31st Jul 2006 09:15
HSBC Holdings PLC31 July 2006 Reconciliation of cash flow statement (a) Reconciliation of operating profit to net cash flow from operating activities Half-year Half-year ended endedFigures in HK$m 30Jun06 30Jun05 Operating profit 6,353 5,632Net interest income (6,375) (5,264)Dividend income (31) (37)Loan impairment charges and other credit risk provisions 34 302Depreciation 150 135Amortisation of intangible assets 4 4Amortisation of available-for-sale investments (222) 7Amortisation of held-to-maturity debt securities - 1Advances written off net of recoveries (166) (112)Interest received 10,530 5,091Interest paid (6,609) (2,537)Operating profit before changes in working capital 3,668 3,222Change in treasury bills and certificates of deposit with original maturity more than three months 4,505 1,277Change in placings with and advances to banks maturing after one month (6,190) (5,350)Change in trading assets 4,831 3,132Change in financial assets designated at fair value 78 299Change in derivative financial instruments 18 (167)Change in advances to customers (5,693) (8,856)Change in other assets (2,271) (171)Change in current, savings and other deposit accounts 17,102 (9,789)Change in deposits from banks 10,080 22,804Change in trading liabilities 15,826 7,817Change in certificates of deposit and other debt securities in issue (1,711) (1,454)Change in other liabilities (600) (731)Change in liabilities to customers under insurance contract 10 -Change in financial liabilities designated at fair value (17) (1)Elimination of exchange differences and other non-cash items (1,149) (1,094)Cash generated from operating activities 38,487 10,938Taxation paid (407) (222)Net cash inflow from operating activities 38,080 10,716 (b) Analysis of the balances of cash and cash equivalents Figures in HK$m At 30Jun06 At 30Jun05 Cash and balances with banks and other financial institutions 13,763 7,816Placings with and advances to banks and other financial institutions maturing within one month 59,056 41,614Treasury bills 6,852 1,033Certificates of deposit 1,191 2 80,862 50,465 Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weightedFigures in HK$m amount amount amount At 30Jun06 Contingent liabilities:Guarantees 3,604 3,364 3,172 Commitments:Documentary credits and short-term trade-related transactions 8,820 1,770 1,755Undrawn formal standby facilities, credit lines and other commitments to lend:- under one year 124,080 - -- one year and over 19,454 9,727 8,953Other 227 227 227 152,581 11,724 10,935 Exchange rate contracts:Spot and forward foreign exchange 253,985 2,404 526Other exchange rate contracts 49,693 414 97 303,678 2,818 623 Interest rate contracts:Interest rate swaps 155,362 1,627 340Other interest rate contracts 4,220 10 2 159,582 1,637 342 Other derivative contracts 4,916 267 65 Credit Risk- Contract equivalent weightedFigures in HK$m amount amount amount At 30Jun05 Contingent liabilities:Guarantees 6,266 6,035 3,336 Commitments:Documentary credits and short-term trade-related transactions 8,845 1,782 1,764Undrawn formal standby facilities, credit lines and other commitments to lend:- under one year 100,918 - -- one year and over 25,593 12,796 11,770Other 26 26 26 135,382 14,604 13,560 Exchange rate contracts:Spot and forward foreign exchange 131,827 1,346 341Other exchange rate contracts 31,916 382 118 163,743 1,728 459 Interest rate contracts:Interest rate swaps 169,762 1,476 406Other interest rate contracts 1,669 8 3 171,431 1,484 409 Other derivative contracts 311 17 9 Credit Risk- Contract equivalent weightedFigures in HK$m amount amount amount At 31Dec05 Contingent liabilities:Guarantees 4,133 3,907 3,131 Commitments:Documentary credits and short-term trade-related transactions 7,402 1,480 1,480Undrawn formal standby facilities, credit lines and other commitments to lend:- under one year 109,369 - -- one year and over 20,385 10,193 9,158Other 220 220 220 137,376 11,893 10,858 Exchange rate contracts:Spot and forward foreign exchange 188,088 1,426 333Other exchange rate contracts 15,176 193 48 203,264 1,619 381 Interest rate contracts:Interest rate swaps 161,083 1,472 308Other interest rate contracts 4,255 20 4 165,338 1,492 312 Other derivative contracts 1,194 86 17 The tables above give the nominal contract, credit equivalent and risk-weightedamounts of off-balance sheet transactions. The credit equivalent amounts arecalculated for the purposes of deriving the risk-weighted amounts. These areassessed in accordance with the Third Schedule of the Hong Kong BankingOrdinance ('the Third Schedule') on capital adequacy and depend on the status ofthe counterparty and the maturity characteristics. The risk weights used rangefrom 0 per cent to 100 per cent for contingent liabilities and commitments, andfrom 0 per cent to 50 per cent for exchange rate, interest rate and otherderivative contracts. In accordance with the Third Schedule, contingent liabilities and commitmentsare credit-related instruments that include acceptances and endorsements,letters of credit, guarantees and commitments to extend credit. The riskinvolved is essentially the same as the credit risk involved in extending loanfacilities to customers. These transactions are, therefore, subject to the samecredit origination, portfolio maintenance and collateral requirements as forcustomers applying for loans. As the facilities may expire without being drawnupon, the total of the contract amounts is not representative of futureliquidity requirements. In accordance with HKAS 39, acceptances and endorsements are recognised on thebalance sheet in 'Other assets' and 'Other liabilities'. These acceptances andendorsements are included in the capital adequacy calculation as contingenciesin accordance with the Third Schedule. Off-balance sheet financial instruments arise from futures, forward, swap andoption transactions undertaken in the foreign exchange, interest rate and equitymarkets. The contract amounts of these instruments indicate the volume of transactionsoutstanding at the balance sheet date and do not represent amounts at risk. Thecredit equivalent amount of these instruments is measured as the sum of positivemarked-to-market values and the potential future credit exposure in accordancewith the Third Schedule. Derivative financial instruments are held for trading, as financial instrumentsdesignated at fair value, or designated as either fair value hedge or cash flowhedges. The following table shows the nominal contract amounts andmarked-to-market value of assets and liabilities of each class of derivatives. At 30Jun06 At 30Jun05 At 31Dec05 Trading/ Trading/ Trading/ designated designated designatedFigures in HK$m at fair value Hedging at fair value Hedging at fair value Hedging Contract amounts:Interest rate contracts 107,608 51,974 103,968 67,463 102,233 63,105Exchange rate contracts 303,678 - 163,743 - 203,264 -Other derivative contracts 4,916 - 311 - 1,194 - 416,202 51,974 268,002 67,463 306,691 63,105 Derivative assets:Interest rate contracts 688 480 675 223 481 454Exchange rate contracts 983 - 647 - 776 -Other derivative contracts 10 - 7 - 4 - 1,681 480 1,329 223 1,261 454 Derivative liabilities:Interest rate contracts 999 507 847 591 998 457Exchange rate contracts 578 - 412 - 310 -Other derivative contracts 172 - 7 - 27 - 1,749 507 1,266 591 1,335 457 The above derivative assets and liabilities, being the positive or negativemarked-to-market value of the respective derivative contracts, represent grossreplacement costs, as none of these contracts are subject to any bilateralnetting arrangements. Cross-border claims Cross-border claims include receivables and loans and advances, and balances duefrom banks and holdings of certificates of deposit, bills, promissory notes,commercial paper and other negotiable debt instruments, as well as accruedinterest and overdue interest on these assets. Claims are classified accordingto the location of the counterparties after taking into account the transfer ofrisk. For a claim guaranteed by a party situated in a country different from thecounterparty, the risk will be transferred to the country of the guarantor. Fora claim on the branch of a bank or other financial institution, the risk will betransferred to the country where its head office is situated. Claims onindividual countries or areas, after risk transfer, amounting to 10 per cent ormore of the aggregate cross-border claims are shown as follows: Banks Sovereign & other & public financial sectorFigures in HK$m institutions entities Other Total At 30Jun06 Asia-Pacific excluding Hong Kong:- Australia 31,760 146 526 32,432- Other 42,580 1,402 7,144 51,126 74,340 1,548 7,670 83,558The Americas:- Canada 18,902 3,628 2,775 25,305- Other 21,351 2,602 9,029 32,982 40,253 6,230 11,804 58,287Western Europe:- United Kingdom 31,828 - 9,356 41,184- Other 89,253 450 5,555 95,258 121,081 450 14,911 136,442 At 30Jun05 Asia-Pacific excluding Hong Kong:- Australia 25,194 61 954 26,209- Other 27,760 1,600 6,197 35,557 52,954 1,661 7,151 61,766The Americas:- Canada 19,011 4,599 1,571 25,181- Other 13,396 2,601 10,882 26,879 32,407 7,200 12,453 52,060Western Europe:- United Kingdom 25,206 15 6,897 32,118- Other 79,498 2,577 6,757 88,832 104,704 2,592 13,654 120,950 Banks Sovereign & other & public financial sectorFigures in HK$m institutions entities Other Total At 31Dec05 Asia-Pacific excluding Hong Kong:- Australia 23,961 144 712 24,817- Other 38,140 1,447 6,882 46,469 62,101 1,591 7,594 71,286The Americas:- Canada 16,229 3,976 1,677 21,882- Other 13,182 2,460 10,712 26,354 29,411 6,436 12,389 48,236Western Europe:- United Kingdom 23,008 - 7,842 30,850- Other 81,089 1,430 6,207 88,726 104,097 1,430 14,049 119,576 Additional information 1. Accounting policies The accounting policies applied in preparing this news release are the same asthose applied in preparing the financial statements for the year ended 31December 2005, as disclosed in the Annual Report and Financial Statements for2005 except for the following: Amendments to Hong Kong Accounting Standard 39 ('HKAS 39') and Hong KongFinancial Reporting Standard 4 'Financial Instruments: Recognition andMeasurement and Insurance Contracts - Financial Guarantee Contracts' In prior years, financial guarantee contracts were accounted for under HKAS 37'Provisions, Contingent Liabilities and Contingent Assets' as contingentliabilities and were disclosed as off-balance sheet items. With effect from 1 January 2006 and in accordance with the above amendments,financial guarantee contracts issued are recognised as financial liabilities andreported under 'Other liabilities'. Financial guarantees are recognisedinitially at fair value and subsequently measured as the higher of (a) theamount as provisions determined in accordance with HKAS 37; and (b) the amountinitially recognised less cumulative amortisation. Financial liabilities recorded under 'Other liabilities' at 30 June 2006amounted to HK$4 million. No restatement of comparative figures was made as theamounts were immaterial. 2. Statement of compliance This news release has been prepared in accordance with Hong Kong AccountingStandard ('HKAS') 34 'Interim Financial Reporting'. It also complies with themodule on 'Interim Financial Disclosure by Locally Incorporated AuthorisedInstitutions' under the Supervisory Policy Manual issued by the Hong KongMonetary Authority ('HKMA'). 3. Statutory accounts The information in this news release is not audited and does not constitutestatutory accounts. Certain financial information in this news release is extracted from thestatutory accounts for the year ended 31 December 2005, which have beendelivered to the Registrar of Companies and the HKMA. The auditors expressed anunqualified opinion on those statutory accounts in their report dated 6 March2006. 4. Comparative figures Certain comparative figures have been reclassified to conform with the currentperiod's presentation. 5. Property revaluation A revaluation of Hang Seng's premises and investment properties in Hong Kong wasperformed in June 2006 to reflect property market movements in the first half of2006. The group's premises and investment properties were revalued by DTZDebenham Tie Leung Limited, an independent professional valuer, and carried outby 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 useand the basis of valuation for investment properties was open market value. Therevaluation surplus for group premises amounted to HK$582 million, of whichHK$13 million was a reversal of revaluation deficits previously charged to theincome statement. The balance of HK$569 million was credited to the propertyrevaluation reserve. Revaluation gains on investment properties of HK$305million were recognised through the income statement in accordance with HKAS 40.The related deferred tax provisions for group premises and investment propertieswere HK$102 million and HK$53 million respectively. 6. 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 for the group.The group's market risk arises from customer-related business and from positiontaking. Market risk is managed within risk limits approved by the Board of Directors anddelegated to the Treasurer who will allocate the limits to the individualtraders. Risk limits are set by product and risk type with market liquiditybeing a principal factor in determining the level of limits set. Limits are setusing a combination of risk measurement techniques, including position limits,sensitivity limits, as well as value at risk ('VAR') limits at a portfoliolevel. 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 action to ensurethe overall market risk is managed within an acceptable level. VAR is a technique that 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,Hang Seng's VAR calculation is predominantly based on historical simulation('HS') effective 3 May 2005. Prior to May 2005, VAR calculation waspredominantly based on variance/co-variance ('VCV'). HS uses scenarios derivedfrom historical market rates, and takes account of the relationships betweendifferent markets and rates, for example, interest rates and foreign exchangerates. Movements in market prices are calculated by reference to market datafrom the last two years. The assumed holding period is a one-day period,reflecting the way the risk positions are managed. 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's VAR for all interest rate risk and foreign exchange risk positionsand on individual risk portfolios during the first halves of 2006 and 2005 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 the Figures in HK$m At 30Jun06 period period period VAR for all interest rate risk and foreign exchange risk 47 47 119 86VAR for foreign exchange risk (trading) 5 3 16 6VAR for interest rate risk- trading 15 3 15 7- non-trading 51 51 123 91 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 194 123 264 205VAR for foreign exchange risk (trading) 2 - 3 1VAR for interest rate risk- trading 1 1 21 6- non-trading 194 122 261 201 The average daily revenue earned from market risk-related treasury activitiesfor the first half of 2006, including non-trading book net interest income andfunding related to trading positions, was HK$5 million (HK$7 million for thefirst half of 2005). The standard deviation of these daily revenues was HK$3million (HK$5 million for the first half of 2005). Interest rate risk arises in both the treasury trading and non-trading portfolios, which are managed by treasury under limits approved by the Board ofDirectors. The average daily revenue earned from treasury-related interest rateactivities for the first half of 2006 was HK$1 million (HK$5 million for thefirst half of 2005). The group's foreign exchange exposures mainly comprise foreign exchange tradingby treasury and currency exposures originated from 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 2006 was HK$4 million(HK$2 million for the first half of 2005). Structural foreign exchange positions arising from capital investment insubsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi asset out in Note 7, are managed by the Asset and Liability Management Committee. 7. Foreign currency positions Foreign currency exposures include those arising from trading, non-trading andstructural positions. At 30 June 2006, the US dollar (US$) was the only currencyin which the group had a non-structural foreign currency position that exceeded10 per cent of the total net position in all foreign currencies. Figures in HK$m At 30Jun06 At 30Jun05 At 31Dec05 US$ RMB US$ RMB US$ RMBNon-structural positionSpot assets 202,537 8,960 188,701 4,665 193,149 5,955Spot liabilities (189,227) (8,582) (177,851) (4,526) (168,513) (6,008)Forward purchases 124,061 570 61,568 384 84,026 439Forward sales (129,724) (827) (71,173) (380) (104,960) (300)Net options position 25 - (4) - (77) -Net long non-structural position 7,672 121 1,241 143 3,625 86 At 30 June 2006, the group's major structural foreign currency positions were USdollar and renminbi. At 30Jun06 At 30Jun05 At 31Dec05 % of % of % of total net total net total net structural structural structural HK$m position HK$m position HK$m positionStructural positionsUS dollar 1,133 33.0 1,037 33.0 1,035 32.5Renminbi 2,194 63.9 1,997 63.6 2,043 64.1 8. Ultimate holding company Hang Seng Bank is an indirectly held, 62.14 per cent-owned subsidiary of HSBCHoldings plc. 9. Register of shareholders The register of shareholders of Hang Seng Bank will be closed on Wednesday, 23August 2006, 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, 183 Queen's Road East, Wanchai, Hong Kong, for registration notlater than 4 pm on Tuesday, 22 August 2006. The second interim dividend will bepayable on Thursday, 31 August 2006 to shareholders on the register ofshareholders of the bank on Wednesday, 23 August 2006. 10. Proposed timetable for the remaining 2006 quarterly dividends Third Fourth interim dividend interim dividend Announcement 6 November 2006 5 March 2007Book close date 20 December 2006 20 March 2007Payment date 3 January 2007 30 March 2007 11. News release Copies of this news release may be obtained from the Legal and CompanySecretarial Services Department, Level 10, 83 Des Voeux Road Central, Hong Kong;or from Hang Seng's website http://www.hangseng.com. The 2006 Interim Report and Financial Statements will be available from the samewebsite on Monday, 31 July 2006 and will also be published on the website of TheStock Exchange of Hong Kong Limited in due course. Printed copies of the 2006Interim Report and Financial Statements will be sent to shareholders in lateAugust 2006 in accordance with the requirements under the Rules Governing theListing of Securities on The Stock Exchange of Hong Kong Limited. Media enquiries to:Walter Cheung Telephone: (852) 2198 4020Cecilia Ko Telephone: (852) 2198 4227 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HSBC Holdings