of 14.8% to HK$22,113m after taking the following major items into account:

·; a HK$355m increase in gain on disposal of a subsidiary, reflecting the gain of HK$355m from the disposal of the group's general insurance manufacturing business;

·; a 21.8% (or HK$216m) fall in net surplus on property revaluation; and

·; a 33.5% (or HK$1,349m) increase in share of profits from associates, mainly from Industrial Bank Co., Ltd. ('Industrial Bank') on the back of strong growth in its customer lending and higher fee-based income. 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. For the financial year ended 31 December 2012, the group's interest in Industrial Bank was recognised using the equity method based on the Industrial Bank's financial statement made up to 30 September 2012 in accordance with the group's accounting policy. The group will not equity account for its interest in Industrial Bank from 7 January 2013.

Consolidated balance sheet and key ratios

Total assets rose by HK$101.4bn, or 10.4%, to HK$1,077.1bn. The group continued to strengthen its asset and liability management and maintained a balanced growth strategy on loans and deposits. Loans and advances to customers increased by HK$55.6bn, or 11.6%, to HK$536.2bn, with growth in the commercial and corporate lending businesses, largely in mainland China. Residential mortgages grew as the bank regained momentum in the year and reinforced its strong position in the residential mortgage sector and gained market share on the back of the active property market. Trade finance lending declined, due mainly to the maturing of certain cross border documentary credit loans during the year more than offsetting the growth in other trade finance loan products. Leveraging the strong connectivity between Hong Kong and mainland China operations, the bank grew its mainland lending during the year, driven mainly by renminbi loans. The group remained vigilant in assessing credit risk in increasing lending on the Mainland. Customer deposits, including certificates of deposit and other debt securities in issue, increased by HK$75.6bn, or 10.2%, to HK$818.8bn. At 31 December 2012, the advances-to-deposits ratio was 65.5%, compared with 64.7% at 31 December 2011. Financial investments increased by 21.1% and trading assets decreased by 46.4%, reflecting the deployment of the commercial surplus to higher quality financial investments.

At 31 December 2012, shareholders' funds (excluding proposed dividends) were HK$88,499m, an increase of HK$12,498m, or 16.4%. Retained profits rose by HK$10,164m, mainly reflecting the increase in profit after the appropriation of interim dividends. With the growth in the property market through 2012, the premises revaluation reserve increased by HK$1,510m, or 12.3%. The available-for-sale investment reserve recorded a surplus of HK$227m, compared with a deficit of HK$561m at the end of 2011, mainly due to the improvement in the group's share of associate's available-for-sale investment reserve which reflected the market interest rate movement and the narrowing of credit spreads of debt securities of the group's investment portfolios.

The return on average total assets was 1.9% (1.8% for 2011). The return on average shareholders' funds was 22.9% (22.7% for 2011).

At 31 December 2012, the capital adequacy ratio was 14.0%, down from 14.3% at the end of 2011, reflecting the net effect of profit growth after accounting for dividends and the 10.4% growth in risk-weighted assets. The core capital ratio rose slightly to 12.2%, compared with 11.6% a year earlier.

The bank maintained a strong liquidity position. The average liquidity ratio for 2012 was 36.9% (calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance), compared with 33.6% for 2011.

The cost efficiency ratio for 2012 was 34.4% compared with 35.0% in 2011.

Dividends

The Directors have declared a fourth interim dividend of HK$2.00 per share, which will be payable on 3 April 2013 to shareholders on the register as of 20 March 2013. Together with the interim dividends for the first three quarters, the total distribution for 2012 will be HK$5.30 per share.

Segmental analysis

Retail Banking and Wealth Management ('RBWM') in Hong Kong reported profit before tax of HK$7,939m in 2012, representing a 22.0% year-on-year increase. Excluding the general insurance business disposal gain, profit before tax was up 19.1%.

Net interest income reached HK$8,761m in 2012, representing a 10.6% year-on-year increase, which was mainly attributable to growth in deposit balances driven by the expansion in affluent customers, as well as the growth of unsecured lending and insurance businesses.

Year-on-year, total loans and deposits increased by 11.5% and 9.1% respectively. Mortgages as one of the core businesses, achieved good momentum throughout 2012, through offering innovative products including the Hang Seng Renminbi / Hong Kong Dollar Mortgage-Link launched in March 2012, a professional one-stop service and flexible sales channels to our customers. Amidst strong competition and the tightening of government measures on mortgage lending, our mortgage business maintained third position in the market, with our market share in terms of new mortgage registrations reaching 18.7% in 2012, representing a 6.2% year-on-year increase. The personal loans portfolio was also up 11.2% year-on-year.

Non-interest income grew by HK$309m to HK$3,822m while overall wealth management income grew by 18.6% to HK$5,328m.

Total operating income from the credit card business recorded year-on-year growth of 8.0% in 2012, supported by a high quality credit card customer base and effective marketing campaigns. Total cards in force reached 2.34 million, representing year-on-year growth of 5.1% and we were the third largest card issuer of VISA and MasterCard as of December 2012. Card spending and card receivables grew robustly by 10.7% and 9.8% year-on-year respectively.

The insurance business achieved a strong performance in 2012 with operating income increased by 45.5% year-on-year, underpinned by proactive management of investment assets, strong distribution and promotion efforts and an effective product diversification strategy. In 2012, we broadened our product suite by launching the SavourLife Annuity Life Insurance Plan, ProsperDragon Renminbi Life Insurance Plan and SurgicalGuard Refundable Life Insurance Plan, thereby attracting new customer segments as well as new sources of income. As a result, annualised life insurance new premiums grew by 13.3% and total life insurance policies in-force rose by 8.7% compared with last year.

Global market uncertainties, particularly from the second quarter onwards, adversely affected investor sentiment. Income from investment business decreased 4.0% compared with last year, primarily from lower securities brokerage. However, with our time-to-market investment solutions catering for customer needs, income and sales turnover of investment funds recorded encouraging growth of 35.7% and 73.7% respectively. New Hang Seng retail investment fund products, including the first renminbi-denominated gold exchange-traded fund ('ETF'), reinforced our reputation as a wealth management leader and a renminbi services pioneer. We have continued to build momentum in our investment fund business into this year. To provide diversified wealth management products to suit customers' needs, we launched the Hang Seng Gold Linked Deposits in January 2013 to meet the increased demand in gold investment products.

As a result of our continued effort to acquire quality customers, the numbers of Prestige and Preferred Banking customers increased by 10.7% and 8.3% respectively compared with 2011. To enhance the customer experience by providing modern environment and to attract affluent customers, a new Prestige and Preferred Banking Centre design concept has been introduced and a total of six Prestige and Preferred Banking Centres have already been opened. We have plans to open more Prestige and Preferred Banking Centres at strategic locations in the coming years.

Service excellence had always been our strength and we continued to receive recognition in the banking industry. We were named by The Asset as the 'Best Domestic Bank in Hong Kong' for the 13th consecutive year in 2012. For the third consecutive year, Euromoney named the bank as 'Best Local Private Bank in Hong Kong' in the Private Banking Survey 2012 based on the assessment of business performance and peer nominations. We were also awarded the Reader's Digest 'Trusted Brands GOLD Award' in the bank category and the Credit Card Issuing Bank category in Hong Kong for the third consecutive year in 2012.

Corporate and Commercial Banking ('CNC') in Hong Kong achieved a 27.3% growth in profit before tax to HK$5,878m. Excluding the general insurance business disposal gain, profit before tax was up 23.7%.

Net interest income grew by 15.6% to HK$5,289m when compared with last year. CNC continued to provide customers with new and renewed facilities while adjusting pricing in line with the credit environment.

Year-on-year, total loans and deposits both grew by 10.4%. The growth in deposits was underpinned by a 21.4% increase in current and saving account deposit balances primarily contributed by new commercial customers.

Non-interest income rose by HK$123m to HK$2,101m. Net fee income reported a growth of 18.5%, which was driven by solid growth in a wide range of non-funds income streams - including remittances, trade, factoring and syndication loan facility fees. Income from corporate wealth management business was HK$634m, representing 8.5% of CNC's net operating income.

The momentum of quality commercial customer acquisition has accelerated in 2012 and the CNC customer base has increased by 12.8% in 2012. Mainland companies represented 45.7% of newly acquired customers in the second half of 2012 - compared with 34.2% in the first half of 2012.

Renminbi business remained one of our key strategic priorities. The number of renminbi accounts was up 25.1% in 2012 and CNC successfully made renminbi loans and will continue to explore such opportunities to achieve more balanced and sustainable growth. As at 31 December 2012, the size of the renminbi lending was three times of a year earlier.

In August 2012, CNC launched a new TV commercial to emphasise the edges of Hang Seng SME Business Loan - 'Speed, Ease and Professional Service'. This has reinforced Hang Seng's progressive image. Hang Seng was awarded 'Excellent Brand of SME Loan Services - Hong Kong Leaders Choice Brand Awards 2012' by Metro Finance.

Network expansion and channel enhancements continued to be one of our key objectives. To strengthen our support to mainland and Hong Kong corporates with cross-border business needs, two new Business Banking Centres were opened in the second half of 2012. Furthermore, Business Mobile Banking was launched in September 2012 to enhance customer convenience.

Focusing on structured finance and syndicated loans also contributed to our success. According to Thomson Reuters LPC, we ranked second in terms of number of deals and third in terms of deal volume in the Mandated Arranger League Table for Hong Kong and Macau Syndicated Loans in 2012.

In 2012, Hang Seng was awarded 'Hong Kong Domestic Trade Finance Bank of the Year' and 'Hong Kong Domestic Cash Management Bank of the Year' by Asian Banking and Finance. CNC would continue to leverage on the solid Hong Kong platform and loyal customer base to provide trade, cash management and wealth management solutions to corporate and commercial customers in Greater China.

CNC will continue to capitalise on her core strengths - customer-focused strategies and propositions, industry-specialised relationship teams, time-to-market and product innovations.

Treasury ('TRY') in Hong Kong recorded a 5.9% decrease in profit before tax to HK$2,364m and a 5.4% decline in operating profit excluding loan impairment charges to HK$2,363m.

Net interest income decreased by 11.3% to HK$1,676m. With the low interest rate environment and flattened yield curves, there were few opportunities for yield enhancement. Further, as balance sheet management portfolios matured, they could only be re-priced at prevailing rates which were relatively low.

Non-interest income grew by HK$104m to HK$960m. Total trading income increased by HK$110m, or 12.5%, to HK$988m. Option income from structured products achieved encouraging growth, boosted in part by rising demand for renminbi-denominated products following further liberalisation of renminbi business in Hong Kong. Faster growth in gross interest income from funding swaps also contributed to the increase. However, these increases were partly offset by a decline in income from securities and other trading.

Front-line channels (including e-Banking) and trading systems were enhanced to facilitate straight-through processing, enabling better position management. To reinforce our brand in gold-related business, the Hang Seng Gold Bar (physical gold product) and renminbi-denominated gold ETF were launched. Treasury will continue to position itself to capture yield enhancement opportunities by investing in Hong Kong and mainland bonds and riding on yield curves of selected currencies. As the renminbi market in Hong Kong evolves, Treasury will continue to develop renminbi-denominated hedging and investment products to meet customer needs as well as explore new business opportunities for cross-selling treasury products with other customer groups.

Mainland China business

Hang Seng Bank (China) Limited ('Hang Seng China') expanded the scope and reach of our mainland Chinese business in 2012, capitalising on the close integration of our Hong Kong and mainland operations and an increasing awareness of our unique brand strengths. Hang Seng China strategically deployed resources to improve our foothold in regions with good long-term growth potential and further enrich our premium service proposition.

Hang Seng China opened one branch and six sub-branches, bringing the network to 46 outlets in 17 cities. Leveraging the favourable policies under CEPA, these new openings included three cross-city sub-branches in Guangdong province where we now have 21 outlets.

The operating environment in China was challenging in 2012 due to slower domestic economic growth and weakened external demand. The People's Bank of China has kept interest rates and the deposit reserve ratio unchanged since 6 July 2012 while using reverse repurchase agreements to maintain liquidity. The upper deviation to standard deposit rates and lower deviation to base lending rates were both widened, paving the way to further interest rate liberalisation. The competition for deposits and wealth management products was keen as foreign banks stepped up efforts to maintain revenue flows and market share.

Despite all the challenges, Hang Seng China has focused on growth of the portfolio, expansion of the customer base as well as diversification of revenue sources through differentiated business propositions for target customer segments and by exploiting opportunities in cross-selling and providing cross-border services between the Mainland and Hong Kong.

As a result, Hang Seng China maintained growth momentum. At 31 December 2012, the total number of mainland customers (including both Corporate and Commercial Banking and Retail Banking and Wealth Management customers) rose by 12.6%, in which the total number of Prestige Banking customers increased by 15.5% over December 2011.

Total operating income grew by 8.5%, supported mainly by growth in net interest income, driven by growth in loans and advances to customers of 15.5%. Total deposits were 12.7% higher. Hang Seng China continued to emphasise credit quality over loan portfolio size, focusing on clients offering good potential for generating additional income streams through wealth management and trade services. Operating expenses increased by 15.3%, due largely to investments in long-term business growth. Together with a net loan impairment charge compared with a net release in 2011, this led to a 28.8% decline in operating profit.

The bank worked closely with Industrial Bank and captured collaboration opportunities in various business areas during the year.

During the first quarter of 2012, Hang Seng Securities Limited ('Hang Seng Securities'), a wholly owned subsidiary of the bank, and Guangzhou Securities Company Limited ('Guangzhou Securities'), a member of the Yue Xiu Group, received approval from the China Securities Regulatory Commission to establish a joint venture, Guangzhou GuangZheng Hang Seng Securities Investment Advisory Company Limited ('Guangzhou GuangZheng Hang Seng Securities'). The joint venture commenced business in the third quarter of the year and became the first joint venture securities investment advisory company in Guangdong province under Supplement VI to the Mainland and Hong Kong Closer Economic Partnership Arrangement ('CEPA'). The joint venture aims at becoming a showcase for cross-border securities investment advisory cooperation under CEPA by leveraging the strengths of both partners, and thus supporting the bank's further business expansion in the Mainland.

Including the share of profit from mainland associates, our mainland China business contributed 24.5% of total profit before tax, compared with 21.7% in last year, as a result of the strong growth in the group's share of Industrial Bank's profit.

WConstant currency comparatives for 2011 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 2011 at the average rates of exchange for 2012; and

- the balance sheet at 31 December 2011 at the prevailing rates of exchange on 31 December 2012.

Consolidated Income Statement

Consolidated Statement of Comprehensive Income