1st Aug 2005 09:00
HSBC Holdings PLC01 August 2005 Additional information 1. Accounting policies This news release has been prepared on a basis consistent with the accountingpolicies adopted in the 2004 financial statements except for the changes inaccounting policies following the adoption on 1 January 2005 of the new andrevised Hong Kong Financial Reporting Standards and Hong Kong AccountingStandards ('HKFRSs') as set out below. HKFRS 2: Share-Based Payment ('HKFRS 2') In prior years, no compensation cost was recognised for share options granted atfair value or not more than 20 per cent discount to fair value. Where theoptions were granted by the bank's ultimate holding company without charging thebank for the value of the option, the value was credited to equity reserves. Forrestricted share awards, the cost for acquisition of shares for the conditionalaward was charged to 'staff costs' over the period in respect of which theperformance condition applied. On adoption of HKFRS 2, all share compensations are recognised at fair valuewhich takes into account the vesting conditions related to market performance.Compensation cost is measured at the date of grant based on the assessed valueof the option or award and is recognised over the service period, which isusually the vesting period, as part of 'personnel cost'. The change in accounting policy has been applied retrospectively by way of prioryear adjustment and restatement of comparative figures for 2004. The unamortisedcost of share compensation of HK$66 million at 31 December 2004 (30 June 2004:HK$38 million) was adjusted to retained profits. The personnel costs for thefirst and second halves of 2004 have been restated to recognise the sharecompensation cost of HK$19 million and HK$28 million attributable to the periodsrespectively. Share compensation cost for the first half of 2005 amounting toHK$28 million was recognised through the profit and loss account. HKFRS 3: Business Combinations ('HKFRS 3') In prior years, positive goodwill arising from the acquisition of subsidiary andassociated companies was amortised over its estimated life, usually taken as 20years, on a straight-line basis in the profit and loss account. On adoption of HKFRS 3, positive goodwill is not amortised but is tested forimpairment at each balance sheet date at the cash-generating unit level byapplying a fair-value-based test in accordance with HKAS 36 'Impairment ofAssets'. The accounting policy on goodwill is applied retrospectively by way of prioryear adjustment and restatement of comparative figures for 2004. The positivegoodwill at 31 December 2004 is restated to reverse all amortisation made priorto that date (HK$9 million) with a corresponding adjustment through retainedprofit at 31 December 2004. The operating profit for the second half of 2004 isadjusted upwards by HK$9 million to reverse the goodwill amortisation for theperiod (first half of 2004: nil). No impairment loss has been recognised for thefirst half of 2005. HKFRS 4: Insurance Contracts ('HKFRS 4') In prior years, all contracts of insurance business, including investment-linkedcontracts were accounted as insurance contracts. On adoption of HKFRS 4, certain long-term insurance contracts which do nottransfer significant insurance risks are treated as investment contracts. Thefinancial assets held under these investment contracts are accounted based ontheir classification in accordance with HKAS 39 as described below. Liabilitiesunder insurance contract are recognised as financial and carried at valuation.No restatement of 2004 comparative figures is required. HKFRS 5: Non-Current Assets Held for Sale and Discontinued Operations ('HKFRS 5') In prior years, collateral assets repossessed for recovery of non-performingadvances were reported as advances. The carrying value was adjusted to the netrealisable value of the repossessed assets and classified as non-performingadvances. On adoption of HKFRS 5, repossessed collateral assets are reported as'Non-current asset held for sale' under 'Other assets'. The change in accounting policy has been applied retrospectively and reflectedby way of prior year adjustment and the restatement of comparative figures for2004. At 31 December 2004, repossessed assets of HK$320 million werereclassified from 'Customer advances' to 'Non-current assets held for sale' (30June 2004: HK$385 million). Gains on disposal of HK$18 million and HK$19 millionfor the first and second halves of 2004 respectively were re-classified from'Net charge for bad and doubtful debts' to 'Other operating income'. Gains ondisposal of HK$9 million for the first half of 2005 were recorded under 'Otheroperating income'. HKAS 17: Leasing ('HKAS 17') In prior years, leasehold premises were stated at valuation, as valued byprofessionally qualified valuers. The apportionment of the value between theland and building elements was made by estimating the 'net replacement cost' ofthe building as the value of the building element, and taking the residualfigure as the value of the land element. On adoption of HKAS 17, where leasehold properties are held for own use andwhere the land and buildings elements can be allocated reliably as at inceptionof the lease, the land element is treated as an operating lease. As such, landpremiums or other costs for acquiring the leasehold land are amortised over theterm of the lease. Where the land and building cannot be allocated reliably asat the inception of the lease, the land and building elements will continue tobe treated as finance leases and carried at fair value. The land element of a leasehold premise with the cost of land premium paidseparately is accounted for as an operating lease. The revaluation reserve onthe leasehold land is de-recognised and the related deferred taxation reversed, while the cost of land premium paid is reflected as a prepayment under 'Other assets' and amortised over the remaining lease term. Amortisation of land premium is recognised as 'Rental charges' instead of depreciation. The change in accounting policy is adopted retrospectively and reflected by wayof prior year adjustment and restatement of comparative figures. Net increases/(decreases) in the outstanding balances on restatement of thebalance sheets Figures in HK$m At 30Jun04 At 31Dec04Assets:Premises (2,501) (2,511)Prepayment 616 609 Liabilities and reserves:Premises revaluation reserve (1,435) (1,502)Retained profits (120) (66)Deferred tax liabilities (330) (334) Increases/(decreases) in the following items on restatement of the profit andloss accounts Half-year ended Half-year endedFigures in HK$m 30Jun04 31Dec04Depreciation (23) (29)Rental expense 7 7Net surplus of revaluation of properties (net of deferred tax) (25) 17 Rental expense on leasehold land for the first half of 2005 amounted to HK$7million. HKAS 19: Employee Benefit ('HKAS 19') In prior years, only the actuarial gains or losses exceeding the thresholdprescribed by HKSSAP 34 were taken into account in calculating the retirementbenefit costs of defined benefit schemes. The revised HKAS 19 effective from 1 January 2005 provides an option foractuarial gains or losses to be recognised in full through 'Retained profits' inthe year of occurrence. The group has elected to take the option to recogniseall actuarial gains or losses through retained profits in the current year. Toreflect the change in accounting policy, the balance of actuarial loss amountingto HK$82 million has been adjusted through 'Retained profits' as at 31 December2004. (30 June 2004: actuarial gain of HK$128 million). An actuarial loss forthe first half of 2005, amounting to HK$9 million, has been recognised throughretained profits. HKAS 27: Consolidated and Separate Financial Statements ('HKAS 27') HKAS Interpretation 12 'Consolidation - Special Purpose Entities' ('Int 12') Life insurance subsidiary In prior years, on consolidation of the life insurance subsidiary, long-termassurance assets and liabilities attributable to policyholders were recognisedin aggregate under 'Other assets' and 'Other liabilities' respectively. Incomefrom long-term assurance assets was reported together with net earned insurancepremiums, less net insurance claims and movement in policyholder liabilities, as'Insurance underwriting profit' in the profit and loss account. On adoption of HKAS 27, life insurance subsidiary accounts are consolidatedline-by-line. Assets of the life insurance subsidiary, including long-termassurance assets, are reported according to asset type as presented in thegroup's consolidated balance sheet. Net earned insurance premiums and netinsurance claims are separately shown in the profit and loss account, withincome on assets reported under the same income categories as in the group'sconsolidated profit and loss account. The change in accounting policy has been adopted retrospectively and thecomparative figures of 2004 have been restated to reflect the aforesaidreclassifications, except for the treatment of financial assets and the relatedincome, in accordance with the requirement of HKAS 39 as described below. HKAS 38: Intangible Assets ('HKAS 38') In prior years, costs incurred for development of IT software for internal usewere expensed through the profit and loss account as incurred. On adoption of HKAS 38, costs incurred in the development phase of a project toproduce application software for internal use are capitalised and amortised overthe software's estimated useful life, usually three years. The change inaccounting policy came into effect on 1 January 2005 and the amount of costscapitalised for the first half of 2005 amounted to HK$5 million. Value of in-force long-term assurance business (embedded value) previouslygrouped under 'Other assets' are reported under 'Intangible assets' with effectfrom 1 January 2005. HKAS 39: Financial Instruments - Recognition and Measurement Interest income and expense In prior years, interest income on loans and advances and debt securities andinterest expense on deposits and debt instruments in issue were recognised on anaccrual basis using the relative contract or coupon interest rates. When a loanwas considered doubtful, interest was suspended and ceased to accrue. Fees on loan origination are recognised when receivable except when such feesare charged to cover the costs of continuing service to, or risk borne for, thecustomers, or are interest in nature. In these cases, the fees are recognised onan appropriate basis over the relevant period. Costs associated with loanorigination or acquisition are usually charged as interest expenses or operatingexpenses when incurred. Premiums or discounts of debt securities held, or debtinstruments in issue, are amortised over the period from the date of purchase orissue to the date of maturity, as part of interest income or interest expense. On adoption of HKAS 39, interest income and expenses are recognised using theeffective interest method. The calculation of effective interest includes allfees, commissions and costs on loans and advances and premiums and discounts ondebt securities. Interest will continue to be recognised on impaired financial assets using therate of interest used to discount future cash flows for the purpose of measuringthe related impairment loss. Subsequent unwinding of discount allowance isrecognised as interest income. Interest income and interest expense of trading assets and liabilities andfinancial assets and liabilities designated as at fair value are recognised aspart of 'Net trading income' and 'Net income on financial instruments designatedas at fair value' respectively in the profit and loss account, instead of'Interest income' and 'Interest expense' as for those arising from otherfinancial assets and liabilities. Interest receipt and payment of interest rate derivatives of qualifying hedgeswill be accounted as interest income or interest expenses following theunderlying recognised assets or liabilities. Interest receipts and payments ofother interest rate derivatives are recognised as trading income or net incomefrom financial instruments designated as at fair value through profit or loss. Derivatives financial instruments In prior years, derivatives financial instruments held for trading purposes wereaccounted at fair value and carried as assets when the fair value was positiveand as liabilities when the fair value was negative. Gains or losses fromchanges in fair value were recognised through the profit and loss account.Derivatives held for non-trading purposes, including qualifying hedges andsynthetic alteration positions in accordance with defined risk managementstrategies, were accounted for on a basis equivalent to the underlying assets,liabilities and positions. On adoption of HKAS 39, all derivatives are initially recognised at fair valueand carried as assets when the fair value is positive and as liabilities whenthe fair value is negative. Subsequent changes in fair value are recogniseddepending on the purpose of the derivatives as follows. Derivatives financial instruments designated as hedges will apply hedgeaccounting provided certain qualifying criteria are met. There are two types ofhedges: - fair value hedge, a hedge against the fair value of recognised assets orliabilities or firm commitments. This will be accounted for with the changes infair value of the derivatives, together with the changes in fair value of thehedged assets or liabilities that are attributable to the hedged risk, recordedthrough the profit and loss account. - cash flow hedge, a hedge against the cash flows attributable to recognisedassets or liabilities or forecast transactions. This is accounted for withchanges in the fair value of the derivatives initially through equity, andsubsequently released into the profit and loss account in line with therecognition of income or expense of the assets or liabilities being hedged. Derivatives financial instruments held for trading and those that do not qualifyfor hedge accounting, will be accounted for with changes in fair value reportedthrough the profit and loss account. Financial assets In prior years, all financial assets were carried at cost or amortised cost, netof impairment provisions, except for securities held for trading purposes andlong-term equity investments which were held at fair value. Gains and lossesfrom change in fair value were recognised in the profit and loss account inrespect of securities held for trading, and in equity in respect of long-termequity investments. On adoption of HKAS 39, financial assets are recognised based on the followingclassifications: Loans and advances Loans and advances not intended for trading are carried at amortised cost takinginto account the unamortised portion of fees and costs less impairment allowances. Held to maturity Debt securities with fixed maturities that management has the positive intentionand ability to hold to maturity are carried at amortised cost. Available for sale Available-for-sale investments including treasury bills, certificates ofdeposits, other debt securities and equities intended to be held for anindefinite period of time but which may be sold in response to needs forliquidity or changes in market environment are carried at fair value. Gains andlosses from changes in fair value are recognised in equity until the financialasset is derecognised or impaired, at which time the cumulative gain or losspreviously recognised in equity will be transferred to the profit and lossaccount. Trading securities Treasury bills, debt securities, equity shares which have been acquired orincurred principally for the purpose of selling or repurchasing in the near termare classified as trading securities. Trading securities are recognised at fairvalue and transaction costs are taken to the profit and loss account. Thechanges in fair value are recognised as 'trading income' in the profit and lossaccount. Financial assets designated as at fair value through profit or loss A financial instrument is classified in this category if it meets the criteriaset out below, and is so designated by management. The group designatesfinancial instruments at fair value because the designation: - eliminates or significantly reduces a measurement or recognition inconsistencythat would otherwise arise from measuring assets or liabilities or recognisingthe gains and losses on them on different bases; or - applies to a group of financial assets, financial liabilities or both that ismanaged and its performance evaluated on a fair value basis, in accordance withthe group's documented risk management or investment strategy, and where information about the group is provided internally on that basis to the group's key management personnel; or - relates to financial instruments containing one or more embedded derivativeswhich significantly modify the cash flows resulting from the financial instruments,and which would otherwise require separate accounting. Financial assets so designated are recognised initially at fair value andtransaction costs taken directly to the profit and loss account. Regular waypurchases of financial assets are accounted for at trade date. The changes in fair value are recognised as 'Net income on fair value throughprofit or loss' in the profit and loss account. Impairment of financial assets Loans and advances In prior years, provisions for bad and doubtful debts were classified intospecific and general provisions. Specific provisions on loans were assessedindividually or, for small homogeneous loans, on a portfolio basis. Generalprovisions were assessed on loans which were not identified as impairedindividually. The assessment methodologies were in line with the requirements ofHKAS 39 as set out below. On adoption of HKAS 39, impairment allowances are made on a loan when there isobjective evidence of impairment as a result of the occurrence of certain lossevents (as listed below) that will impact on the estimated future cash flows ofthe loan. Impairment loss is assessed either individually for individuallysignificant loans, or collectively for loan portfolios with similar credit riskcharacteristics. Loss events include: (i) significant financial difficulty of the issuer or obligor; (ii) a breach of contract, such as a default or delinquency in interest orprincipal payments; (iii) the group granting to the borrower, for economic or legal reasons relatingto the borrower's financial difficulty, a concession that the lender would nototherwise consider; (iv) it becoming probable that the borrower will enter bankruptcy or otherfinancial reorganisation; (v) the disappearance of an active market for that financial asset because offinancial difficulties; or (vi) observable data indicating that there is a measurable decrease in theestimated future cash flows from a group of financial assets since the initialrecognition of those assets, although the decrease cannot yet be identified withthe individual financial assets in the group, including:- adverse changes in the payment status of borrowers in the group; or- national or local economic conditions that correlate with defaults on theassets in the group. Impairment loss of an individually assessed loan is measured as the differencebetween the carrying value and the present value of estimated future cash flowsdiscounted at the original effective interest rate of the individual loan. For the purpose of collective assessment of impairment, loans are grouped on thebasis of similar credit risk characteristics relevant to the estimation offuture cash flows. Portfolios of small homogeneous loans are collectivelyassessed using roll rate or historical loss rate methodologies. Loans which havebeen assessed individually and determined to have no objective evidence ofimpairment are grouped by similar credit characteristics and collectivelyassessed based on historical loss experience of each type of loan andmanagement judgement of the current economic and credit environment. Other financial assets In prior years, financial assets, other than loans and advances, were reviewedon each balance sheet date to determine whether there was any indication ofimpairment. If the recoverable amount of the asset was estimated to be less thanits carrying amount, the carrying amount of the asset was reduced to itsrecoverable amount and the impairment loss was recognised in the profit and lossaccount. For investment securities carried at fair value through equity, anyloss previously recognised in equity was transferred to the profit and lossaccount. On adoption of HKAS 39, held-to-maturity investments and available-for-salefinancial assets are assessed for objective evidence of impairment at eachbalance sheet date. Impairment loss for held-to-maturity investments isrecognised through the profit and loss account. When an available-for-salefinancial asset is determined to be impaired, the cumulative loss previouslyrecognised in equity will be transferred to the profit and loss account. Financial liabilities In prior years, all financial liabilities except trading securities shortpositions were carried at cost or amortised cost. Trading securities shortpositions were carried at fair value and any gains and losses from changes infair value were recognised through the profit and loss account. On adoption of HKAS 39, the group's financial liabilities are recognised basedon the following classifications: Trading liabilities Trading liabilities, include trading securities short positions, customerdeposits and debt securities-in-issue for market risks trading and the embeddedderivatives, are carried at fair value. Gains and losses from change in fairvalue are recognised through the profit and loss account. Financial liabilities designated as at fair value through profit or loss Financial liabilities designated as at fair value through profit or loss,including own debt securities in issue, are designated as such at inceptionusually together with the related assets or derivatives for economic hedge. Theclassification criteria of financial liabilities designated as at fair valuethrough profit or loss are set out above under the caption of 'Financial assetsdesignated as at fair value through profit or loss'. Gains and losses from the changes in fair value are recognised as 'Net incomefrom financial instruments designated as at fair value' through the profit and loss account. Deposits, securities in issue and other liabilities Deposits and debt securities in issue, other than those designated as tradingliabilities or at fair value, and other financial liabilities, are carried atamortised cost. Valuation of securities and derivatives The fair value of financial instruments is based on their quoted market pricesat the balance sheet date without any deduction for estimated future sellingcosts. Financial assets are priced at current bid prices, while financialliabilities are priced at current asking prices. If a quoted market price is not available on a recognised stock exchange or froma broker / dealer for non-exchange-traded financial instruments, the fair valueof the instrument is estimated using valuation techniques, including use ofrecent arm's length market transactions, reference to the current fair value ofanother instrument that is substantially the same, discounted cash flowtechniques, option pricing models or any other valuation technique that providesa reliable estimate of prices obtained in actual market transactions. Where discounted cash flow techniques are used, estimated future cash flows arebased on management's best estimates, and the discount rate used is a marketrate at the balance sheet date applicable for an instrument with similar termsand conditions. Where other pricing models are used, inputs are based on marketdata at the balance sheet date. Fair values for unquoted equity investments areestimated, if possible, using applicable price/earnings ratios for similarlisted companies adjusted to reflect the specific circumstances of the issuer. When valuing instruments on a model basis using the fair value of underlyingcomponents, management additionally considers the need for adjustments to takeaccount of counterparty creditworthiness, model uncertainty and the future costsof servicing the portfolio based on defined policies. For derivatives where market observable data is not available, the initialincrease in fair value indicated by the valuation model, but based onunobservable inputs, is not realised immediately in the profit and lossaccounts. This amount is held back and recognised over the life of thetransaction where appropriate, or released to the profit and loss account whenthe inputs become observable, or, when the transaction matures or is closed out. Investments in other unlisted open-ended investment funds are recorded at thenet asset value per share as reported by the managers of such funds. The change in accounting policies on adoption of HKAS 39 is applied with effectfrom 1 January 2005. The opening balance sheet has been restated with netincreases in total assets of HK$1,168 million, retained profits of HK$534million, equity reserves of HK$532 million, and other liabilities of HK$116million and reduction in minority interests of HK$14 million. The relevantfinancial assets and liabilities are re-classified to suit the new definitionand requirements of the accounting standard and disclosure requirements. HKAS 40: Investment Property ('HKAS 40')HKAS 12: Income Taxes - HKAS Interpretation 21 In prior years, investment properties were carried at valuation assessed byprofessional valuers on the basis of open market value. Surpluses arising onrevaluation on a portfolio basis were credited to the investment propertiesrevaluation reserve. Deficits arising on revaluation on a portfolio basis werefirstly set off against any previous revaluation surpluses and thereafter takento the profit and loss account. No deferred tax was provided on revaluationsurplus. On adoption of HKAS 40, investment properties are carried at fair value with thechanges in fair value reported directly in the profit and loss account. Deferredtax is provided on revaluation surplus of investment properties in accordancewith HKAS Int 21 on HKAS 12. The change in accounting policy was reflected by way of prior year adjustment,and as permitted by HKAS 40, no restatement of comparative figures of 2004 wasmade. At 31 December 2004, the balance of investment revaluation surplusreserves of HK$3,283 million, after deducting deferred tax of HK$574 million,was transferred to retained profit. Revaluation gain for the first half of 2005was HK$729 million and the related deferred tax amounted to HK$127 million. 2. Restatement of profit and loss accounts and balance sheets The following are shown as exhibits to the Financial Review section of this newsrelease: - the profit and loss accounts for the first and second halves of 2004 and thebalance sheets at 30 June 2004 and 31 December 2004 as previously reported andas restated showing the effects of the adoption of the aforesaid new and revisedHKFRSs and Interpretations (except HKAS 39 and HKFRS 4) on the individualaccount items - Appendices 1 to 4. - restatement of the opening balance sheet at 1 January 2005 showing the effectsof the adoption of HKAS 39 and HKFRS 4 - Appendix 5. 3. Comparative figures Certain comparative figures have been reclassified to conform with currentperiod's presentation. 4. Property revaluation A revaluation of the group's premises and investment properties was performed inJune 2005 to reflect property market movements in the first half of 2005. Thevaluation was conducted by DTZ Debenham Tie Leung Limited, an independentprofessional valuer, and carried out by qualified persons who are members of theHong Kong Institute of Surveyors. The basis of the valuation of premises andinvestment properties was open market value. The revaluation surplus for bankpremises amounted to HK$918 million of which HK$148 million was a reversal ofrevaluation deficits previously charged to the profit and loss account. The balanceof HK$770 million was credited to the premises revaluation reserve. Revaluationgains on investment properties of HK$729 million were recognised through theprofit and loss account on adoption of HKAS 40. The related deferred taxprovision of bank premises and investment properties were HK$160 million andHK$127 million respectively. 5. Market risk Market risk is the risk that foreign exchange rates, interest rates or equityand commodity prices will move and result in profits or losses to the group. Thegroup's market risk arises from customer-related business and from positiontaking. Market risk is managed within risk limits approved by the Board of Directors.Risk limits are set by product and risk type with market liquidity being aprincipal factor in determining the level of limits set. Limits are set using acombination of risk measurement techniques, including position limits,sensitivity limits, as well as value at risk (VAR) limits at a portfolio level. The group adopts the risk management policies and risk measurement techniquesdeveloped by the HSBC Group. The daily risk monitoring process measures actualrisk exposures against approved limits and triggers specific actions to ensureoverall market risk is managed within an acceptable level. VAR is a technique which estimates the potential losses that could occur on riskpositions taken due to movements in market rates and prices over a specifiedtime horizon and to a given level of confidence. In line with the HSBC Group,the bank refined its basis of calculating VAR from one predominantly based onvariance/co-variance ('VCV') to one predominantly based on historical simulation('HS') effective 3 May 2005. This latter calculation was introduced because itbetter captures the non-linear characteristics of certain market risk positions.HS uses scenarios derived from historical market rates, and takes account of therelationships between different markets and rates, for example, interest ratesand foreign exchange rates. Movements in market prices are calculated byreference to market data from the last two years. Aggregation of VAR fromdifferent risk types is based upon the assumption of independence between risktypes. In recognition of the inherent limitations of VAR methodology, stresstesting is performed to assess the impact of extreme events on market riskexposures. The group has obtained approval from the Hong Kong Monetary Authority (HKMA) tochange the VAR model from VCV to HS for calculating market risk in capitaladequacy reporting and the HKMA has expressed itself satisfied with the group'smarket risk management process. The group's VAR for all interest rate risk and foreign exchange risk positionsand on individual risk portfolios during the first halves of 2005 and 2004 areshown in the tables below. The VAR figures for the first half of 2005 are basedon four months' VCV and two months' HS. VAR Minimum Maximum Average during during for the the theFigures in HK$m At 30Jun05 period period period VAR for all interest rate risk and foreign exchange risk 614 389 836 647VAR for foreign exchange risk (trading) 7 1 10 4VAR for interest rate risk- trading 4 4 67 19- banking 613 387 825 635 Minimum Maximum Average during during for the the theFigures in HK$m At 30Jun04 period period period VAR for all interest rate risk and foreign exchange risk 349 250 607 387VAR for foreign exchange risk (trading) 37 35 58 43VAR for interest rate risk- trading 4 1 8 4- banking 348 245 605 386 The average daily revenue earned from market risk-related treasury activitiesfor the first half of 2005 was HK$7 million (HK$10 million for the first half of2004). The standard deviation of these daily revenues was HK$5 million (HK$5million for the first half of 2004). An analysis of the frequency distributionof daily revenues shows that out of 121 trading days in the first half of 2005,losses were recorded on six days and the maximum daily loss was HK$4 million.The most frequent result was a daily revenue of between HK$4 million and HK$8million, with 46 occurrences. The highest daily revenue was HK$23 million. The group's foreign exchange exposures mainly comprise foreign exchange dealingby Treasury and currency exposures originated by its banking business. Thelatter are transferred to Treasury where they are centrally managed withinforeign exchange position limits approved by the Board of Directors. The averageone-day foreign exchange profit for the first half of 2005 was HK$2 million(HK$4 million for the first half of 2004). Interest rate risk, which arises in both Treasury trading and non-tradingportfolios and the banking books, is centrally managed by Treasury under limitsapproved by the Board of Directors. The average daily revenue earned fromTreasury-related interest rate activities for the first half of 2005 was HK$5million (HK$6 million for the first half of 2004). Structural foreign exchange positions arising from capital investment insubsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi asset out in Note 6, are managed by the Asset and Liability Management Committee. 6. Foreign currency positions Foreign currency exposures include those arising from dealing, non-dealing andstructural positions. At 30 June 2005, the US dollar (US$) was the only currencyin which the group had a non-structural foreign currency position which exceeded10 per cent of the total net position in all foreign currencies. Figures in HK$m At 30Jun05 At 30Jun04 At 31Dec04 US$ RMB US$ RMB US$ RMBNon-structural positionSpot assets 188,701 4,665 166,456 1,534 173,071 2,664Spot liabilities (177,851) (4,526) (161,751) (1,415) (171,698) (2,400)Forward purchases 61,568 384 41,452 836 68,726 207Forward sales (71,173) (380) (34,390) (835) (69,795) (192)Net options positions (4) - (2) - (37) -Net long non-structural position 1,241 143 11,765 120 267 279 At 30 June 2005, the group's major structural foreign currency positions were USdollar and renminbi. At 30Jun05 At 30Jun04 At 31Dec04 % of % of % of total net total net total net structural structural structural HK$m position HK$m position HK$m position Structural positionUS dollar 1,037 33.0 852 29.7 850 28.8Renminbi 1,997 63.6 1,910 66.6 1,998 67.6 7. Material related-party transactions (a) Immediate holding company and fellow subsidiary companies During the first half of 2005, the group entered into transactions with itsimmediate holding company and fellow subsidiary companies in the ordinary courseof its interbank activities including the acceptance and placement of interbankdeposits, correspondent banking transactions and off-balance-sheet transactions.The activities were priced at the relevant market rates at the time of thetransactions. The group participated, in its ordinary course of business, incertain structured finance deals arranged by its immediate holding company. The group used the information technology of, and shared an automated tellermachine network with, its immediate holding company, and used certain processingservices of a fellow subsidiary on a cost recovery basis. The group alsomaintained a staff retirement benefit scheme for which a fellow subsidiarycompany acted as insurer and administrator and the bank acted as agent for themarketing of Mandatory Provident Fund products and the distribution of retailinvestment funds for two fellow subsidiary companies. The premiums, commissionsand other fees on these transactions are determined on an 'arm's length' basis.In the normal course of business, the immediate holding company acted as leadmanager and bookrunner for the bank in an offering of subordinated notes. Thefees paid on this transaction were in line with remuneration for similartransactions in the market. The aggregate amount of income and expenses arising from these transactionsduring the period, the balances of amounts due to and from the relevant relatedparties, and the total contract sum of off-balance-sheet transactions atperiod-end are as follows: Income and expenses for the period Half-year ended Half-year ended Half-year endedFigures in HK$m 30Jun05 30Jun04 31Dec04 Interest income 76 72 56Interest expenses 130 22 69Other operating income 58 92 34Operating expenses 314 300 357 Balances at period-end Figures in HK$m At 30Jun05 At 30Jun04 At 31Dec04 Total amount due from 7,301 6,615 5,595Total amount due to 10,852 7,533 3,931 Interest rate and exchange rate contracts Credit Risk- Contract equivalent weightedFigures in HK$m amount amount amount 30 June 2005 47,428 448 9031 December 2004 34,622 485 9730 June 2004 44,887 544 109 (b) Associated companies The group maintained an interest-free shareholders' loan to an associatedcompany. The balance at 30 June 2005 was HK$233 million (HK$233 million at 30June 2004 and HK$233 million at 31 December 2004). (c) Ultimate holding company For the first half of 2005, no transactions were conducted with the bank'sultimate holding company (same as 2004). (d) Key management personnel For the first half of 2005, no material transaction was conducted with keymanagement personnel of the group and its holding companies and parties relatedto them (same as 2004). 8. Statutory accounts The information in this news release does not constitute statutory accounts. The statutory accounts for the year ended 31 December 2004 have been deliveredto the Registrar of Companies and the Hong Kong Monetary Authority. The auditorsexpressed an unqualified opinion on those statutory accounts in their reportdated 28 February 2005. The Annual Report and Accounts for the year ended 31December 2004, which includes the statutory accounts, can be obtained on requestfrom Legal and Company Secretarial Services Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from Hang Seng Bank's website http://www.hangseng.com. 9. Ultimate holding company Hang Seng Bank is an indirectly-held, 62.14 per cent-owned subsidiary of HSBCHoldings plc. 10. Statement of compliance This news release has been prepared in accordance with Hong Kong AccountingStandard 34 'Interim Financial Reporting'. It also complies with the module on'Interim Financial Disclosure by Locally Incorporated Authorised Institutions'under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority. 11. Register of Shareholders The Register of Shareholders of Hang Seng Bank will be closed on Wednesday, 24August 2005, during which no transfer of shares can be registered. In order toqualify for the second interim dividend, all transfers, accompanied by therelevant share certificates, must be lodged with the bank's Registrars,Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor,Hopewell Centre, 83 Queen's Road East, Wanchai, Hong Kong, for registration notlater than 4:00 pm on Tuesday, 23 August 2005. The second interim dividend willbe payable on Thursday, 1 September 2005 to shareholders on the Register ofShareholders of the bank on Wednesday, 24 August 2005. 12. Proposed timetable for the remaining quarterly dividends for 2005 Third Fourth interim dividend interim dividend Announcement 7 November 2005 6 March 2006Book close date 21 December 2005 21 March 2006Payment date 4 January 2006 31 March 2006 13. News release Copies of this news release may be obtained from Legal and Company SecretarialServices Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from HangSeng's website http://www.hangseng.com. The 2005 Interim Report and Accounts will be available from the same website onMonday, 1 August 2005 and will also be published on the website of The StockExchange of Hong Kong Limited in due course. Printed copies of the 2005 InterimReport will be sent to shareholders in late August 2005. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HSBC Holdings