Hang Seng Bank Limited 2008 I

4th Aug 2008 09:38

Segmental analysis 

Segmental information is presented in respect of business and geographical segments. Business by customer group information, which is more relevant to the group in making operating and financial decisions, is chosen as the primary reporting format.

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

(a) By customer group 

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

  

Hang Seng Bank Limited	Financial Review (continued)
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Segmental analysis (continued)

(a) By customer group (continued)

Profit before tax contributed by the customer groups for the periods stated is set out in the table below. More customer group analysis and discussions are set out in the 'Customer group performance' section on page 11.

		Personal
		Financial		Commercial						Corporate
Figures in HK$m		Services					Banking					Banking						Treasury						Other				Total
Half-year ended 30 June 2008
Profit before tax		5,284					1,703					365						1,983						1,195							10,530
Share of profit before tax		50.2		%			16.2			%		3.5				%		18.8				%		11.3				%			100.0						%
Half-year ended 30 June 2007
Profit before tax		5,278				1,285						192						571						2,892						10,218
Share of profit before tax		51.7		%		12.6				%		1.8				%		5.6				%		28.3			%			100.0						%
Half-year ended 31 December 2007
Profit before tax	6,640					1,416						283						1,258						1,656						11,253
Share of profit before tax	59.0			%		12.6				%		2.5				%		11.2				%		14.7			%			100.0						%

  

Hang Seng Bank Limited	Financial Review (continued)
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Segmental analysis (continued)

 

(b) By geographical region

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

						Mainland
Figures in HK$m	Hong Kong		Americas			and other		Total
Half-year ended 30 June 2008
Income and expense
Total operating income		16,789		1,296		438		18,523
Profit before tax		8,410		1,273		847		10,530
Capital expenditure incurred		313		__		54		367
At 30 June 2008
Total assets		620,326		74,177		53,413		747,916
Total liabilities		658,663		3,453		30,192		692,308
Contingent liabilities and commitments		207,082		__		12,417		219,499
Half-year ended 30 June 2007
Income and expense
Total operating income		15,001		794		277		16,072
Profit before tax		7,547		776		1,895		10,218
Capital expenditure incurred		181		__		37		218
At 30 June 2007
Total assets		639,154		67,972		34,196		741,322
Total liabilities		668,243		3,886		16,245		688,374
Contingent liabilities and commitments		176,613		__		13,218		189,831
Half-year ended 31 December 2007
Income and expense
Total operating income		18,258		988		374		19,620
Profit before tax		9,603		972		678		11,253
Capital expenditure incurred		251		__		72		323
At 31 December 2007
Total assets		630,989		71,082		43,928		745,999
Total liabilities		663,333		4,020		22,190		689,543
Contingent liabilities and commitments		200,462		__		15,007		215,469

  

Hang Seng Bank Limited	Financial Review (continued)
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Cash and balances with banks and other financial institutions

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Cash in hand		3,099			4,626			3,308
Balances with central banks		2,049			562			6,004
Balances with banks and
other financial institutions		14,607			7,733			7,552
		19,755			12,921			16,864

Placings with and advances to banks and other financial institutions 

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Placing with and advances to banks and other financial institutions
maturing within one month		99,200			73,931			93,370
Placings with and advances to banks and other financial institutions
maturing after one month		37,334			20,554			19,659
		136,534			94,485			113,029

Trading assets 

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Treasury bills		6,732			4,566			6,303
Certificates of deposit		__			61			__
Other debt securities		5,413			4,870			4,058
Debt securities		12,145			9,497			10,361
Equity shares		6			14			2
Total trading securities		12,151			9,511			10,363
Other		1,538			337			27
Total trading assets		13,689			9,848			10,390

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

Hang Seng Bank Limited	Financial Review (continued)
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Financial assets designated at fair value

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Certificates of deposit		190			198			52
Other debt securities		9,813			4,521			7,860
Debt securities		10,003			4,719			7,912
Equity shares		2,604			5,108			5,980
		12,607			9,827			13,892

Advances to customers

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Gross advances to customers		338,202			311,952			309,409
Less:
Loan impairment allowances:
- individually assessed		(415	)		(408	)		(417	)
- collectively assessed		(630	)		(572	)		(636	)
		337,157			310,972			308,356
Included in advances to customers are:
- trade bills		3,676			3,491			3,690
- loan impairment allowances		(12	)		(17	)		(14	)
		3,664			3,474			3,676

  

Hang Seng Bank Limited	Financial Review (continued)
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Loan impairment allowances against advances to customers

		Individually		Collectively
Figures in HK$m		assessed		assessed					Total
At 1 January 2008		417			636				1,053
Amounts written off		(64	)		(157		)		(221	)
Recoveries of advances
written off in previous years		11			19				30
New impairment allowances
charged to income statement		109			169				278
Impairment allowances released
to income statement		(53	)		(37		)		(90	)
Unwinding of discount of loan
impairment allowances
recognised as 'interest income'		(5	)		__				(5	)
At 30 June 2008		415			630				1,045

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

	At 30 June			At 30 June			At 31 December
		2008			2007			2007
		%			%			%
Loan impairment allowances:
- individually assessed		0.12			0.13			0.13
- collectively assessed		0.19			0.18			0.21
Total loan impairment allowances		0.31			0.31			0.34

Total loan impairment allowances as a percentage of gross advances to customers was 0.31 per cent at 30 June 2008, 0.03 percentage points lower than at the end of 2007. Individually assessed allowances as a percentage of gross advances fell by 0.01 percentage points to 0.12 per cent, reflecting recoveries from doubtful accounts and the writing off of irrecoverable balances against impairment allowances. The percentage of collectively assessed allowances decreased by 0.02 percentage points to 0.19 per cent, due mainly to the release in impairment allowances made on advances not identified as impaired as a result of the update of the historical loss rates and loan balances used for the first half of 2008.

  

Hang Seng Bank Limited	Financial Review (continued)
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Impaired advances and allowances

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Gross impaired advances		1,391			1,432			1,261
Individually assessed allowances		(415	)		(408	)		(417	)
		976			1,024			844
Individually assessed allowances
as a percentage of
gross impaired advances		29.8	%		28.5	%		33.1	%
Gross impaired advances
as a percentage of gross
advances to customers		0.4	%		0.5	%		0.4	%

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

Gross impaired advances rose by HK$130 million, or 10.3 per cent, to HK$1,391 million, mainly due to the downgrade of certain commercial banking accounts which is partly offset by the write-off of irrecoverable balances against impairment allowances and customer repayments. Same as the end of 2007, gross impaired advances as a percentage of gross advances to customers stayed at 0.4 per cent. 

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Gross individually assessed
impaired advances		1,300			1,366			1,183
Individually assessed allowances		(415	)		(408	)		(417	)
		885			958			766
Gross individually assessed
impaired advances
as a percentage of
gross advances to customers		0.4	%		0.4	%		0.4	%
Amount of collateral which
has been taken into account
in respect of individually assessed
impaired advances to customers		848			922			754

  

Hang Seng Bank Limited	Financial Review (continued)
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Impaired advances and allowances (continued)

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

Overdue advances 

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

	At 30 June				At 30 June				At 31 December
			2008				2007				2007
	HK$m		%		HK$m		%		HK$m		%
Gross advances to customers
which have been overdue
with respect to either principal
or interest for periods of:
- more than three months
but not more than six months	217		0.1		472		0.1		329		0.1
- more than six months
but not more than one year	164		__		178		0.1		312		0.1
- more than one year	336		0.1		173		0.1		112		__
	717		0.2		823		0.3		753		0.2

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

Overdue advances fell by 4.8 per cent to HK$717 million at 30 June 2008. Overdue advances as a percentage of gross advances to customers stood at 0.2 per cent, the same as at the end of 2007.

  

Hang Seng Bank Limited	Financial Review (continued)
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Rescheduled advances

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

	At 30 June				At 30 June				At 31 December
			2008				2007				2007
	HK$m		%		HK$m		%		HK$m		%
Rescheduled advances
to customers	272		0.1		343		0.1		352		0.1

Rescheduled advances are those advances that have been rescheduled or renegotiated for reasons related to the borrower's financial difficulties. This will normally involve the granting of concessionary terms and resetting the overdue account to non-overdue status. A rescheduled advance will continue to be disclosed as such unless the debt has been performing in accordance with the rescheduled terms for a period of six to 12 months. Rescheduled advances that have been overdue for more than three months under the rescheduled terms are reported as overdue advances (page 42).

Rescheduled advances decreased by HK$80 million, or 22.7 per cent, to HK$272 million at 30 June 2008, representing 0.1 per cent of gross advances to customers (unchanged from the previous year-end).

Segmental analysis of advances to customers by geographical area

Advances to customers by geographical area are classified according to the location of the counterparties after taking into account the transfer of risk. In general, risk transfer applies when an advance is guaranteed by a party located in an area that is different from that of the counterparty. At 30 June 2008, about 90 per cent (over 90 per cent at 30 June 2007 and 31 December 2007) of the group's advances to customers, including related impaired advances and overdue advances, were classified under Hong Kong. There was no geographical segment other than Hong Kong to which the bank's advances to customers is not less than 10 per cent of the total loans and advances.

  

Hang Seng Bank Limited	Financial Review (continued)
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Gross advances to customers by industry sector

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

	At 30 June			At 30 June			At 31 December
		2008			2007			2007
Figures in HK$m
Gross advances to customers for
use in Hong Kong
Industrial, commercial and
financial sectors
Property development		20,658			17,855			20,431
Property investment		62,251			51,461			54,676
Financial concerns		2,468			1,917			3,232
Stockbrokers		313			7,976			524
Wholesale and retail trade		6,875			6,084			6,034
Manufacturing		13,767			8,098			8,311
Transport and transport equipment		8,837			9,431			9,368
Recreational activities		235			211			218
Information technology		1,051			911			913
Other		20,380			39,822			21,396
		136,835			143,766			125,103
Individuals
Advances for the purchase of flats under
the Government Home Ownership
Scheme, Private Sector Participation
Scheme and Tenants Purchase Scheme		17,934			19,126			18,437
Advances for the purchase of other
residential properties		94,792			82,983			85,923
Credit card advances		11,685			9,804			11,354
Other		13,698			8,970			13,155
		138,109			120,883			128,869
Total gross advances for
use in Hong Kong		274,944			264,649			253,972
Trade finance		25,206			21,988			22,995
Gross advances for
use outside Hong Kong		38,052			25,315			32,442
Gross advances to customers		338,202			311,952			309,409

  

Hang Seng Bank Limited	Financial Review (continued)
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Gross advances to customers by industry sector (continued)

Gross advances to customers rose by HK$28.8 billion, or 9.3 per cent, to HK$338.2 billion compared with the previous year-end.

New financing for CIB customers was active, reflecting strong growth in property investment lending to keep stride with the buoyant property market. Lending to the manufacturing industry and wholesale and retail sector grew by 65.6 per cent and 13.9 per cent respectively. Advances to the financial concerns and stockbrokers sectors fell by 23.6 per cent and 40.3 per cent respectively. Lending to the 'Other' sector fell by 4.7 per cent, due mainly to the decrease in advances to non-stockbroking companies. 

Trade finance recorded satisfactory growth of 9.6 per cent, reflecting CMB's achievements in broadening its range of product and service offerings for small and medium-sized enterprise ('SME') customers. CMB also enlarged its servicing teams and expanded delivery channels to strengthen the bank's position as the preferred bank for SMEs in Hong Kong.

Lending to individuals recorded a rise of 7.2 per cent. Excluding the fall in Government Home Ownership Scheme ('GHOS') mortgages, lending to individuals grew by 8.8 per cent. The bank enhanced its straight-through application capabilities available via its comprehensive e-mortgage channel and offered consultancy services to deliver personalised home-financing solutions. Supported by these efforts, residential mortgage lending to individuals rose by 10.3 per cent and the bank maintained its position as one of the market leaders in an intensely competitive sector. Mortgages under the GHOS fell at a slower pace of 2.7 per cent due to new loan drawdowns following the Housing Authority's re-launch of GHOS flat sales in early 2007. 

Sustained strong consumer spending saw card advances grow by 2.9 per cent, supported by a rise of 7.9 per cent in the number of cards in issue and a 19.3 per cent increase in cardholder spending. Lending to the 'Other' sector - mainly personal loans and overdrafts - increased by 4.1 per cent, due in part to a series of successful promotional initiatives.

Loans for use outside Hong Kong increased by HK$5,610 million, or 17.3 per cent, compared with the end of 2007. This was due largely to the 14.7 per cent expansion of mainland loan portfolios, which reached HK$29.8 billion. Strong growth was recorded in corporate lending, driven by renminbi loans. Trade finance on the Mainland rose significantly by 55.5 per cent, benefiting from the bank's strong capabilities and experience, premium services, and broad customer base in the Pearl River Delta region. Residential mortgage business grew by 4.7 per cent.

  

Hang Seng Bank Limited	Financial Review (continued)
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Financial investments 

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Available-for-sale at fair value:
- debt securities		156,464			230,075			220,998
- equity shares		2,987			2,802			4,299
Held-to-maturity debt securities
at amortised cost		25,203			18,314			18,997
		184,654			251,191			244,294
Fair value of held-to-maturity debt securities		24,720			17,556			19,526
Treasury bills		3,796			3,629			3,089
Certificates of deposit		21,694			25,635			30,247
Other debt securities		156,177			219,125			206,659
Debt securities		181,667			248,389			239,995
Equity shares		2,987			2,802			4,299
		184,654			251,191			244,294

Available-for-sale investments include treasury bills, certificates of deposit, other debt securities and equity shares intended to be held for an indefinite period of time, but which may be sold in response to needs for liquidity or changes in the market environment. Available-for-sale investments are carried at fair value with the gains and losses from changes in fair value recognised through equity reserves.

Held-to-maturity debt securities are stated at amortised cost. Where debt securities have been purchased at a premium or discount, the carrying value of the security is adjusted to reflect the effective interest rate of the debt security taking into account such premium or discount. 

Financial investments fell by HK$59,640 million, or 24.4 per cent, against last year-end, due mainly to the shift of funds from money market instruments to the interbank market in light of continued volatility in the credit market. At 30 June 2008, about 92 per cent of the Group's financial investments were assigned with grade A or above by rating agencies. The Group did not hold any sub-prime related assets such as collateralised debt obligations, mortgages and asset-backed securities, and structured investment vehicles at 30 June 2008.

Investments in associates

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Share of net assets		6,848			5,007			5,894
Goodwill		301			272			283
		7,149			5,279			6,177

Investments in associates increased by HK$972 million, mainly due to the increase in the bank's share of net assets of Industrial Bank Co., Ltd.

  

Hang Seng Bank Limited	Financial Review (continued)
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Other assets

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Items in the course of collection
from other banks		6,856			21,350			6,193
Prepayments and accrued income		3,072			3,990			4,433
Deferred tax assets		5			1			1
Assets held for sale
- Repossessed assets		99			111			116
- Other assets held for sale		62			915			83
Acceptances and endorsements		3,834			3,237			3,294
Retirement benefit assets		88			1,366			109
Other accounts		2,194			1,763			1,237
		16,210			32,733			15,466

 

Current, savings and other deposit accounts

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Current, savings and
other deposit accounts:
- as stated in consolidated balance
sheet		535,148			512,450			546,653
- structured deposits reported as
trading liabilities		31,067			27,571			24,162
		566,215			540,021			570,815
By type:
- demand and current accounts		37,674			36,555			34,130
- savings accounts		259,058			227,101			254,976
- time and other deposits		269,483			276,365			281,709
		566,215			540,021			570,815

  

Hang Seng Bank Limited	Financial Review (continued)
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Certificates of deposit and other debt securities in issue

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Certificates of deposit and
other debt securities in issue:
- as stated in consolidated balance
sheet		4,026			7,282			5,685
- structured certificates of deposit
and other debt securities in issue
reported as trading liabilities		9,867			11,116			14,087
		13,893			18,398			19,772
By type:
- certificates of deposit in issue		4,660			13,504			9,212
- other debt securities in issue		9,233			4,894			10,560
		13,893			18,398			19,772

Customer deposits and certificates of deposit and other debt securities in issue fell by 1.8 per cent to HK$580.1 billion, with notable reductions in time deposits, structured certificates of deposit and other debt securities in issue. Structured deposits, however, recorded an increase of 28.6 per cent, reflecting the bank's efforts to broaden the range of investment options and yield enhancement products available to meet the diverse needs of its customers.

In tandem with the expanding scope of renminbi banking services offered by Hang Seng China, deposits from mainland branches registered very strong growth of 94.1 per cent. Hang Seng China will continue to expand its number of outlets and provide premium customer service and comprehensive renminbi services to grow its customer base. In order to further grow personal banking and wealth management business, a variety of investment-linked deposit products are being offered to customers on the Mainland.

 

Trading liabilities

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Structured certificates of deposit and
other debt securities in issue		9,867			11,116			14,087
Structured deposits		31,067			27,571			24,162
Short positions in securities and other		12,833			5,607			9,902
		53,767			44,294			48,151

  

Hang Seng Bank Limited	Financial Review (continued)
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Other liabilities

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Items in the course of transmission
to other banks		7,951			13,332			8,407
Accruals		2,775			2,805			3,836
Acceptances and endorsements		3,834			3,237			3,294
Retirement benefit liabilities		1,098			__			633
Other		1,971			2,749			1,680
		17,629			22,123			17,850

 

Subordinated liabilities

			At 30 June			At 30 June			At 31 December
Figures in HK$m				2008			2007			2007
Nominal value	Description
Amount owed to third parties
HK$1,500 million	Callable floating rate
	subordinated notes
	due June 2015			1,497			1,496			1,497
HK$1,000 million	4.125 per cent callable
	fixed rate subordinated
	notes due June 2015			979			969			989
US$450 million	Callable floating rate
	subordinated notes
	due July 2016			3,498			3,503			3,497
US$300 million	Callable floating rate
	subordinated notes
	due July 2017			2,332			2,342			2,332
Amount owed to HSBC Group undertakings
US$260 million	Callable floating rate
	subordinated loan debt
	due December 2015			2,028			2,032			2,028
				10,334			10,342			10,343
Representing:
- measured at amortised cost				9,355			9,373			9,354
- designated at fair value				979			969			989
				10,334			10,342			10,343
Hang Seng Bank Limited			Financial Review (continued)
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Subordinated liabilities (continued)

There was no subordinated debt issued during the first half of 2008. The outstanding subordinated notes, which qualify as supplementary capital, serve to help the bank maintain a more balanced capital structure and support business growth.

 

Shareholders' funds 

	At 30 June			At 30 June		At 31 December
Figures in HK$m		2008			2007			2007
Share capital		9,559			9,559			9,559
Retained profits		37,358			32,706			32,873
Premises revaluation reserve		4,094			3,621			3,639
Cash flow hedges reserve		(11	)		(206	)		144
Available-for-sale investments reserve
- on debt securities		(2,214	)		(575	)		(841	)
- on equity securities		1,352			1,595			2,733
Capital redemption reserve		99			99			99
Other reserves		3,268			2,129			2,514
Total reserves		43,946			39,369			41,161
		53,505			48,928			50,720
Proposed dividends		2,103			2,103			5,736
Shareholders' funds		55,608			51,031			56,456
Return on average shareholders' funds		32.8%			36.6%			34.3%

 

 

Shareholders' funds (excluding proposed dividends) grew by HK$2,785 million, or 5.5 per cent, to HK$53,505 million at 30 June 2008. Retained profits rose by HK$4,485 million, mainly reflecting the growth in attributable profit (excluding first and second interim dividends) during the period. The premises revaluation reserve increased by HK$455 million on the back of the strong property market. The available-for-sale investments reserve on debt securities showed a deficit of HK$2,214 million compared with a deficit of HK$841 million at last year-end, reflecting the significant widening of credit spreads due to continued credit market disruption. During the period, the Group has assessed that there are no objective indications that the debt securities have suffered any impairment, and thus, no impairment loss has been recognized. The available-for-sale investments reserve on equity securities was reduced by HK$1,381 million to HK$1,352 million since last year-end, mainly attributable to the decrease in the fair value of certain equity securities which were not impaired but adversely affected by the slowdown of the equities market. 

In accordance with the accounting standard, we have written down the value of certain impaired equity securities acquired in recent years amounted to HK$118 million and recognised through the income statement as a result of the significant and in some case, prolonged decline in global equity markets. 

The return on average shareholders' funds was 32.8 per cent, compared with 36.6 per cent for the first half of 2007 and 34.3 per cent for the second half of 2007.

There was no purchase, sale or redemption by the bank, or any of its subsidiaries, of the bank's securities during the first half of 2008.

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Capital resources management

Analysis of capital base and risk-weighted assets

	At 30 June			At 30 June			At 31 December
Figures in HK$m		2008			2007			2007
Capital base
Core capital:
- Share capital		9,559			9,559			9,559
- Retained profits		33,262			27,546			29,437
- Classified as regulatory reserve		(1,061	)		(572	)		(911	)
- Less: goodwill		(301)			(272)			(283)
- Less: 50 per cent of total
unconsolidated investments and
other deductions		(6,430	)		(2,416	)		(5,875	)
- Total core capital		35,029			33,845			31,927
Supplementary capital:
- Fair value gains on the revaluation
of property		3,750			3,328			3,466
-Fair value gains on the revaluation
of available-for-sale investment
and equity		507			599			823
- Collective impairment allowances		68			572			636
- Regulatory reserve		127			572			911
- Term subordinated debt		10,354			10,343			10,354
- Less: 50 per cent of total
unconsolidated investments and
other deductions		(6,430	)		(2,416	)		(5,875	)
- Total supplementary capital		8,376			12,998			10,315
Total capital base after deductions		43,405			46,843			42,242
Risk-weighted assets
- Credit risk		272,701			348,698			342,798
- Market risk		2,333			1,313			2,166
- Operational risk		36,314			30,377			33,558
		311,348			380,388			378,522
Capital adequacy ratio		13.9%			12.3%			11.2%
Core capital ratio		11.3%			8.9%			8.4%

 

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Capital resources management (continued)

Capital ratios at 30 June 2008 were compiled in accordance with the Banking (Capital) Rules ('the Capital Rules') issued by the HKMA under section 98A of the Hong Kong Banking Ordinance for the implementation of Basel II, which came into effect on 1 January 2007. Having obtained approval from the HKMA to adopt the 'foundation internal ratings-based approach' ('FIRB') to calculate the risk-weighted assets for credit risk from 1 January 2008, the bank used the FIRB approach to calculate its credit risk exposure at 30 June 2008. The standardised (operational risk) approach and internal models approach were used to calculate its operational risk and market risk respectively. The capital adequacy ratio and core capital ratio at 31 December 2007 were calculated using the standardised (credit risk) approach ('STC'). As there are significant differences between the FIRB and STC approaches, the capital ratios of the two periods are not directly comparable.

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

In accordance with the HKMA guideline Impact of the New Hong Kong Accounting Standards on Authorised Institutions' Capital Base and Regulatory Reporting, the group has earmarked a 'regulatory reserve' of HK$1,061 million from retained profits. 

 

Liquidity ratio

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

	Half-year ended			Half-year ended			Half-year ended
		30 June			30 June		31 December
		2008			2007			2007
The bank and its subsidiaries
designated by the HKMA		47.3	%		52.9	%		53.0	%

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Reconciliation of cash flow statement 

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

	Half year ended			Half year ended
		30 June			30 June
Figures in HK$m		2008			2007
Operating profit		9,112			7,773
Net interest income		(8,252	)		(6,696	)
Dividend income		(54 )	)		(26	) )
Loan impairment charges and other
credit risk provisions		188			280
Impairment of available-for-sale equity securities		118			__
Depreciation		201			169
Amortisation of intangible assets		27			11
Amortisation of available-for-sale investments		(333	)		(392	)
Amortisation of held-to-maturity debt securities		__			(2	)
Advances written off net of recoveries		(192	)		(215	)
Interest received		7,021			12,029
Interest paid		(4,818	)		(9,372	)
Operating profit before changes in working capital		3,018			3,559
Change in treasury bills and certificates of deposit
with original maturity more than three months		9,223			(3,108	)
Change in placings with and advances to banks
maturing after one month		(17,675	)		3,429	)
Change in trading assets		(2,881	))		1,677
Change in financial assets designated at fair value		(125	)		(472	)
Change in derivative financial instruments		3,069			806
Change in advances to customers		(28,797	)		(31,685	)
Change in other assets		(3,354	)		4,164
Change in financial liabilities designated at fair value		(10	)		486
Change in current, savings and other deposit accounts		(11,505	)		29,125
Change in deposits from banks		(1,101	))		40,154
Change in trading liabilities		5,616			(15,799	)
Change in certificates of deposit and
other debt securities in issue		(1,659	)		(313	)
Change in other liabilities		4,724			(15,665	)
Elimination of exchange differences
and other non-cash items		(3,435	)		(3,560	)
Cash (used in)/generated from operating activities		(44,892	))		12,798
Taxation paid		(26	)		(422	)
Net cash (outflow)/inflow from operating activities		(44,918	))		12,376

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Reconciliation of cash flow statement (continued)

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

	At 30 June			At 30 June
Figures in HK$m		2008			2007
Cash and balances with banks and
other financial institutions		19,755			12,921
Placings with and advances to banks and other
financial institutions maturing within one month		96,126			71,487
Treasury bills		5,371			6,258
Certificates of deposit		2,882			445
		124,134			91,111

 

Contingent liabilities, commitments and derivatives

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

 The contract amount for undrawn formal standby facilities, credit lines and other commitments to lend with original maturity of 'not more than one year' and 'more than one year' were HK$16,028 million and HK$17,093 million respectively.

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Contingent liabilities, commitments and derivatives (continued)

				Credit		Risk-
	Contract		equivalent		weighted
		amount		amount		amount
Figures in HK$m	(restated)
At 30 June 2007
Direct credit substitutes		4,167		4,167		3,437
Transaction-related contingencies		677		339		335
Trade-related contingencies		10,911		2,182		2,172
Forward asset purchases		45		45		45
Undrawn formal standby facilities, credit lines
and other commitments to lend:
- not more than one year		29,323		5,865		5,865
- more than one year		17,384		8,692		7,409
- unconditionally cancellable		110,015		__		__
		172,522		21,290		19,263
Exchange rate contracts:
Spot and forward foreign exchange		390,707		4,601		1,180
Other exchange rate contracts		20,295		504		123
		411,002		5,105		1,303
Interest rate contracts:
Interest rate swaps		176,490		1,524		347
Other interest rate contracts		323		1		__
		176,813		1,525		347
Other derivative contracts		8,860		637		293

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Contingent liabilities, commitments and derivatives (continued)

				Credit		Risk-
	Contract		equivalent		weighted
Figures in HK$m		amount		amount		amount
At 31 December 2007
Direct credit substitutes		4,651		4,651		3,638
Transaction-related contingencies		812		406		398
Trade-related contingencies		10,274		2,055		2,045
Forward asset purchases		115		115		115
Undrawn formal standby facilities, credit lines
and other commitments to lend:
- not more than one year		20,253		4,051		4,051
- more than one year		15,973		7,986		6,752
- unconditionally cancellable		145,641		__		__
		197,719		19,264		16,999
Exchange rate contracts:
Spot and forward foreign exchange		580,889		7,606		2,196
Other exchange rate contracts		25,957		803		189
		606,846		8,409		2,385
Interest rate contracts:
Interest rate swaps		189,703		2,121		520
Other interest rate contracts		312		__		__
		190,015		2,121		520
Other derivative contracts		26,709		2,294		1,263

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

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

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Contingent liabilities, commitments and derivatives (continued)

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

	At 30 June				At 30 June					At 31 December
	2008				2007					2007
Figures in HK$m	Trading		Hedging		Trading		Hedging			Trading		Hedging
Contract amounts:
Interest rate contracts	149,919		77,233		110,819		66,737			129,861		60,232
Exchange rate contracts	732,597		__		557,212		__			725,862		__
Other derivative contracts	46,185		__		13,120		__			43,983		__
	928,701		77,233		681,151		66,737			899,706		60,232
Derivative assets:
Interest rate contracts	987		562		412		650			703		935
Exchange rate contracts	3,326		__		1,214		__			2,512		__
Other derivative contracts	1,168		__		72		__			552		__
	5,481		562		1,698		650			3,767		935
Derivative liabilities:
Interest rate contracts	1,041		256		580		185			777		148
Exchange rate contracts	2,667		__		1,260		__			2,073		__
Other derivative contracts	4,918		__		93		__			1,685		__
	8,626		256		1,933		185			4,535		148

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

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Additional information 

 

 

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

Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2007 ('2007 accounts'), which have been delivered to the Registrar of Companies and the HKMA. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 3 March 2008.

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

This news release has been prepared on a basis consistent with the accounting policies adopted in the 2007 accounts except for the following:

HK(IFRIC)-Int 11 'Group and Treasury Share Transactions' is effective for annual periods beginning on or after 1 March 2007. On application of this interpretation, with effect from 1 January 2008, the group has recognised all share-based payment transactions as equity-settled. In prior years, certain share-based payment transactions involving principally achievement and restricted share awards were recognised as cash-settled transactions, whereby a liability was recognised in respect of the fair value of such awards at each reporting date. With effect from 1 January 2008, when these are recognised as equity-settled transactions, the fair value of the awards at grant date are recognised in 'Other reserves' under shareholders' equity, instead of the fair value being remeasured at each reporting date as a liability. The application of the HK(IFRIC)-Int 11 does not have significant financial and presentation effects on the group's financial statements. As a result, no restatement of comparative figures was made as the amounts were immaterial.

 

2. Comparative figures

Certain comparative figures have been reclassified to conform with the current period's presentation.

 

3. Acquisition

On 31 January 2008, the bank signed an agreement to subscribe for 20 per cent of the enlarged share capital of Yantai City Commercial Bank ('YTCCB') - one of the largest city commercial banks in Shandong province - for a total consideration of RMB800 million. Upon completion of the acquisition, which is subject to the relevant regulatory and YTCCB shareholder approvals, the bank will become the largest shareholder of YTCCB.

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Additional information (continued)

4. Property revaluation

A revaluation of Hang Seng's premises and investment properties in Hong Kong was performed in June 2008 to reflect property market movements in the first half of 2008. The group's premises and investment properties were revalued by DTZ Debenham Tie Leung Limited, an independent professional valuer, and carried out by qualified persons who are members of the Hong Kong Institute of Surveyors. The basis of the valuation of premises was open market value for existing use and the basis of valuation for investment properties was open market value. The revaluation surplus for group premises amounted to HK$598 million of which HK$39 million was a reversal of revaluation deficits previously charged to the income statement. The balance of HK$559 million was credited to the premises revaluation reserve. Revaluation gains of HK$190 million on investment properties were recognised through the income statement. The related deferred tax provisions for group premises and investment properties were HK$99 million and HK$31 million respectively.

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

 

5. Foreign currency positions 

Foreign currency exposures include those arising from trading, non-trading and structural positions. Net option position is calculated on the basis of delta-weighted positions of all foreign exchange options contracts. At 30 June 2008, the US dollar (US$) and renminbi (RMB) were the currencies in which the group had non-structural foreign currency positions that were not less than 10 per cent of the total net position in all foreign currencies. The group also had a renminbi structural foreign currency position, which was not less than 10 percent of the total net structural position in all foreign currencies.

	At 30 June				At 30 June				At 31 December
Figures in HK$m			2008				2007				2007
	US$		RMB		US$		RMB		US$		RMB
Non-structural position
Spot assets	211,580		41,181		218,083		22,021		227,698		26,160
Spot liabilities	(195,205	)	(42,101	)	(212,016	)	(22,935	)	(184,258	)	(26,149	)
Forward purchases	284,711		44,852		241,832		4,049		298,806		26,549
Forward sales	(298,470	)	(45,877	)	(238,922	)	(6,144	)	(335,592	)	(28,330	)
Net option position	(29	)	__		60		__		32		__
Net long/(short) non-structural position	2,587		(1,945	)	9,037		(3,009	)	6,686		(1,770	)

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Additional information (continued)

5. Foreign currency positions (continued)

At 30 June 2008, the group's major structural foreign currency positions were in US$ and RMB.

	At 30 June				At 30 June				At 31 December
			2008				2007				2007
			% of				% of				% of
			total net				total net				total net
			structural				structural				structural
	HK$m		position		HK$m		position		HK$m		position
Structural positions
US dollar	287		2.2		287		2.9		286		2.5
Renminbi	12,265		96.0		9,469		95.9		10,752		95.8

6. Ultimate holding company

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

 

7. Register of shareholders

The register of shareholders of Hang Seng Bank will be closed on Wednesday, 20 August 2008, during which no transfer of shares can be registered. In order to qualify for the second interim dividend, all transfers, accompanied by the relevant share certificates, must be lodged with the Bank's registrars, Computershare Hong Kong Investor Services Limited, Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration no later than 4:30 pm on Tuesday, 19 August 2008. The second interim dividend will be payable on Thursday, 4 September 2008 to shareholders on the register of shareholders of the Bank on Wednesday, 20 August 2008. Shares of the Bank will be traded ex-dividend as from Monday, 18 August 2008.

 

8. Proposed timetable for the remaining 2008 quarterly dividends 

	Third	Fourth
	interim dividend	interim dividend
Announcement	3 November 2008	2 March 2009
Book close and record date	20 November 2008	18 March 2009
Payment date	10 December 2008	31 March 2009

  

Hang Seng Bank Limited	Financial Review (continued)
__________________________________________________________________________________________

Additional information (continued)

9.  Code on Corporate Governance Practices

The bank is committed to high standards of corporate governance and follows the module on 'Corporate Governance of Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority. The bank has also followed all the code provisions set out in the Code on Corporate Governance Practices contained in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited throughout the six months ended 30 June 2008.

The Audit Committee of the bank has reviewed the results for the six months ended 30 June 2008.

 

10.  Board of Directors

As at 4 August 2008, the Board of Directors of the bank comprises Dr Raymond K F Ch'ien* (Chairman), Mr Raymond C F Or (Vice-Chairman and Chief Executive), Mr Edgar D Ancona#, Mr John C C Chan*, Mr Patrick K W Chan, Dr Y T Cheng*, Dr Marvin K T Cheung*, Mr Alexander A Flockhart#, Mr Jenkin Hui*, Mr Peter T C Lee*, Dr Eric K C Li*, Dr Vincent H S Lo#, Mr Joseph C Y Poon, Dr David W K Sin*, Mr Richard Y S Tang* and Mr Peter T S Wong#.

* Independent non-executive Directors

# Non-executive Directors

 

11. News release

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

The 2008 Interim Report and Financial Statements, which contains all disclosures required by the Banking (Disclosure) Rules issued by the HKMA, will be published on the websites of The Stock Exchange of Hong Kong Limited and Hang Seng Bank on the date of the issue of this news release. Printed copies of the 2008 Interim Report will be sent to shareholders in late August 2008.

Media enquiries to:

Walter Cheung	Telephone: (852) 2198 4020
Michelle Chan	Telephone: (852) 2198 4236

ENDIR ZGGGRVDMGRZG

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