1st Aug 2005 09:00
HSBC Holdings PLC01 August 2005 HANG SENG BANK LIMITED 2005 INTERIM RESULTS - HIGHLIGHTS •Total operating income up 8.9 per cent to HK$10,499 million (HK$9,645 million for the first half of 2004). •Operating profit before loan impairment (charges)/releases and other credit risk allowances down 2.2 per cent to HK$5,934 million (HK$6,070 million for the first half of 2004). •Attributable profit down 2.3 per cent to HK$6,045 million (HK$6,188 million for the first half of 2004). •Return on average shareholders' funds of 29.7 per cent (32.0 per cent for the first half of 2004). •Total assets up 4.2 per cent to HK$569.7 billion (HK$547.0 billion at 31 December 2004). •Earnings per share down 2.5 per cent to HK$3.16 (HK$3.24 per share for the first half of 2004). •Second interim dividend of HK$1.10 per share; total dividends of HK$2.20 per share for the first half of 2005 (HK$2.20 per share for the first half of 2004). •Total capital ratio of 12.4 per cent (12.0 per cent at 31 December 2004); tier 1 capital ratio of 10.5 per cent (10.8 per cent at 31 December 2004). •Cost:income ratio of 26.7 per cent (24.6 per cent for the first half of 2004). Note: Certain figures have been restated to reflect the adoption of a number ofnew and revised Hong Kong Financial Reporting Standards and Hong Kong AccountingStandards (new HKFRSs'), details of which are set out in note 1 of theadditional information on page 61. Results Summary Hang Seng Bank Limited (the bank) and its subsidiaries and associated companies(the group) reported an unaudited profit attributable to shareholders ofHK$6,045 million for the first half of 2005, representing a decline of 2.3 percent compared with the first half of 2004 which benefited from a release of HK$698 million in general provisions. Attributable profit increased by 16.8 per cent compared with the second half of 2004. The adoption of a number of new and revised Hong Kong Financial ReportingStandards and Hong Kong Accounting Standards ('HKFRSs') from 1 January 2005 required changes in accounting policies as described in detail on page 61.The resulting changes in accounting treatment and presentation of various profitand loss and balance sheet items may render certain comparative figures notstrictly comparable. Total operating income rose by HK$854 million, or 8.9 per cent, over the firsthalf of 2004 to HK$10,499 million, underpinned by the strong growth of 18.2 percent in income from Personal Financial Services and improved net interestmargin. Compared with the second half of 2004, there was an increase of HK$251million, or 2.4 per cent. Net interest income rose by HK$549 million, or 11.6 per cent, compared with thesame period last year. The rise was attributable to improved interest spreads ondeposits, growth in commercial banking and consumer lending portfolios, anincreased contribution from net free funds and the inclusion of interest incomefrom life insurance fund investments. These outweighed the compression ofinterest spreads on treasury investment and money market portfolios, which wereaffected negatively by the rise in interest costs and the flattening of theyield curves, and further falls in mortgage portfolio yields. Compared with thesecond half of 2004, net interest income rose by HK$284 million, or 5.7 percent. Net interest margin improved to 2.13 per cent, 11 basis points and 6 basispoints higher than the first and second halves of 2004 respectively. Net fee income fell by HK$295 million, or 16.2 per cent, compared with the sameperiod last year, affected by exceptionally high capital guaranteed fund salesin the first quarter of 2004, and a change in accounting treatment of creditfacilities fees as interest income instead of fee income with effect from 1January 2005. These were partially offset by the growth in income from sales ofstructured investment products and private banking related investment andadvisory service fees and commissions. Card services fees, insurance agencycommissions and import and export commissions also recorded encouraging growth.Compared with the second half of 2004, net fee income rose by HK$34 million, or2.3 per cent. Trading income fell by HK$125 million, or 22.4 per cent, compared with the firsthalf of 2004. Foreign exchange income fell by HK$253 million, mainly due to thedecline in customer trade volume, and a loss incurred on foreign exchangecontracts used for hedging on-balance sheet positions. Income from derivativestrading rose by HK$136 million, mainly attributable to increased sales ofstructured investment products to commercial and personal customers. Comparedwith the second half of 2004, trading income fell by HK$33 million, or 7.1 percent. Net earned insurance premiums rose by HK$730 million, or 36.5 per cent, over thefirst half of 2004. Premiums earned from policy renewal increased substantiallyas the portfolio of in-force policies continued to grow. Annualised premiums andnet premiums earned on new policies also reported satisfactory growth. Comparedwith the second half of 2004, there was a rise of HK$254 million, or 10.3 percent. Net insurance claims incurred and movement in policyholder liabilities increasedby HK$815 million, or 51.1 per cent, compared with the first half of 2004,reflecting mainly the growth in liabilities to policyholders of long-term lifeinsurance business. This was in line with the increase in long-term insurancepolicies in-force. Claims for general insurance business remained stable. Other operating income rose by HK$39 million, or 9.2 per cent, over the firsthalf of 2004, mainly attributable to the growth in embedded value of long-terminsurance contracts. Wealth management business related income (as detailed on page 21) fell by HK$54million, or 3.0 per cent, compared with the first half of 2004. Investmentservices related income recorded a fall of HK$142 million, or 11.9 per cent. Ina rising interest rate environment, the focus of the bank's investment servicesshifted from capital guaranteed funds to yield enhancement structuredinstruments. Private banking business recorded encouraging growth in bothcustomers and funds under management. Insurance agency and underwriting income, including embedded value of long-term life contracts, increased by HK$88 million,or 14.3 per cent, following the successful launch of new insurance plans with cumulative life protection and wealth benefits. Compared with the second half of2004, wealth management business related income rose by HK$137 million, or 8.4 per cent, attributable to the growth of 13.7 per cent and 1.4 per cent in investment services related income and insurance income respectively. Net operating income before loan impairment charges and other credit riskallowances rose 0.5 per cent over the first half of 2004 and was 1.1 per centabove the second half of 2004. Loan impairment charges amounted to HK$302 million, compared with net releasesin loan loss allowance of HK$746 million for the first half of 2004 and HK$31million for the second half of 2004. The overall loan impairment charges onindividually assessed loans amounted to HK$95 million, compared with a netrelease of HK$144 million in the first half of 2004. New loan impairment chargeson certain commercial banking accounts were partly offset by net releases frommortgages and personal loans. Charges on small homogeneous loans collectivelyassessed on a portfolio basis amounted to HK$55 million, compared with HK$96million for the first half of 2004, reflecting further improvement in creditcard charge-offs in the generally stronger economic conditions. Collectiveassessment of loans determined not to be individually impaired resulted in acharge of HK$152 million, following an update of the historical loss rate tocover the economic cycle. This compared with releases in general provisions ofHK$698 million and HK$114 million for the first and second halves of 2004respectively. Operating expenses rose by HK$175 million, or 8.8 per cent, compared with thesame period last year, attributable largely to the rise in personnel expenses.Average headcount increased by 193, mainly due to recruitment for PersonalFinancial Services business and the expansion of the Mainland network. Marketingexpenses to promote cards and insurance products also increased. Compared withthe second half of 2004, operating expenses fell by HK$95 million, or 4.2 percent, mainly due to lower marketing expenditure and personnel expenses. Operating profit before loan impairment (charges)/releases and other credit riskallowances was down by HK$136 million, or 2.2 per cent, compared with the firsthalf of 2004 but was up by HK$183 million, or 3.2 per cent, over the second halfof 2004, due to higher net interest income and lower operating expenses. Operating profit fell by HK$1,184 million, or 17.4 per cent, compared with thefirst half of 2004 and was lower by HK$150 million, or 2.6 per cent, comparedwith the second half of 2004. Profit before tax amounted to HK$7,062 million, which was HK$198 million, or 2.7per cent, lower than the same period last year after accounting for thefollowing items: (1) profit on disposal of fixed assets and long-terminvestments of HK$348 million, which was maintained at the same level as thefirst half of 2004; (2) surplus on property revaluation, which amounted toHK$877 million, and included two components: (i) reversal of revaluation lossesof bank premises previously charged to profit and loss account of HK$148 million(HK$91 million for the same period last year); and (ii) revaluation gain oninvestment properties of HK$729 million, recognised through the profit and lossaccount following the change in accounting policy on 1 January 2005 and (3)share of profits in associated companies (net of taxation), which grewsubstantially to HK$205 million, and was mainly contributed by Industrial BankCo., Ltd. Compared with the second half of 2004, profit before tax was up byHK$1,039 million, or 17.3 per cent. Attributable profit, after taxation and minority interests, fell by HK$143million, or 2.3 per cent, compared with the same period last year but was up byHK$869 million, or 16.8 per cent, compared with the second half of 2004. Total assets grew by HK$22.7 billion, or 4.2 per cent, to HK$569.7 billion at 30June 2005. Advances to customers recorded encouraging growth of 3.6 per cent,mainly in residential mortgages, trade finance and corporate lending. Customerdeposits, including certificates of deposit, including those reported undertrading liabilities, fell by 1.0 per cent. Shareholders' funds (excluding proposed dividends) rose by HK$2,106 million, or5.6 per cent to HK$39,397 million at 30 June 2005, mainly attributable to theincrease in retained profits and the premises revaluation reserves, reflectingthe rise in the property market. The return on average total assets was 2.2 per cent (2.5 per cent in the firsthalf of 2004 and 2.0 per cent in the second half of 2004). The return on averageshareholders' funds was 29.7 per cent, compared with 32.0 per cent and 25.2 percent in the first and second halves of 2004 respectively. The advances to deposits ratio rose to 56.8 per cent at 30 June 2005 compared with54.3 per cent at 31 December 2004, the result of a growth of 3.6 per cent in customeradvances and a fall of 1.0 per cent in customer deposits during the first halfof 2005. The group continued to maintain a strong liquidity position, with anaverage liquidity ratio in the first half of 2005 (calculated in accordance withthe Fourth Schedule of the Hong Kong Banking Ordinance) of 43.6 per cent (48.1per cent in the first half of 2004 and 46.3 per cent in the second half of2004). The total capital ratio at 30 June 2005 was 12.4 per cent (12.8 per cent at30 June 2004 and 12.0 per cent at 31 December 2004) and the tier 1 capital ratio was 10.5 per cent (11.6 per cent at 30 June 2004 and 10.8 per cent at 31 December 2004). The cost:income ratio, calculated as total operating expenses to net operatingincome before loan impairment (charges)/releases and other credit riskallowances was 26.7 per cent, higher than the first half of 2004 by 2.1percentage points but lower by 1.4 percentage points compared with the secondhalf of 2004. The Directors have declared a second interim dividend of HK$1.10 per share,which will be payable on 01 September 2005 to shareholders on the Register of Shareholders as of 24 August 2005. Together with the first interim dividends of HK$1.10 per share, the total distribution for the first half of 2005 will amount to HK$2.20 per share, the same as that in the first half of 2004. Comment by Michael Smith, Chairman "In the first half of 2005, Hang Seng's total operating income reached HK$10,499million, an increase of 8.9 per cent over the same period in 2004. This wasachieved against a backdrop of an increasingly competitive environment. "Profit attributable to shareholders was HK$6,045 million, representing a fallof 2.3 per cent compared with the first half of last year which benefited from alarge release in general provisions. "Net interest income rose by 11.6 per cent to HK$5,264 million. This rise wasdue largely to improved interest spread on deposits, growth in commercialbanking and consumer lending portfolios, and contributions from net free funds.Our net interest margin improved by 11 basis points to 2.13 per cent. "We also enjoyed solid growth in Personal Financial Services with pre-tax profitof HK$3,970 million, up 12.8 per cent. "We have continued to invest in the growth of our businesses. Marketing expensesincreased to promote cards and insurance products. There were also increases inaverage headcount, mainly due to recruitment for Personal Financial Servicesbusiness and the expansion of our mainland network. "Our strategy for developing our mainland China business is yielding positiveresults, with the first half of 2005 recording an increase in our share ofprofits from Industrial Bank Co., Ltd. Along with our own growing network ofmainland outlets, we are well positioned to capitalise on growth opportunitiescreated by the ongoing financial liberalisation on the Mainland. "With the rate of economic growth in the second half of 2005 expected to be moremoderate, the competitive banking environment is set to continue. However, ouroverall outlook for the year remains positive. The improvement in employment,coupled with the wealth effects resulting from the sustained economic recovery,will help ensure that domestic demand maintains momentum. The recent interestrate rises should continue to have a positive impact on the interest margin,although further rises may dampen loan demand. "Hang Seng will continue to focus on diversifying income through expanding ourwealth management, consumer finance and SME services, improving productivity andexploring business opportunities on the Mainland. This strategy will enable usto strengthen our profitability and continue to deliver value to ourshareholders." Contents The financial information in this news release is based on the unauditedconsolidated accounts of Hang Seng Bank Limited and its subsidiary andassociated companies for the six months ended 30 June 2005. - Highlights of Results and Chairman's Comment- Contents- Consolidated Profit and Loss Account (Unaudited)- Consolidated Balance Sheet (Unaudited)- Consolidated Statement of Changes in Equity (Unaudited)- Economic Profit (Unaudited)- Consolidated Cash Flow Statement (Unaudited)- Financial Review - Net interest income - Net fee income - Trading income - Net income from financial instruments designated as at fair value - Analysis of income from wealth management business - Loan impairment (charges)/releases and other credit risk allowances - Operating expenses - Profit on disposal of tangible fixed assets and financial investments - Tax expenses - Earnings per share - Dividends per share - Segmental analysis - Analysis of financial assets and liabilities by accounting treatment - Analysis of assets and liabilities by remaining maturity - Cash and short-term funds - Trading securities - Financial assets designated as at fair value through profit or loss - Advances to customers - Loans impairment allowances against advances to customers - Impaired loans to customers and allowances - Overdue advances to customers - Rescheduled advances to customers - Segmental analysis of advances to customers by geographical area - Gross advances to customers by industry sector - Financial investments - Analysis of securities by counterparty and place of listing - Amount due from/to immediate holding company and fellow subsidiary companies - Investments in associated companies - 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 - Cross-border claims - Accounting policies - Restatement of profit and loss accounts and balance sheets - Comparative figures - Property revaluation - Market risk - Foreign currency positions - Material related-party transactions - Statutory accounts - Ultimate holding company - Statement of compliance - Register of shareholders - Proposed timetable for the remaining quarterly dividends for 2005 - News release Appendices 1 - 5 Consolidated Profit and Loss Account (Unaudited) Half-year ended Half-year ended Half-year ended 30Jun05 30Jun04 31Dec04Figures in HK$m restated restated Interest income 7,900 5,875 6,597Interest expenses (2,636) (1,160) (1,617)Net interest income 5,264 4,715 4,980Fee income 1,741 1,974 1,755Fee expense (215) (153) (263)Net fee income 1,526 1,821 1,492Trading income 433 558 466Net income from financial instruments designated as at fair value 50 - -Net investment income on assets backing policyholder liabilities - 83 346Dividend income 37 48 27Net earned insurance premiums 2,728 1,998 2,474Other operating income 461 422 463Total operating income 10,499 9,645 10,248Net insurance claims incurred and movement in policyholder liabilities (2,409) (1,594) (2,246)Net operating income before loan impairment (charges)/releases and other credit risk allowances 8,090 8,051 8,002Loan impairment (charges)/ releases and other credit risk allowances (302) 746 31Net operating income 7,788 8,797 8,033Personnel expenses (1,125) (1,056) (1,178)General and administrative expenses (892) (795) (939)Depreciation of business premises and equipment (135) (126) (130)Amortisation of intangible assets (4) (4) (4)Total operating expenses (2,156) (1,981) (2,251)Operating profit 5,632 6,816 5,782Profit on disposal of tangible fixed assets and financial investments 348 349 93Net surplus on property revaluation 877 91 55Share of profits in associated companies 205 4 93Profit before tax 7,062 7,260 6,023Tax expenses (924) (992) (719)Profit for the period 6,138 6,268 5,304Profit attributable to minority interests (93) (80) (128)Profit attributable to shareholders 6,045 6,188 5,176 Figures in HK$Earnings per share 3.16 3.24 2.71Dividends per share 2.20 2.20 3.00 Consolidated Balance Sheet (Unaudited) At 30Jun05 At 30Jun04 At 31Dec04Figures in HK$m restated restated AssetsCash and short-term funds 50,966 62,213 64,845Placings with banks maturing after one month 22,832 5,319 17,482Trading securities 13,812 3,953 6,000Financial assets designated as at fair value through profit or loss 3,743 - -Derivatives financial instruments 1,552 1,209 1,684Advances to customers 260,512 246,394 251,553Financial investments 192,951 162,118 182,938Investments in associated companies 2,449 2,103 2,299Intangible assets 1,426 1,146 1,266Premises and equipment 6,559 5,277 5,558Investment properties 3,913 3,260 3,383Other assets 9,004 9,566 9,980 569,719 502,558 546,988LiabilitiesCurrent, savings and other deposit accounts 430,395 418,638 447,460Deposits from banks 34,753 13,118 11,934Trading liabilities 24,358 2,657 5,840Financial liabilities designated as at fair value through profit or loss 995 - -Derivatives financial instruments 1,857 961 1,273Certificates of deposit and other debt securities in issue 11,158 9,807 16,055Liabilities to customers under investment contracts 542 - -Other liabilities 7,866 15,195 20,982Liabilities to customers under insurance contracts 11,558 - -Deferred tax and current tax liabilities 2,310 2,116 1,668Subordinated liabilities 1,496 - - 527,288 462,492 505,212Capital resourcesMinority interests 931 724 852Share capital 9,559 9,559 9,559Reserves 29,838 27,680 27,732Proposed dividends 2,103 2,103 3,633Shareholders' funds 41,500 39,342 40,924 42,431 40,066 41,776 569,719 502,558 546,988Figures in HK$Net asset value per share 22.19 20.96 21.85 Consolidated Statement of Changes in Equity (Unaudited) Attributable to shareholders Minority Total Share Other Retained Total interests equityFigures in HK$m capital reserves profits restated Balance at 01Jan05- as above 9,559 3,878 27,487 40,924 852 41,776- opening adjustment for the adoption of HKAS 39 and IFRS 4 - 535 535 1,070 (14) 1,056- as restated 9,559 4,413 28,022 41,994 838 42,832 Premises revaluation reserve, net of tax 609 26 635 635- unrealised surplus on revaluation 635 - 635 635- depreciation charge on revaluation (26) 26 - - Available-for-sale investments, net of tax (1,165) (1,165) (1,165)- valuation losses taken to equity (842) (842) (842)- transferred to profit or loss on disposal (323) (323) (323) Cash flow hedges, net of tax (265) (265) (265)- valuation losses taken to equity (265) (265) (265) Exchange and other adjustments (4) (23) (27) (27) Actuarial loss on defined benefit plan - (9) (9) (9) Share option reserve 28 - 28 28 Profit for the period - 6,045 6,045 93 6,138 Dividends declared or approved during the period - (5,736) (5,736) - (5,736) Balance at 30Jun05 9,559 3,616 28,325 41,500 931 42,431 Balance at 01Jul04 as above 9,559 3,387 26,396 39,342 724 40,066 Premises revaluation reserve, net of tax 163 321 484 484 - unrealised surplus on revaluation 220 257 477 477 - transfer of investment properties reserve from premises reserve (32) 32 - - - depreciation charge on revaluation (25) 25 - - - realisation of revaluation surplus on disposal of premises - 7 7 7 Long-term equity investment revaluation reserve, net of tax 300 300 300 - valuation gains taken to equity 389 389 389 - transferred to profit or loss on disposal (89) (89) (89) Exchange and other adjustments - 10 10 10 Actuarial loss on defined benefit plan - (210) (210) (210) Share option reserve 28 28 28 Profit for the period - 5,176 5,176 128 5,304 Dividends declared or approved during the period - (4,206) (4,206) - (4,206) Balance at 31Dec04 9,559 3,878 27,487 40,924 852 41,776 Balance at 01Jan04- as previously reported 9,559 6,921 23,161 39,641 644 40,285 - arising on change in accounting policies - (3,679) 2,255 (1,424) - (1,424) - as restated 9,559 3,242 25,416 38,217 644 38,861 Premises revaluation reserve, net of tax 501 390 891 891 - unrealised surplus on revaluation 492 380 872 872 - transfer of investment properties reserve to premises reserve 32 (32) - - - depreciation charge on revaluation (21) 21 - - - realisation of revaluation surplus on disposal of premises (2) 21 19 19 Long-term equity investment revaluation reserve, net of tax (374) (374) (374) - valuation losses taken to equity (57) (57) (57) - transferred to profit or loss on disposal (317) (317) (317) Exchange and other adjustments - (6) (6) (6) Actuarial loss on defined benefit plan - (48) (48) (48) Share option reserve 18 - 18 18 Profit for the period - 6,188 6,188 80 6,268 Dividends declared or approved during the period - (5,544) (5,544) - (5,544) Balance at 30Jun04 9,559 3,387 26,396 39,342 724 40,066 Economic Profit (Unaudited) Economic profit is calculated from post-tax profit, adjusted for surpluses/deficits on properties revaluation and depreciation attributable to revaluationsurpluses, and takes into account the cost of capital invested by the bank'sshareholders. For the first half of 2005, economic profit was HK$3,268 million,a decrease of HK$973 million, or 22.9 per cent, over the same period last year.Post-tax profit, adjusted for surpluses on properties revaluation net ofdeferred tax (HK$724 million) and depreciation attributable to revaluationsurpluses (HK$26 million), fell by HK$804 million, due to a large release ingeneral provisions in the same period last year. Cost of capital rose by HK$169million, in line with the growth in invested capital with the accumulation ofretained profits. The analysis indicates that the bank continues to create valuefor its shareholders. Half-year ended Half-year ended Half-year ended 30Jun05 30Jun04 31Dec04 restated restated HK$m % HK$m % HK$m %Average invested capital 35,708 33,272 34,825 Return on invested capital^ 5,340 30.1 6,144 37.1 5,182 29.6Cost of capital (2,072) (11.7) (1,903) (11.5) (2,038) (11.6)Economic profit 3,268 18.4 4,241 25.6 3,144 18.0 ^Return on invested capital is based on post-tax profit excluding surpluses/deficits on properties revaluation and depreciation attributable to revaluationsurpluses. Consolidated Cash Flow Statement (Unaudited) Half-year ended Half-year ended 30Jun05 30Jun04Figures in HK$m restated Net cash inflow from operating activities 10,716 826 Cash flows from investing activities Purchase of an interest in an associated company - (1,634)Dividends received from associated companies 55 4Purchase of available-for-sale investments (37,944) (30,345)Proceeds from sale or redemption of available- for-sale investments 11,844 21,455Purchase of fixed assets (97) (58)Proceeds from sale of fixed assets 94 141Interest received from available-for-sale investments 2,190 1,395Dividends received from available-for-sale investments 35 76Net cash outflow from investing activities (23,823) (8,966) Cash flows from financing activitiesDividends paid (5,736) (5,544)Issuance of subordinated debts, including financial liabilities designated as at fair value 2,492 -Net cash outflow from financing activities (3,244) (5,544) Decrease in cash and cash equivalents (16,351) (13,684) Cash and cash equivalents at beginning of period 67,051 77,575Effect of foreign exchange rate changes (235) (371)Cash and cash equivalents at end of period 50,465 63,520 Financial Review Net interest income Half-year ended Half-year ended Half-year ended 30Jun05 30Jun04 31Dec04Figures in HK$m restated restated Net interest income^ 5,264 4,715 4,980Average interest-earning assets 497,987 470,141 478,253Net interest spread 1.99% 1.95% 1.99%Net interest margin 2.13% 2.02% 2.07% ^Included within net interest income was HK$9 million with respect of interestincome accrued on impaired loans and advances. Net interest income increased by HK$549 million, or 11.6 per cent, compared withthe first half of 2004, with an increase of HK$27.8 billion, or 5.9 per cent inaverage interest-earning assets. Net interest margin improved by 11 basis pointsto 2.13 per cent with an increase in net interest spread of 4 basis points to1.99 per cent. Contribution from net free funds rose by 7 basis points to 0.14per cent benefiting from the rise in market interest rates. Deposits spreads benefited as local market interest rates moved up in the secondquarter, after a prolonged period of exceptionally low levels. Net interestmargin also benefited from the growth in customer advances, particularly, higheryielding card, personal and SME loans and the inclusion of interest income fromthe held-to-maturity debt portfolio of life insurance funds. Treasury securities investment and money market portfolios were negativelyaffected by the rise in funding costs and the flattening of the yield curves.The mortgage portfolio yields continued to fall amidst intense marketcompetition, although the downward pricing trend started to reverse in thesecond quarter. The impact of individual factors on net interest income and net interest marginis analysed below: HK$m Basis points Net interest Net interest income margin Narrowing of spread on treasury securities and money market portfolios (148) (6)Fall in mortgage portfolio yields (123) (5)Improvement in deposits spreads 173 7Contribution from net free funds 173 7Interest income from insurance fund assets 198 8Growth in average interest-earning assets 276 - 549 11 The average yield on the residential mortgage portfolio, excluding GHOSmortgages and staff loans, fell to 223 basis points below BLR for the first halfof 2005, before accounting for the effect of cash incentive payments. Thiscompared with 192 basis points and 211 basis points below BLR in the first andsecond halves of 2004 respectively. Following adoption of the new accountingpolicies on 1 January 2005, mortgage incentive payments are taken into accountfor calculation of effective interest rate and recognised over the expected lifeof a mortgage loan together with mortgage interest income. During the first halfof 2005, cash incentive paid amounted to HK$94 million. That part of mortgageincentive payment (including the unamortised amount carried forward fromprevious years) recognised in accordance with the new accounting policy in thefirst half of 2005 was HK$55 million. In the first and second halves of 2004,incentive payments written off against interest income amounted to HK$80 millionand HK$77 million respectively. Compared with the second half of 2004, net interest income improved by HK$284million, or 5.7 per cent, with a 6 basis points increase in net interest marginto 2.13 per cent. Net interest spread remained the same as the second half of2004 while contribution from net free funds rose by 6 basis points to 0.14 percent. Improvement in deposits spreads, growth in average customer advances andthe inclusion of interest income from the held-to-maturity portfolios of lifeinsurance funds, contributed favourably to net interest spread. Negative factorsincluded the narrowing in treasury portfolio spread, the fall in mortgageportfolio yields and the recovery of suspended interest on upgrading of largedoubtful accounts in the second half of 2004. The impact of individual factors on net interest income and net interest marginis analysed below: HK$m Basis points Net interest Net interest income margin Narrowing of spread on treasury securities and money market portfolios (198) (8)Recovery of suspended interest (74) (3)Fall in mortgage portfolio yields (49) (2)Improvement in deposits spreads 123 5Contribution from net free funds 148 6Interest income from insurance fund assets 198 8Growth in average interest-earning assets 136 - 284 6 On adoption of HKAS 39, interest income and expenses of financial instrumentsfor trading and designated as at fair value through profit or loss for the firsthalf of 2005, are reported as trading income and net income from financialinstruments designated as at fair value respectively with effect from 01 January 2005. Whereas net interest income from the held-to-maturity debt securities ofinsurance funds were reported as net investment income on assets backingpolicyholder liabilities in the first and second halves of 2004. The followingtable shows the total net interest income from all sources for the threehalf-year periods: Half-year ended Half-year ended Half-year ended 30Jun05 30Jun04 31Dec04Figures in HK$m restated restated Net interest income per profit and loss account 5,264 4,715 4,980Interest income less expenses from:- trading financial instruments 44 - -- fair value financial instruments 24 - -- assets backing policyholder liabilities - 124 186Total net interest income 5,332 4,839 5,166 Net fee income Half-year ended Half-year ended Half-year ended 30Jun05 30Jun04 31Dec04Figures in HK$m restated restated - securities/ stockbroking 233 295 265- retail investment products and funds under management 670 869 630- insurance 77 51 50- account services 110 108 106- remittance 67 60 65- cards 334 283 315- credit facilities 41 123 117- import/export 139 118 138- other 70 67 69Fee income 1,741 1,974 1,755Fee expense (215) (153) (263)Net fee income 1,526 1,821 1,492 Net fee income fell by HK$295 million, or 16.2 per cent, compared with the firsthalf of 2004. Income from stockbroking and securities related income fell byHK$62 million, or 21.0 per cent. Income from retail investment products and funds under management was lower by HK$199 million, or 22.9 per cent, as compared to the exceptionally high capital guaranteed fund sales in the first quarter of 2004, although this was partly offset by the strong sales of structured investment products and the growth in private banking business in thefirst half of 2005. Credit facilities income fell by HK$82 million as all corporate loan origination fees are now reported as part of interest income under the new accounting policies that came into effect on 1 January 2005. Card services income rose by 18.0 per cent, underpinned by 20.6 per cent growth in card spending. Insurance agency commissions and trade finance also recorded encouraging growth, reflecting the business growth of the Commercial Banking Customer Group. Compared with the second half of 2004, net fee income rose by HK$34 million, or2.3 per cent, mainly contributed by growth in card services fees and insuranceagency commission. Trading income Half-year ended Half-year ended Half-year ended 30Jun05 30Jun04 31Dec04Figures in HK$m restated restated Net interest income 44 - - Dealing profits:- foreign exchange 277 530 445- securities, derivatives and other trading activities 112 28 21 389 558 466 433 558 466 Trading income fell by HK$125 million, or 22.4 per cent (a fall of HK$169million, or 30.3 per cent, excluding interest income and expenses from tradingfinancial instruments), compared with the first half of 2004. This was mainlydue to the HK$253 million fall in foreign exchange income which included therevaluation loss of HK$147 million of foreign exchange contracts used forhedging on-balance sheet positions. Income from securities, derivatives and other trading activities rose by HK$84million, mainly due to the rise in profit from derivatives of HK$136 million,attributable mainly to the packaging of structured investment products forcommercial and personal customers. Compared with the second half of 2004, trading income fell by HK$33 million, or7.1 per cent (a fall of HK$77 million, or 16.5 per cent, excluding interestincome and expenses). Net income from financial instruments designated as at fair value Net income from financial instruments as at fair value through profit or loss amounted to HK$50 million, including net interest income and expenses, investment income, and revolution gains and losses. Financial assets, liabilities and derivatives are designated as at fair value through profit and loss mainly to achieve economic hedge of market risks and are not for short-termtrading. Certain long-term insurance fund assets are also designated as at fair value through profit and loss to meet policyholders' liabilities. Before the change in accounting policies effective 1 January 2005, these income were reported under their respective income categories. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HSBC Holdings