30th Jul 2012 09:15
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
2012 INTERIM CONSOLIDATED RESULTS - HIGHLIGHTS
·; Net operating income before loan impairment charges and other credit risk provisions up 16% to HK$84,977m (HK$73,456m in the first half of 2011).
·; Profit before tax up 25% to HK$57,988m (HK$46,234m in the first half of 2011).
·; Attributable profit up 30% to HK$44,690m (HK$34,292m in the first half of 2011).
·; Return on average shareholders' equity of 24.8% (22.5% in the first half of 2011).
·; Total assets up 3% to HK$5,762bn (HK$5,607bn at the end of 2011).
·; Cost efficiency ratio of 40.1% (45.2% for the first half of 2011).
Within this document the Hong Kong Special Administrative Region of the People's Republic of China is referred to as 'Hong Kong'. The abbreviations 'HK$m' and 'HK$bn' represent millions and billions (thousands of millions) of Hong Kong dollars respectively.
Comment by Stuart Gulliver, Chairman
After a resilient start to 2012, Asian economies slowed markedly in the second quarter of the year. Concerns over the solution to the European debt crisis contributed to a reduction in demand for Asian exports, particularly from mainland China, which also experienced a moderation in growth in construction and household spending. Demand from the US also remained muted. Lower demand from Europe and mainland China reduced levels of export related activity in Hong Kong and growth slowed, though domestic demand remained buoyant and retail sales grew strongly. Singapore also experienced a slowdown in the second quarter, but inflation remained high. Persistently high inflation also remains a challenge for India, where monetary tightening led to a reduction in growth during the period.
Although weak demand from the West is likely to persist during the remainder of the year, anticipated monetary and fiscal easing in mainland China should stimulate an improvement in Asia's rates of growth in intra-regional trade and economic activity. Asia is now less reliant on the West for trade and growth should therefore remain more resilient than in previous downturns, given the right policy responses. There remains a risk that European banks may once again reduce credit supply in Asia, but the region's banking systems are strong and have proven to be capable of meeting demand for lending where it arises, gaining market share in the process. The global economy remains fragile and vulnerable to setbacks, but Asia is nonetheless likely to maintain good rates of growth, driven primarily by consumption and investment in mainland China, which is increasingly driving regional demand. In this environment, we see good opportunities to continue to serve our customers through our extensive network, and gain market share through meeting their financial needs.
Notwithstanding the challenges posed by the mixed economic environment of the first half of 2012, The Hongkong and Shanghai Banking Corporation Limited delivered a sound and broadly-based performance. Profit before tax for the period was HK$57,988m, 25% higher than in the first half of 2011. This included gains of HK$4,471m from the sale of subscale activities in Japan and Thailand and non-core investments in India and the Philippines. These disposals demonstrate progress in our strategy of simplifying the group and eliminating non-core or subscale businesses, allowing us to focus our capital and resources on our core businesses. In addition to these completed sales, we also announced the sale of our general insurance businesses in Hong Kong and Singapore to AXA and QBE. Following the sale we will continue to distribute general insurance products to our customers under agreements with these buyers. In July 2012, we announced the proposed sale of Global Payments Asia-Pacific Limited to partner Global Payments Inc. In Hong Kong, profits grew strongly driven by growth in lending and trading revenues and further development in our customers' activities with mainland China. In the Rest of Asia Pacific, profits growth was supported by last year's strong loan and deposit increases, and higher contributions from our associates in mainland China.
During the period we maintained our focus on our key priority growth markets in the region, namely Hong Kong, mainland China, India, Indonesia, Singapore, Malaysia and Australia. We continued to execute our strategy to leverage our international connectivity and increase cross-sell activity across our businesses and in a broad range of products and services. We maintained our position as a leading international bank for offshore renminbi products and services and, through our global renminbi trade settlement capability, we are well positioned to capture the growth in renminbi denominated trade finance. Customer loans grew by 4% during the period, while deposits grew by 1%, and at the half-year the loans to deposits ratio stood at 61.9%.
In competitive markets for both loans and deposits, margins remained stable during the period. We maintained tight control of operating expenses, while continuing to invest for future growth, and the cost efficiency ratio improved from 45.2% to 40.1% on a reported basis and to 42.3% excluding the gains on sales noted earlier. The loan impairment charge remained low in Hong Kong, but rose in the Rest of Asia Pacific, largely as a result of impairments on a small number of specific exposures. While there has been a slight deterioration in average corporate credit grades, overall the quality of the loan book remains sound and we continue to exercise vigilance towards lending.
In Retail Banking and Wealth Management ('RBWM'), profits increased by 18%. Revenues grew from higher loan balances following successful marketing campaigns and a strong performance in insurance, partly offset by weaker investor sentiment which impacted brokerage income and unit trust fees. In Hong Kong we maintained our leading market positions in deposits, mortgages, credit cards, life insurance and mandatory provident funds. We continued to invest in enhancing our wealth management services and sales productivity in the region. Asset growth remained focused on residential mortgages and the loan book continued to perform well, with loan impairment charges remaining low. In line with our strategy, we completed the sale of our RBWM business in Thailand. We continued to expand our branch network in order to capture growth opportunities in mainland China, Malaysia and Taiwan.
Commercial Banking ('CMB') increased lending to customers around the region and revenues in both trade finance and Payments and Cash Management continued to grow strongly. Profits were up by 17%. We continued to leverage our global network to capture the growing trade and capital flows with mainland China. Collaboration with Global Banking and Markets ('GB&M') continued to provide a growing contribution to revenues, particularly in foreign exchange products. We strengthened our position in the provision of renminbi denominated products and won a number of prestigious awards in the Asiamoney Offshore Renminbi Survey, coming top in all seven product categories. Costs were well controlled during the period, growing by less than revenues. Our focus remained on supporting our customers in growing their businesses, particularly through financing their international trade, payments, foreign exchange and cash management and providing advisory services.
Global Banking and Markets delivered a robust business performance and profits increased by 18%. We continued to grow lending, notably in mainland China. Fee income increased, particularly in Hong Kong, driven by Payments and Cash Management, credit facilities and debt capital markets transactions. Trading income benefited from client activity in Rates and Foreign Exchange in particular. We maintained a strong focus on asset quality and loan impairment charges remained very low. The positive results of recent investments were evident in a number of significant industry awards. Among these were six Euromoney Awards for Excellence in Asia, including Best Debt House, Best Flow House, Best Risk House, Best Project Finance House, Best Bank in Hong Kong and Best Debt House in Hong Kong.
During the second half of 2012, although the conditions are in place for economic growth in Asia to pick up in response to policy stimulus, confidence is likely to remain fragile while uncertainties persist over Western economies, leading to customer caution and, in consequence, relatively modest growth in demand for lending and other financial services. With our strong capital and liquidity we remain well placed to continue to serve our customers' needs when and where they arise, through an unrivalled network connecting their businesses around the world.
Results by Geographical Region | ||||||||
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Geographical regions | Hong Kong | Rest of Asia-Pacific | Intra- segment elimination | Total | ||||
HK$m | HK$m | HK$m | HK$m |
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Period ended 30 June 2012 | ||||||||
Net interest income | 19,622 | 21,370 | - | 40,992 |
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Net fee income | 11,953 | 7,906 | - | 19,859 |
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Net trading income | 5,027 | 7,117 | - | 12,144 |
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Net income from financial instruments designated atfair value | 645 | 297 | - | 942 |
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Gains less losses from financial investments | 2,185 | 195 | - | 2,380 |
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Dividend income | 329 | 25 | - | 354 |
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Net earned insurance premiums | 23,967 | 3,064 | - | 27,031 |
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Other operating income | 6,401 | 3,625 | (2,099) | 7,927 |
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Total operating income | 70,129 | 43,599 | (2,099) | 111,629 |
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Net insurance claims incurred and movement in policyholders' liabilities | (23,990) | (2,662) | - | (26,652) |
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Net operating income before loan impairmentcharges and other credit risk provisions | 46,139 | 40,937 | (2,099) | 84,977 |
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Loan impairment charges and other credit riskprovisions | (264) | (1,952) | - | (2,216) |
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Net operating income | 45,875 | 38,985 | (2,099) | 82,761 |
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Operating expenses | (18,211) | (17,958) | 2,099 | (34,070) |
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Operating profit | 27,664 | 21,027 | - | 48,691 |
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Share of profit in associates and joint ventures | 438 | 8,859 | - | 9,297 |
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Profit before tax | 28,102 | 29,886 | - | 57,988 |
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Share of profit before tax | 48.5% | 51.5% | 100% |
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Cost efficiency ratio | 39.5% | 43.9% | 40.1% |
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Net loans and advances to customers | 1,233,329 | 988,292 | - | 2,221,621 |
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Total assets | 3,702,828 | 2,567,749 | (508,118) | 5,762,459 |
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Customer accounts | 2,326,870 | 1,260,031 | - | 3,586,901 |
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Geographical regions | Hong Kong | Rest of Asia-Pacific | Intra- segmentelimination | Total | |||
HK$m | HK$m | HK$m | HK$m | ||||
Period ended 30 June 2011 | |||||||
Net interest income | 16,872 | 18,845 | (2) | 35,715 | |||
Net fee income | 11,754 | 8,185 | - | 19,939 | |||
Net trading income | 4,362 | 6,442 | 2 | 10,806 | |||
Net income from financial instruments designated atfair value | 309 | 39 | - | 348 | |||
Gains less losses from financial investments | 247 | (178) | - | 69 | |||
Dividend income | 543 | 2 | - | 545 | |||
Net earned insurance premiums | 20,216 | 2,666 | - | 22,882 | |||
Other operating income | 7,151 | 1,256 | (2,219) | 6,188 | |||
Total operating income | 61,454 | 37,257 | (2,219) | 96,492 | |||
Net insurance claims incurred and movement in policyholders' liabilities | (20,953) | (2,083) | - | (23,036) | |||
Net operating income before loan impairmentcharges and other credit risk provisions | 40,501 | 35,174 | (2,219) | 73,456 | |||
Loan impairment charges and other credit riskprovisions | (186) | (802) | - | (988) | |||
Net operating income | 40,315 | 34,372 | (2,219) | 72,468 | |||
Operating expenses | (17,699) | (17,705) | 2,219 | (33,185) | |||
Operating profit | 22,616 | 16,667 | - | 39,283 | |||
Share of profit in associates and joint ventures | 243 | 6,708 | - | 6,951 | |||
Profit before tax | 22,859 | 23,375 | - | 46,234 | |||
Share of profit before tax | 49.4% | 50.6% | 100% | ||||
Cost efficiency ratio | 43.7% | 50.3% | 45.2% | ||||
Net loans and advances to customers | 1,193,969 | 930,218 | - | 2,124,187 | |||
Total assets | 3,574,763 | 2,313,617 | (391,321) | 5,497,059 | |||
Customer accounts | 2,220,666 | 1,230,011 | - | 3,450,677 |
Results by Geographic Global Business | |||||||||||
Hong Kong | |||||||||||
Retail Banking and Wealth Management | Commercial Banking | Global Banking & Markets | Other | Intra- segment elimination | Total | ||||||
HK$m | HK$m | HK$m | HK$m | HK$m | HK$m | ||||||
Period ended 30 June 2012 | |||||||||||
Net interest income/(expense) | 10,871 | 5,963 | 4,298 | (1,848) | 338 | 19,622 | |||||
Net fee income | 6,401 | 3,355 | 2,113 | 84 | - | 11,953 | |||||
Net trading income/(expense) | 466 | 664 | 4,286 | (51) | (338) | 5,027 | |||||
Net income/(loss) fromfinancial instruments designated at fair value | 695 | (139) | 122 | (33) | - | 645 | |||||
Gains less losses fromfinancial investments | (7) | - | 32 | 2,160 | - | 2,185 | |||||
Dividend income | 1 | - | 14 | 314 | - | 329 | |||||
Net earned insurance premiums | 20,884 | 3,022 | 61 | - | - | 23,967 | |||||
Other operating income | 2,772 | 269 | 254 | 4,111 | (1,005) | 6,401 | |||||
Total operating income | 42,083 | 13,134 | 11,180 | 4,737 | (1,005) | 70,129 | |||||
Net insurance claims incurred and movement in policyholders' liabilities | (21,293) | (2,650) | (47) | - | - | (23,990) | |||||
Net operating income before loan impairment charges and other credit risk provisions | 20,790 | 10,484 | 11,133 | 4,737 | (1,005) | 46,139 | |||||
Loan impairment (charges)/ releases and other credit risk provisions | (340) | (13) | 89 | - | - | (264) | |||||
Net operating income | 20,450 | 10,471 | 11,222 | 4,737 | (1,005) | 45,875 | |||||
Operating expenses | (6,948) | (2,746) | (5,189) | (4,333) | 1,005 | (18,211) | |||||
Operating profit | 13,502 | 7,725 | 6,033 | 404 | - | 27,664 | |||||
Share of profit in associatesand joint ventures | 148 | 48 | 22 | 220 | - | 438 | |||||
Profit before tax | 13,650 | 7,773 | 6,055 | 624 | - | 28,102 | |||||
Share of profit before tax | 23.5% | 13.4% | 10.5% | 1.1% | - | 48.5% | |||||
Net loans and advances to customers | 452,110 | 455,246 | 315,669 | 10,304 | - | 1,233,329 | |||||
Customer accounts | 1,433,785 | 623,470 | 266,347 | 3,268 | - | 2,326,870 | |||||
Hong Kong | |||||||||||
Retail Banking and Wealth Management | Commercial Banking | Global Banking & Markets | Other | Intra- segment elimination | Total | ||||||
HK$m | HK$m | HK$m | HK$m | HK$m | HK$m | ||||||
Period ended 30 June 2011 | |||||||||||
Net interest income/(expense) | 9,774 | 4,867 | 3,899 | (1,822) | 154 | 16,872 | |||||
Net fee income | 7,066 | 2,767 | 1,843 | 78 | - | 11,754 | |||||
Net trading income/(expense) | 479 | 672 | 3,424 | (58) | (155) | 4,362 | |||||
Net income/(loss) fromfinancial instruments designated at fair value | 502 | (207) | 14 | (1) | 1 | 309 | |||||
Gains less losses fromfinancial investments | - | - | 153 | 94 | - | 247 | |||||
Dividend income | 1 | 4 | 84 | 454 | - | 543 | |||||
Net earned insurance premiums | 17,075 | 3,066 | 75 | - | - | 20,216 | |||||
Other operating income | 2,915 | 641 | 179 | 4,311 | (895) | 7,151 | |||||
Total operating income | 37,812 | 11,810 | 9,671 | 3,056 | (895) | 61,454 | |||||
Net insurance claims incurred and movement in policyholders' liabilities | (18,236) | (2,658) | (59) | - | - | (20,953) | |||||
Net operating income before loan impairment charges and other credit risk provisions | 19,576 | 9,152 | 9,612 | 3,056 | (895) | 40,501 | |||||
Loan impairment (charges)/ releases and other credit risk provisions | (300) | (56) | 170 | - | - | (186) | |||||
Net operating income | 19,276 | 9,096 | 9,782 | 3,056 | (895) | 40,315 | |||||
Operating expenses | (6,939) | (2,687) | (4,915) | (4,053) | 895 | (17,699) | |||||
Operating profit/(loss) | 12,337 | 6,409 | 4,867 | (997) | - | 22,616 | |||||
Share of profit in associatesand joint ventures | 24 | 10 | 7 | 202 | - | 243 | |||||
Profit/(loss) before tax | 12,361 | 6,419 | 4,874 | (795) | - | 22,859 | |||||
Share of profit before tax | 26.7% | 13.9% | 10.5% | (1.7)% | - | 49.4% | |||||
Net loans and advances to customers | 420,233 | 455,490 | 304,471 | 13,775 | - | 1,193,969 | |||||
Customer accounts | 1,366,892 | 581,805 | 267,310 | 4,659 | - | 2,220,666 |
Rest of Asia-Pacific | |||||||||||||
Retail Banking and Wealth Management | Commercial Banking | Global Banking & Markets | Global Private Banking | Other | Intra- segment elimination | Total | |||||||
HK$m | HK$m | HK$m | HK$m | HK$m | HK$m | HK$m | |||||||
Period ended 30 June 2012 | |||||||||||||
Net interest income | 6,953 | 5,365 | 9,393 | 92 | 554 | (987) | 21,370 | ||||||
Net fee income/(expense) | 3,207 | 2,048 | 2,616 | 57 | (22) | - | 7,906 | ||||||
Net trading income/(expense) | 336 | 762 | 5,058 | 7 | (34) | 988 | 7,117 | ||||||
Net income/(loss) from financial instruments designated at fair value | 316 | 4 | (10) | - | (12) | (1) | 297 | ||||||
Gains less losses from financial investments | (7) | 6 | 8 | (1) | 189 | - | 195 | ||||||
- | |||||||||||||
Dividend income | 1 | - | - | - | 24 | - | 25 | ||||||
Net earned insurance premiums | 2,624 | 439 | - | 1 | - | - | 3,064 | ||||||
Other operating income | 1,310 | 342 | 256 | 503 | 1,482 | (268) | 3,625 | ||||||
Total operating income | 14,740 | 8,966 | 17,321 | 659 | 2,181 | (268) | 43,599 | ||||||
Net insurance claims incurred and movement in policyholders' liabilities | (2,274) | (387) | - | (1) | - | - | (2,662) | ||||||
Net operating income before loan impairment charges and other credit risk provisions | 12,466 | 8,579 | 17,321 | 658 | 2,181 | (268) | 40,937 | ||||||
Loan impairment (charges) /releases and other credit risk provisions | (796) | (1,018) | (137) | 1 | (2) | - | (1,952) | ||||||
Net operating income | 11,670 | 7,561 | 17,184 | 659 | 2,179 | (268) | 38,985 | ||||||
Operating expenses | (8,682) | (3,787) | (4,978) | (155) | (624) | 268 | (17,958) | ||||||
Operating profit | 2,988 | 3,774 | 12,206 | 504 | 1,555 | - | 21,027 | ||||||
Share of profit in associates and joint ventures | 1,095 | 5,678 | 2,080 | - | 6 | - | 8,859 | ||||||
Profit before tax | 4,083 | 9,452 | 14,286 | 504 | 1,561 | - | 29,886 | ||||||
Share of profit before tax | 7.0% | 16.3% | 24.6% | 0.9% | 2.7% | - | 51.5% | ||||||
Net loans and advances to customers | 327,083 | 319,961 | 337,092 | 2,740 | 1,416 | - | 988,292 | ||||||
Customer accounts | 465,665 | 325,751 | 462,031 | 5,421 | 1,163 | - | 1,260,031 |
Rest of Asia-Pacific | ||||||||||||||
Retail Banking and Wealth Management | Commercial Banking | Global Banking & Markets | Global Private Banking | Other | Intra- segment elimination | Total | ||||||||
HK$m | HK$m | HK$m | HK$m | HK$m | HK$m | HK$m | ||||||||
Period ended 30 June 2011 | ||||||||||||||
Net interest income | 6,936 | 4,514 | 7,752 | 80 | 405 | (842) | 18,845 | |||||||
Net fee income | 3,449 | 2,019 | 2,670 | 84 | (37) | - | 8,185 | |||||||
Net trading income/(expense) | 387 | 584 | 4,899 | 37 | (307) | 842 | 6,442 | |||||||
Net income/(loss) from financial instruments designated at fair value | 56 | 14 | 4 | - | (35) | - | 39 | |||||||
Gains less losses from financial investments | (2) | 11 | (181) | - | (6) | - | (178) | |||||||
Dividend income | (1) | - | - | - | 3 | - | 2 | |||||||
Net earned insurance premiums | 1,753 | 913 | - | - | - | - | 2,666 | |||||||
Other operating income | 547 | 246 | 251 | 4 | 430 | (222) | 1,256 | |||||||
Total operating income | 13,125 | 8,301 | 15,395 | 205 | 453 | (222) | 37,257 | |||||||
Net insurance claims incurred and movement in policyholders' liabilities | (1,345) | (738) | - | - | - | - | (2,083) | |||||||
Net operating income before loan impairment charges and other credit risk provisions | 11,780 | 7,563 | 15,395 | 205 | 453 | (222) | 35,174 | |||||||
Loan impairment (charges) /releases and other credit risk provisions | (874) | 40 | 32 | - | - | - | (802) | |||||||
Net operating income | 10,906 | 7,603 | 15,427 | 205 | 453 | (222) | 34,372 | |||||||
Operating expenses | (9,119) | (3,574) | (4,721) | (187) | (326) | 222 | (17,705) | |||||||
Operating profit | 1,787 | 4,029 | 10,706 | 18 | 127 | - | 16,667 | |||||||
Share of profit in associates and joint ventures | 836 | 4,216 | 1,645 | - | 11 | - | 6,708 | |||||||
Profit before tax | 2,623 | 8,245 | 12,351 | 18 | 138 | - | 23,375 | |||||||
Share of profit before tax | 5.7% | 17.8% | 26.8% | - | 0.3% | - | 50.6% | |||||||
Net loans and advances to customers | 324,579 | 281,181 | 315,012 | 8,058 | 1,388 | - | 930,218 | |||||||
Customer accounts | 462,314 | 311,184 | 438,547 | 16,886 | 1,080 | - | 1,230,011 | |||||||
Results by Geographic Region (continued)
Hong Kong reported pre-tax profits of HK$28,102m compared with HK$22,859m in the first half of 2011, an increase of 23%.
The increase in profits was driven by higher net interest income in RBWM and CMB coupled with the gain on sale of our shares in two Indian banks. Trading revenues were higher in GB&M resulting from positive performances in the Rates, Foreign Exchange and Credit businesses. These increases were partly offset by higher operating expenses, including staff costs.
In RBWM, we were awarded the 'Best Wealth Management Award' from The Asian Banker. We announced the sale of our general insurance business enabling us to focus on life insurance manufacturing where we maintained our market leadership position. We launched a dual currency Hong Kong dollar and renminbi credit card for customers who travel frequently between Hong Kong and mainland China that offers payment flexibility and protection against fluctuating exchange rates. We maintained our market leadership position in deposits, mortgages and mandatory provident funds as well as credit cards where we received 26 awards from Visa, Mastercard and China UnionPay.
In CMB we capitalised on our international connectivity and our standing as a leading trade finance bank to grow trade-related revenues, particularly with mainland China. Cross-border referrals between Hong Kong and mainland China grew by 13% and by 10% between Hong Kong and the rest of the world. The collaboration between CMB and GB&M continued to strengthen, with growth of 16% in revenues which are shared between the global businesses, most notably from the provision of foreign exchange products to our corporate customers. We also won the 'Best SME Partner Award' from the Hong Kong General Chamber of Small and Medium Business for the seventh consecutive year.
In GB&M we led the market in Hong Kong dollar bond issuance and participated in several significant debt capital markets transactions. We continued to lead the market in offshore renminbi bond issuance with several high profile deals completed in the first half of 2012 for multinationals accessing the market.
We reinforced our position as a leading international bank for offshore renminbi products, topping all seven product categories in Asiamoney's inaugural Offshore Renminbi Survey, including 'Best Overall Products and Services', 'Best Clearance, Transaction Banking and Settlement' and 'Best for Deposits'.
Net interest income was 16% higher than in the first half of 2011, notably in RBWM and in CMB, driven primarily by wider deposit spreads and growth in balances of both customer loans and deposits.
We experienced growth in average lending balances in mortgages and personal loans in RBWM, following increased demand, and trade related lending in CMB as a result of customer acquisition campaigns launched in 2011 as we capitalised on trade and capital flows. In CMB, growth in trade-related lending returned in the first half of 2012 following reductions in the second half of 2011.
Net interest income also rose due to higher average deposit balances as we focused on funding lending growth with deposit acquisition. These were partly offset by narrower asset spreads, notably in residential mortgages in RBWM, as funding costs increased.
Net interest income from Balance Sheet Management was higher in the first half of 2012, through improved fund deployment amidst a consistently low interest rate environment.
Net fee income increased by 2%, primarily from higher trade related volumes as we successfully captured opportunities from international trade and capital flows, as well as our participation in several significant debt capital markets transactions in the first half of 2012. This increase was offset in RBWM, primarily by a reduction in brokerage income from lower market turnover as a result of weaker investor sentiment, and by lower fee income from unit trusts where customer preference shifted towards products with lower fees.
Net trading income increased by 15%, driven by a positive performance in GB&M, notably in Rates trading activities, which reflected greater market volatility and tightening of spreads, and in Foreign Exchange due to increased client activity. Credit trading revenues also rose due to favourable debt securities trading and increased volumes.
Net income from financial instruments designated at fair value was HK$645m compared with HK$309m in the first half of 2011 due to higher investment gains on assets held by the insurance business as a result of more favourable equity market conditions. To the extent that these investment gains were attributed to policyholders of unit-linked insurance policies and insurance contracts with discretionary participation features ('DPF'), there was a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.
Net earned insurance premiums increased by 19%, notably from insurance contracts with DPF, following higher sales volumes, reflecting strong sales and renewals of life insurance products as a result of product launches and marketing campaigns. The growth in premiums resulted in a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.
Gains less losses from financial investments were HK$2,185m, driven by the gain of HK$2,131m from the sale of our shares in Axis Bank Limited and Yes Bank Limited, two non-core investments in India.
Other operating income of HK$6,401m was HK$750m lower than in the first half of 2011. The fall in income was primarily due to the non-recurrence of the gain from the refinement to the present value of in-force insurance business ('PVIF') calculation methodology in the first half of 2011, partly offset by a rise in PVIF reflecting a favourable market conditions update and increased insurance sales in 2012. In addition, the gain on revaluation of investment properties was lower in 2012 than in the previous year.
Loan impairment charges and other credit risk provisions stayed at a low level at HK$264m as the credit environment remained stable and we maintained our focus on high levels of asset quality.
Operating expenses increased by 3% primarily due to wage inflation across the business and higher performance-related costs in GB&M reflecting increased revenue. Premises and equipment costs rose, mainly relating to systems implementation programmes and higher volume-driven processing charges, as well as increased property maintenance and rental costs. We continued to maintain strict cost control and progressed with the implementation of our organisational effectiveness programme that started in 2011. Rest of Asia-Pacific reported pre-tax profits of HK$29,886m compared with HK$23,375m in the first half of 2011, an increase of 28%. Reported profits include gains from the sale of our RBWM business in Thailand of HK$811m, our global private banking ("GPB") business in Japan of HK$520m, and our interest in a property company in the Philippines of HK$1,009m.
Excluding the above gains, pre-tax profits rose by 18%, reflecting strong growth in lending and deposit balances, coupled with improved liability spreads. These were offset by higher expenses, in part due to HK$856m of restructuring costs arising from the ongoing strategic review of our businesses and support functions in the region, as well as higher loan impairment charges due to a small number of new individual impairments in CMB and GB&M. Increased profits from our associates in mainland China also contributed to our improved profitability.
In RBWM, we focused on capturing wealth management opportunities in the region. We continued to expand our branch network in mainland China, Malaysia and Taiwan and launched initiatives to enhance our multi-channel capabilities, including a mobile banking platform in Vietnam and expansion of the mobile functionality in mainland China, Australia and Singapore. We also carried out a detailed review of our loan approval process which reduced processing times. In Taiwan we launched Fundmax, a product that offers our customers the ability to invest in unit trusts with monthly management fees as an alternative to upfront fees.
In CMB, trade revenues grew as we capitalised on our global network to capture cross-border trade and capital flows, particularly with mainland China. Cross-border referrals between mainland China and the rest of the world increased by 11%. We were recognised as 'Financial institution of the year 2011' by the Brazil-China Chamber of Commerce for our contribution to the growth and development of the fast growing South-South trade corridor.
We continued to be a key participant in the internationalisation of the renminbi and we received approval from the People's Bank of China to be a market maker for direct trading between the renminbi and the Japanese Yen in mainland China's interbank market.
Net interest income increased by 13% due to higher average lending balances in CMB and GB&M, most notably in mainland China, as we captured international trade and capital flows. Residential mortgage balances also grew, primarily in Singapore, Malaysia, mainland China and Australia, driven by promotional campaigns. This was partly offset by narrower asset spreads, particularly in RBWM, due to competitive pricing pressures in residential mortgage lending in a number of markets.
Customer deposit balances rose, notably in Payments and Cash Management from new mandates and deposit acquisition as customers made use of our comprehensive product offering. This reflected our strategy of supporting growth in customer lending with core funding.
Net interest income from Balance Sheet Management was higher in the first half of 2012 primarily in mainland China, reflecting growth in the investment portfolio.
Net fee income decreased by 3%, most notably in RBWM due to lower fees in Japan following the discontinuation of our premier business and in Singapore as a result of weak investor sentiment. This was partly offset by increased fee income from CMB due to higher remittance revenue.
Net trading income increased by 10% compared with the first half of 2011, mainly from a strong performance in Rates trading activities in a number of countries in the region due to favourable movements in interest rates.
Net income from financial instruments designated at fair value was HK$297m compared with HK$39m in the first half of 2011, driven by higher investment gains on assets held by the insurance business, primarily in Singapore, due to positive equity market movements during the first half of 2012. To the extent that these investment gains were attributed to policyholders of unit-linked insurance policies and insurance contracts with DPF, there was a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.
Gains from financial investments were HK$195m compared with losses of HK$178m in first half of 2011, due to a disposal gain on investments managed by a private equity fund and a lower impairment loss on an equity investment in the first half of 2012 compared with 2011 in GB&M.
Net earned insurance premiums increased by 15% to HK$3,064m, primarily in Singapore as a result of increased renewals and new business volumes. The growth in premiums resulted in a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policyholders'.
Other operating income increased by HK$2,369m, due to gains from the sale of our RBWM business in Thailand of HK$811m, our GPB business in Japan of HK$520m and our interest in a property company in the Philippines of HK$1,009m.
Loan impairment charges and other credit risk provisions increased by HK$1,150m as a result of a specific impairment of a corporate exposure in Australia as well as individual loan impairment charges in India and New Zealand.
Operating expenses increased by 1% due to restructuring costs of HK$856m incurred across several countries as part of the ongoing strategic review of our businesses and support functions in the region. This resulted in a net reduction of more than 3,400 staff numbers in the first half of 2012, which was offset by inflationary pressures and business growth, including branch expansion in mainland China, Malaysia and Taiwan. However, we continued to maintain tight control on costs as part of the organisational effectiveness programme launched in 2011.
Share of profit from associates and joint ventures increased by 32% driven by higher profits from Bank of Communications as a result of loan growth and wider spreads. Fee income also increased from settlements and credit cards. The contribution from Industrial Bank rose as a result of strong growth in customer lending and higher fee-based revenue, which was partly offset by a rise in operating expenses.
Consolidated Income Statement | |||
Half-yearended 30 June 2012 | Half-yearended 30 June 2011 | ||
HK$m | HK$m | ||
Interest income | 57,787 | 50,677 | |
Interest expense | (16,795) | (14,962) | |
Net interest income | 40,992 | 35,715 | |
Fee income | 23,028 | 23,267 | |
Fee expense | (3,169) | (3,328) | |
Net fee income | 19,859 | 19,939 | |
Net trading income | 12,144 | 10,806 | |
Net income from financial instruments designated at fair value | 942 | 348 | |
Gains less losses from financial investments | 2,380 | 69 | |
Dividend income | 354 | 545 | |
Net earned insurance premiums | 27,031 | 22,882 | |
Other operating income | 7,927 | 6,188 | |
Total operating income | 111,629 | 96,492 | |
Net insurance claims incurred and movement in policyholders' liabilities | (26,652) | (23,036) | |
Net operating income before loan impairment charges | |||
and other credit risk provisions | 84,977 | 73,456 | |
Loan impairment charges and other credit risk provisions | (2,216) | (988) | |
Net operating income | 82,761 | 72,468 | |
Employee compensation and benefits | (19,525) | (18,970) | |
General and administrative expenses | (11,597) | (11,335) | |
Depreciation of property, plant and equipment | (2,043) | (1,884) | |
Amortisation and impairment of intangible assets | (905) | (996) | |
Total operating expenses | (34,070) | (33,185) | |
Operating profit | 48,691 | 39,283 | |
Share of profit in associates and joint ventures | 9,297 | 6,951 | |
Profit before tax | 57,988 | 46,234 | |
Tax expense | (9,424) | (8,897) | |
Profit for the period | 48,564 | 37,337 | |
Profit attributable to shareholders | 44,690 | 34,292 | |
Profit attributable to non-controlling interests | 3,874 | 3,045 | |
Consolidated Statement of Comprehensive Income | |||
Half-yearended 30 June 2012 | Half-yearended 30 June 2011 | ||
HK$m | HK$m | ||
Profit for the period | 48,564 | 37,337 | |
Other comprehensive income | |||
Available-for-sale investments: | |||
- fair value changes taken to equity | 9,569 | (5,536) | |
- fair value changes transferred to the income statement on disposal | (2,429) | (75) | |
- fair value changes transferred to the income statement on hedged items | |||
due to hedged risk | (461) | 1 | |
- income taxes | (432) | 91 | |
Cash flow hedges: | |||
- fair value changes taken to equity | 127 | 319 | |
- fair value changes transferred to the income statement | (181) | (245) | |
- income taxes | 6 | (16) | |
Property revaluation: | |||
- fair value changes taken to equity | 2,432 | 6,451 | |
- income taxes | (389) | (1,057) | |
Share of changes in equity of associates and joint ventures | 644 | (618) | |
Exchange differences | (2,057) | 4,720 | |
Actuarial losses on post-employment benefits: | |||
- before income taxes | (568) | (1,025) | |
- income taxes | 86 | 167 | |
Other comprehensive income for the period, net of tax | 6,347 | 3,177 | |
Total comprehensive income for the period, net of tax | 54,911 | 40,514 | |
Total comprehensive income for the period attributable to: | |||
- shareholders | 50,654 | 36,959 | |
- non-controlling interests | 4,257 | 3,555 | |
54,911 | 40,514 | ||
Consolidated Statement of Financial Postion | |||
At 30 June 2012 | At 31 December 2011 | ||
HK$m | HK$m | ||
ASSETS | |||
Cash and short-term funds | 920,794 | 919,906 | |
Items in the course of collection from other banks | 48,501 | 34,546 | |
Placings with banks maturing after one month | 262,908 | 198,287 | |
Certificates of deposit | 93,854 | 88,691 | |
Hong Kong Government certificates of indebtedness | 165,074 | 162,524 | |
Trading assets | 444,985 | 447,968 | |
Financial assets designated at fair value | 61,993 | 57,670 | |
Derivatives | 385,566 | 377,296 | |
Loans and advances to customers | 2,221,621 | 2,130,871 | |
Financial investments | 665,794 | 722,433 | |
Amounts due from Group companies | 150,496 | 152,730 | |
Interests in associates and joint ventures | 111,289 | 91,785 | |
Goodwill and intangible assets | 37,852 | 34,839 | |
Property, plant and equipment | 86,056 | 85,294 | |
Deferred tax assets | 2,206 | 2,325 | |
Retirement benefit assets | 95 | 111 | |
Other assets | 103,375 | 100,204 | |
Total assets | 5,762,459 | 5,607,480 | |
LIABILITIES | |||
Hong Kong currency notes in circulation | 165,074 | 162,524 | |
Items in the course of transmission to other banks | 61,296 | 47,163 | |
Deposits by banks | 227,276 | 222,582 | |
Customer accounts | 3,586,901 | 3,565,001 | |
Trading liabilities | 197,131 | 171,431 | |
Financial liabilities designated at fair value | 41,171 | 40,392 | |
Derivatives | 385,632 | 383,252 | |
Debt securities in issue | 82,129 | 77,472 | |
Retirement benefit liabilities | 8,718 | 8,097 | |
Amounts due to Group companies | 113,133 | 108,423 | |
Other liabilities and provisions | 111,177 | 108,314 | |
Liabilities under insurance contracts issued | 227,604 | 209,438 | |
Current tax liabilities | 7,783 | 4,126 | |
Deferred tax liabilities | 14,911 | 14,712 | |
Subordinated liabilities | 16,101 | 16,114 | |
Preference shares | 95,003 | 97,096 | |
Total liabilities | 5,341,040 | 5,236,137 | |
EQUITY | |||
Share capital | 45,404 | 30,190 | |
Other reserves | 120,113 | 112,218 | |
Retained profits | 215,796 | 188,416 | |
Proposed dividend | 7,500 | 10,000 | |
Total shareholders' equity | 388,813 | 340,824 | |
Non-controlling interests | 32,606 | 30,519 | |
Total equity | 421,419 | 371,343 | |
Total equity and liabilities | 5,762,459 | 5,607,480 | |
Consolidated Statement of Changes in Equity | |||||
Half-yearended 30 June 2012 | Half-yearended 31 December 2011 | Half-yearended 30 June 2011 | |||
HK$m | HK$m | HK$m | |||
Share capital | |||||
At beginning of period | 30,190 | 22,494 | 22,494 | ||
Shares issued | 15,214 | 7,696 | - | ||
45,404 | 30,190 | 22,494 | |||
Retained profits and proposed dividend | |||||
At beginning of period | 198,416 | 187,037 | 173,254 | ||
Dividends paid | (17,500) | (14,000) | (19,000) | ||
Movement in respect of share-based payment arrangements | (375) | 5 | 86 | ||
Other movements | - | (1) | (2) | ||
Transfers | (1,430) | (6,116) | (823) | ||
Total comprehensive income for the period | 44,185 | 31,491 | 33,522 | ||
223,296 | 198,416 | 187,037 | |||
Other reserves | |||||
Property revaluation reserve | |||||
At beginning of period | 38,939 | 34,489 | 29,980 | ||
Other movements | - | 24 | (24) | ||
Transfers | (494) | (487) | (382) | ||
Total comprehensive income for the period | 1,855 | 4,913 | 4,915 | ||
40,300 | 38,939 | 34,489 | |||
Available-for-sale investment reserve | |||||
At beginning of period | 29,786 | 51,543 | 57,553 | ||
Other movements | 8 | (5) | (2) | ||
Total comprehensive income/(expense) for the period | 6,745 | (21,752) | (6,008) | ||
36,539 | 29,786 | 51,543 | |||
Cash flow hedging reserve | |||||
At beginning of period | 51 | 164 | 106 | ||
Total comprehensive income/(expense) for the period | (49) | (113) | 58 | ||
2 | 51 | 164 | |||
Foreign exchange reserve | |||||
At beginning of period | 14,265 | 20,354 | 15,789 | ||
Total comprehensive income/(expense) for the period | (1,985) | (6,089) | 4,565 | ||
12,280 | 14,265 | 20,354 | |||
Other reserves | |||||
At beginning of period | 29,177 | 21,879 | 20,954 | ||
Movement in respect of share-based payment arrangements | (11) | 677 | 17 | ||
Transfers | 1,924 | 6,603 | 1,205 | ||
Other movements | (1) | (1) | (204) | ||
Total comprehensive expense for the period | (97) | 19 | (93) | ||
30,992 | 29,177 | 21,879 | |||
Half-yearended 30 June 2012 |
| Half-yearended 31 December2011 | Half-yearended 30 June 2011 | ||
HK$m | HK$m | HK$m | |||
Total shareholders equity | |||||
At beginning of period | 340,824 | 337,960 | 320,130 | ||
Shares issued | 15,214 | 7,696 | - | ||
Dividends paid | (17,500) | (14,000) | (19,000) | ||
Movement in respect of share-based payment arrangements | (386) | 682 | 103 | ||
Other movements | 7 | 17 | (232) | ||
Total comprehensive income for the period | 50,654 | 8,469 | 36,959 | ||
388,813 | 340,824 | 337,960 | |||
Non-controlling interests | |||||
At beginning of period | 30,519 | 28,674 | 27,305 | ||
Dividends paid | (2,171) | (1,593) | (2,171) | ||
Movement in respect of share-based payment arrangements | 8 | 16 | 10 | ||
Other movements | (7) | 1 | (25) | ||
Total comprehensive income for the period | 4,257 | 3,421 | 3,555 | ||
32,606 | 30,519 | 28,674 | |||
Total equity | |||||
At beginning of period | 371,343 | 366,634 | 347,435 | ||
Shares issued | 15,214 | 7,696 | - | ||
Dividends paid | (19,671) | (15,593) | (21,171) | ||
Movement in respect of share-based payment arrangements | (378) | 698 | 113 | ||
Other movements | - | 18 | (257) | ||
Total comprehensive income for the period | 54,911 | 11,890 | 40,514 | ||
421,419 | 371,343 | 366,634 |
Consolidated Cash Flow Statement | |||
Half-yearended 30 June 2012 | Half-yearended 30 June 2011 | ||
HK$m | HK$m | ||
Operating activities | |||
Cash generated from/(used in) operations | (80,261) | 73,073 | |
Interest received on financial investments | 7,558 | 6,471 | |
Dividends received on financial investments | 105 | 189 | |
Dividends received from associates | 2,165 | 510 | |
Taxation paid | (5,908) | (4,817) | |
Net cash inflow/(outflow) from operating activities | (76,341) | 75,426 | |
Investing activities | |||
Purchase of financial investments | (156,084) | (282,998) | |
Proceeds from sale or redemption of financial investments | 230,557 | 322,280 | |
Purchase of property, plant and equipment | (730) | (961) | |
Proceeds from sale of property, plant and equipment and assets held for sale | 40 | 35 | |
Purchase of other intangible assets | (635) | (815) | |
Net cash outflow in respect of the acquisition of and increased shareholding ... in a subsidiary | - | (143) | |
Net cash inflow in respect of the sale of a subsidiary | - | 1 | |
Net cash outflow in respect of the purchase of interests in associates and joint ventures | (72) | (218) | |
Proceeds from the sale of interest in an associate | 2,095 | 8 | |
Net cash inflow/(outflow) from the sale of interest in business portfolios | (12,712) | 4,670 | |
Net cash inflow from investing activities | 62,459 | 41,859 | |
Net cash inflow/(outflow) before financing | (13,882) | 117,285 | |
Financing | |||
Issue of ordinary share capital | 15,214 | - | |
Redemption of preference shares | (1,941) | - | |
Repayment of subordinated liabilities | - | (1,650) | |
Ordinary dividends paid | (17,500) | (19,000) | |
Dividends paid to non-controlling interests | (2,171) | (2,171) | |
Interest paid on preference shares | (1,235) | (1,355) | |
Interest paid on subordinated liabilities | (438) | (409) | |
Net cash outflow from financing | (8,071) | (24,585) | |
Increase/(decrease) in cash and cash equivalents | (21,953) | 92,700 | |
Additional Information
1. Net interest income
Half-yearended 30 June 2012 | Half-yearended 30 June 2011 | ||
HK$m | HK$m | ||
Net interest income | 40,992 | 35,715 | |
Average interest-earning assets | 4,119,731 | 3,877,827 | |
Net interest spread | 1.89% | 1.76% | |
Net interest margin | 2.00% | 1.86% |
Net interest income increased as a result of loan growth in all key countries, as well as increasing interest rates in certain countries, notably Hong Kong, mainland China and India.
Average interest-earning assets increased by HK$241,904m or 6% compared with the half-year ended 30 June 2011, largely funded by an increase in average deposits. Average customer lending increased 9% with notable growth in both mortgages and term lending. Financial investments also increased by 4%.
Net interest margin increased by 14 basis points to 2.00% compared with the first half of 2011. Interest rate increases in certain countries led to improved deposit spreads and asset spreads were broadly stable. In addition, the larger increase in customer lending compared to financial investments also contributed to the increase in net interest margin. Net interest spread increased by 13 basis points to 1.89%, whilst the contribution from net free funds increased by one basis point to 11 basis points.
In Hong Kong, the bank recorded an increase in net interest margin of 18 basis points to 1.50%. Net interest spread increased by 17 basis points to 1.49% as deposit spreads improved. Average interest-earning assets increased by 6% compared with 30 June 2011, mainly in customer lending. Net interest income increased on the back of loan growth and the improved net interest margin.
At Hang Seng Bank, the net interest margin increased by 25 basis points to 2.15% and the net interest spread increased by 22 basis points to 2.06%, driven by improvements in deposit and loan spreads, notably in corporate and commercial lending.
In the Rest of Asia-Pacific, the net interest margin was 2.08%, 11 basis points lower than 30 June 2011. The reduction in margin arose as liquidity pressures eased in some markets and the lending environment remained competitive. Notable growth in the loan book was recorded in Singapore, mainland China, Australia and Malaysia.
2. Net fee income
Half-year ended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Account services | 1,410 | 1,241 | |
Credit facilities | 1,425 | 1,423 | |
Import/export | 2,596 | 2,412 | |
Remittances | 1,474 | 1,372 | |
Securities/broking | 3,430 | 4,380 | |
Cards | 3,358 | 3,219 | |
Insurance | 456 | 365 | |
Unit trusts | 2,061 | 2,237 | |
Funds under management | 2,022 | 2,357 | |
Underwriting | 793 | 609 | |
Other | 4,003 | 3,652 | |
Fee income | 23,028 | 23,267 | |
Fee expense | (3,169) | (3,328) | |
19,859 | 19,939 |
Net fee income decreased marginally by HK$80m compared to 2011.
Fees from securities/broking decreased by 22%, as investor sentiment weakened and turnover reduced following stock market declines in the second half of 2011, while fee income from funds under management declined by 14% on the back of lower asset values. Unit trust fees fell by 8%, notably in Hong Kong where customer preference has shifted towards lower risk products with lower fees, and in both Taiwan and Singapore where sales volumes declined.
Underwriting fees rose by 30%, largely in Hong Kong from our participation in several significant debt capital markets transactions in 2012.
Fee income from account services and cards was up by 14% and 4% respectively. Higher account services fees correlated with growth in both transaction volumes and loans. Card fee income benefited from increased retail spending notably in Hong Kong, coupled with the strong uptake of our dual currency Hong Kong dollar and renminbi credit card. Australia was also higher due to the growth in circulation of co-branded credit cards.
Fees from import/export and remittances increased by 8% and 7% respectively, on the back of growing trade activities from existing and new-to-bank customers, notably in Hong Kong, India, mainland China and Singapore.
3. Net trading income
Half-yearended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Dealing profits | 9,659 | 8,404 | |
Net loss from hedging activities | (17) | (8) | |
Net interest income on trading assets and liabilities | 2,078 | 2,074 | |
Dividend income from trading securities | 424 | 336 | |
12,144 | 10,806 |
Net trading income increased by HK$1,338m, or 12%, compared to 2011.
Higher dealing profits in Rates came from more volatile market conditions and favourable positioning, notably in Hong Kong, and from Indonesia reflecting the upgrade of the country's credit rating. Foreign exchange income also increased from increased client activities, primarily in Hong Kong, Indonesia, Singapore and Taiwan.
Equities income decreased in 2012, notably in Hong Kong, as business flows reduced and lower revenues were earned from the warrants business as retail participation declined.
4. Gains less losses from financial investments
Half-year ended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Gains on disposal of available-for-sale securities | 2,464 | 192 | |
Impairment of available-for-sale equity investments | (84) | (123) | |
2,380 | 69 |
Gains less losses from financial investments were HK$2,311m higher than 2011.
Gains on disposal of available-for-sale securities were driven by the gain of HK$2,131m on the sale of our shares in Axis Bank Limited and Yes Bank Limited, two non-core investments in India.
5. Other operating income
Half-year ended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Movement in present value of in-force insurance business | 3,100 | 3,485 | |
Gains on investment properties | 259 | 427 | |
Rental income from investment properties | 103 | 92 | |
Gain/(loss) on disposal of property, plant and equipment, and assets held for sale | 19 | (23) | |
Gain on disposal of subsidiaries, associates and business portfolios | 2,354 | - | |
Other | 2,092 | 2,207 | |
7,927 | 6,188 |
Other operating income rose by HK$1,739m or 28% in 2012.
The movement in present value of in-force insurance business ('PVIF') decreased by HK$385m or 11%, largely due to the refinement of the calculation of the PVIF asset in 2011 that led to a one-off increase of HK$1,133m. This was partly offset by a favourable market conditions update on existing portfolios in 2012.
Gains on investment properties were lower in 2012 in comparison to 2011, reflecting property market conditions in Hong Kong.
The gain on disposal of subsidiaries, associates and business portfolios includes gains from the sale of our RBWM business in Thailand of HK$811m, from the sale of our Global Private Banking business in Japan of HK$520m and from the sale of an interest in a property company in the Philippines of HK$1,009m.
6. Insurance income
Included in the consolidated income statement are the following revenues earned by the insurance business:
Half-year ended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Net interest income | 3,779 | 3,237 | |
Net fee income | 545 | 454 | |
Net trading loss | (135) | (164) | |
Net income from financial instruments designated at fair value | 875 | 366 | |
Net earned insurance premiums | 27,031 | 22,882 | |
Movement in present value of in-force insurance business | 3,100 | 3,485 | |
Other operating income | 36 | 179 | |
35,231 | 30,439 | ||
Net insurance claims incurred and movement in policyholders' liabilities | (26,652) | (23,036) | |
Net operating income | 8,579 | 7,403 |
Net interest income increased by 17% as funds under management grew, reflecting net inflows
from new and renewal insurance business.
Net income from financial instruments designated at fair value was HK$875m compared to HK$366m in 2011 due to investment gains on assets held by the insurance business, mainly due to movements in equity markets. To the extent that revaluation is attributed to policyholders, there is an offsetting movement reported under 'Net insurance claims incurred and movement in policyholders' liabilities'.
Net insurance premiums rose by 18% as a result of higher premiums received from policy renewals and successful sales initiatives for annuity products. The growth in premiums resulted in a corresponding increase in 'Net insurance claims incurred and movement in liabilities to policy holders'.
The movement in PVIF decreased by 11%, mainly as a result of a refinement of the calculation of the PVIF asset in 2011. The revised approach explicitly rather than implicitly allows for non-economic risks and the cost of options and guarantees, and led to a one-off increase of HK$1,133m. This was offset in 2012 by a favourable market conditions update on existing portfolios.
7. Loan impairment charges and other credit risk provisions
Half-year ended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Net charge for impairment of loans and advances to customers | |||
- Individually assessed impairment allowances: | |||
New allowances | 1,221 | 786 | |
Releases | (420) | (651) | |
Recoveries | (86) | (181) | |
715 | (46) | ||
- Net charge for collectively assessed impairment allowances | 1,185 | 1,047 | |
Net charge/(release) for other credit risk provisions | 316 | (13) | |
Net charge for loan impairment and other credit risk provisions | 2,216 | 988 |
The charge for loan impairment and other credit risk provisions increased by HK$1,228m in 2012.
The net charge for individually assessed impairment allowances increased by HK$761m in 2012, due to impairment of a corporate exposure in Australia, as well as individual impairment charges in India and New Zealand. The increase was also attributable to lower recoveries and releases in 2012, notably in Hong Kong and India.
The net charge for collectively assessed impairment allowances rose by HK$138m or 13% in 2012, reflecting the overall increase in loans and advances to customers. These were partially offset by lower impairment allowances in Indonesia as the overall portfolio credit quality improved.
The net charge for other credit risk provisions was HK$329m higher, representing charges against off-balance sheet exposures in 2012, notably in Australia.
There were no impairment losses or provisions against held-to-maturity investments.
8. Employee compensation and benefits
Half-year ended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Wages and salaries | 18,056 | 17,536 | |
Social security costs | 473 | 454 | |
Retirement benefit costs | 996 | 980 | |
19,525 | 18,970 | ||
Staff numbers by region - full-time equivalent | At30 June 2012 | At31 December 2011 | |
Hong Kong | 26,883 | 28,835 | |
Rest of Asia-Pacific | 40,166 | 44,695 | |
Total | 67,049 | 73,530 | |
Employee compensation and benefits increased HK$555m or 3%, compared to 2011.
Salaries and wages included termination benefits in 2012 of HK$615m in several countries across the region, compared with HK$28m in 2011, as part of the ongoing strategic review of our business and support functions. This has resulted in a net reduction of more than 6,400 staff numbers since the second half of 2011.
Excluding termination benefits, wages and salaries were marginally lower as reduced staff numbers were offset by wage inflation across the region, as well as business growth including branch expansion in mainland China and Malaysia. Performance-related pay increased marginally, as higher variable pay for GB&M in line with performance was offset by lower share-based payment expenses.
9. General and administrative expenses
Half-year ended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Premises and equipment | |||
- Rental expenses | 1,623 | 1,507 | |
- Amortisation of prepaid operating lease payments | 9 | 9 | |
- Other premises and equipment | 1,787 | 1,702 | |
3,419 | 3,218 | ||
Marketing and advertising expenses | 1,793 | 1,789 | |
Other administrative expenses | 6,385 | 6,328 | |
11,597 | 11,335 |
General and administrative expenses increased by HK$262m or 2% in 2012.
Premises and equipment expenses included restructuring costs of HK$175m, relating to the sale of the RBWM business in Thailand, the sale of the Global Private Banking business in Japan and the implementation of organisational effectiveness programmes in a number of countries. Excluding restructuring costs, premises and equipment expenses increased slightly, mainly driven by higher property maintenance and rental charges in Hong Kong.
Other administrative expenses rose marginally by HK$57m or 1%. Intercompany expenses were higher in 2012, notably in Hong Kong from higher processing costs consistent with higher transaction volumes, and an increase in IT costs, offset by lower expenditure on legal and business integration costs in India.
10. Share of profit in associates and joint ventures
Share of profit in associates and joint ventures principally included the group's share of post-tax profits from Bank of Communications and Industrial Bank.
On 6 March 2012, Industrial Bank announced a proposal for the private placement of additional share capital. As at 30 June 2012, the proposal is subject to regulatory approvals and, if it proceeds, will dilute our interest in Industrial Bank and lead to a reassessment of the current accounting treatment of the investment.
11. Tax expense
The tax expense in the consolidated income statement comprises:
Half-year ended 30 June 2012 | Half-year ended 30 June 2011 | ||
HK$m | HK$m | ||
Current income tax | |||
- Hong Kong profits tax | 3,943 | 3,363 | |
- Overseas taxation | 5,857 | 4,605 | |
Deferred taxation | (376) | 929 | |
9,424 | 8,897 |
The effective tax rate for the first half of 2012 was 16.3%, compared with 19.2% for the first half of 2011. As explained in note 21, the tax expense has been reduced by the implementation of Hong Kong Accounting Standard ('HKAS') 12.
12. Dividends
Half-year ended30 June 2012 | Half-year ended30 June 2011 | ||||||
HK$ | HK$ | ||||||
per share | HK$m | per share | HK$m | ||||
Ordinary dividends paid | |||||||
- fourth interim dividend in respect of theprevious financial year approved and paidduring the year | 0.83 | 10,000 | 1.33 | 12,000 | |||
- first interim dividend paid | 0.58 | 7,500 | 0.78 | 7,000 | |||
1.41 | 17,500 | 2.11 | 19,000 | ||||
The Directors have declared a second interim dividend in respect of the half-year ended 30 June 2012 of HK$7,500m (HK$0.41 per ordinary share).
13. Loans and advances to customers
At30 June 2012 | At31 December 2011 | ||
HK$m | HK$m | ||
Gross loans and advances to customers | 2,233,139 | 2,142,172 | |
Impairment allowances: | |||
- Individually assessed | (7,137) | (6,894) | |
- Collectively assessed | (4,381) | (4,407) | |
(11,518) | (11,301) | ||
Net loans and advances to customers | 2,221,621 | 2,130,871 | |
Allowances as a percentage of gross loans and advances to customers: | |||
- Individually assessed | 0.32% | 0.32% | |
- Collectively assessed | 0.20% | 0.21% | |
Total allowances | 0.52% | 0.53% |
14. Impairment allowances against loans and advances to customers
Individually assessed allowances | Collectively assessed allowances | Total | |||
HK$m | HK$m | HK$m | |||
At 1 January 2012 | 6,894 | 4,407 | 11,301 | ||
Amounts written off | (477) | (1,785) | (2,262) | ||
Recoveries of loans and advances written off in previous years | 86 | 618 | 704 | ||
Net charge to income statement | 715 | 1,185 | 1,900 | ||
Unwinding of discount of loan impairment | (32) | (56) | (88) | ||
Exchange and other adjustments | (49) | 12 | (37) | ||
At 30 June 2012 | 7,137 | 4,381 | 11,518 |
15. Analysis of loans and advances to customers based on categories used by the HSBC Group
The following analysis of loans and advances to customers is based on categories used by the HSBC Group, including The Hongkong and Shanghai Banking Corporation Limited and its subsidiaries, for risk management purposes.
Rest of | |||||
Hong Kong | Asia-Pacific | Total | |||
At 30 June 2012 | HK$m | HK$m | HK$m | ||
Residential mortgages | 376,414 | 259,023 | 635,437 | ||
Credit card advances | 40,127 | 31,841 | 71,968 | ||
Other personal | 50,465 | 39,595 | 90,060 | ||
Total personal | 467,006 | 330,459 | 797,465 | ||
Commercial, industrial and international trade | 324,724 | 378,972 | 703,696 | ||
Commercial real estate | 162,845 | 73,985 | 236,830 | ||
Other property-related lending | 132,469 | 53,098 | 185,567 | ||
Government | 22,541 | 3,024 | 25,565 | ||
Other commercial | 99,303 | 128,046 | 227,349 | ||
Total corporate and commercial | 741,882 | 637,125 | 1,379,007 | ||
Non-bank financial institutions | 26,473 | 27,557 | 54,030 | ||
Settlement accounts | 2,029 | 608 | 2,637 | ||
Total financial | 28,502 | 28,165 | 56,667 | ||
Gross loans and advances to customers | 1,237,390 | 995,749 | 2,233,139 | ||
Individually assessed impairment allowances | (1,870) | (5,267) | (7,137) | ||
Collectively assessed impairment allowances | (2,191) | (2,190) | (4,381) | ||
Net loans and advances to customers | 1,233,329 | 988,292 | 2,221,621 |
Loans and advances to customers in Hong Kong increased by HK$51bn, or 4%, during the first half of 2012, largely through growth in corporate and commercial lending of HK$34bn, reflecting higher demand primarily in manufacturing and international trade. Residential mortgage lending increased by HK$16bn as the property market remained active.
In the Rest of Asia-Pacific, loans and advances to customers increased by HK$40bn, or 4%, including foreign exchange translation effects of HK$0.2bn. The underlying increase was mainly from growth in corporate and commercial lending of HK$24bn from business growth in mainland China, India, Indonesia, Australia and Singapore. Residential mortgage lending increased by HK$9bn, notably in Singapore, Malaysia, mainland China and Australia.
Hong Kong | Rest of Asia-Pacific | Total | |||
At 31 December 2011 | HK$m | HK$m | HK$m | ||
Residential mortgages | 360,368 | 247,767 | 608,135 | ||
Credit card advances | 41,200 | 31,849 | 73,049 | ||
Other personal | 51,339 | 38,093 | 89,432 | ||
Total personal | 452,907 | 317,709 | 770,616 | ||
Commercial, industrial and international trade | 295,729 | 365,579 | 661,308 | ||
Commercial real estate | 158,222 | 74,041 | 232,263 | ||
Other property-related lending | 134,910 | 49,659 | 184,569 | ||
Government | 22,669 | 7,471 | 30,140 | ||
Other commercial | 96,398 | 117,205 | 213,603 | ||
Total corporate and commercial | 707,928 | 613,955 | 1,321,883 | ||
Non-bank financial institutions | 24,799 | 23,300 | 48,099 | ||
Settlement accounts | 1,236 | 338 | 1,574 | ||
Total financial | 26,035 | 23,638 | 49,673 | ||
Gross loans and advances to customers | 1,186,870 | 955,302 | 2,142,172 | ||
Individually assessed impairment allowances | (2,174) | (4,720) | (6,894) | ||
Collectively assessed impairment allowances | (2,254) | (2,153) | (4,407) | ||
Net loans and advances to customers | 1,182,442 | 948,429 | 2,130,871 |
16. Other assets
At | At | ||
30 June | 31 December | ||
2012 | 2011 | ||
HK$m | HK$m | ||
Current taxation recoverable | 507 | 676 | |
Assets held for sale | 5,482 | 8,117 | |
Prepayments and accrued income | 4,252 | 3,135 | |
Accrued interest receivable | 14,635 | 14,524 | |
Acceptances and endorsements | 36,077 | 31,750 | |
Other accounts | 42,422 | 42,002 | |
103,375 | 100,204 |
17. Customer accounts
At 30 June 2012 | At31 December 2011 | ||
HK$m | HK$m | ||
Current accounts | 753,885 | 696,435 | |
Savings accounts | 1,875,638 | 1,826,893 | |
Other deposit accounts | 957,378 | 1,041,673 | |
3,586,901 | 3,565,001 |
Customer accounts increased by HK$22bn during the first half of 2012.
In Hong Kong, customer accounts increased by HK$30bn and in the Rest of Asia-Pacific, customer accounts decreased by HK$8bn compared with 31 December 2011.
The group's advances-to-deposits ratio increased to 61.9% at 30 June 2012, from 59.8% at 31 December 2011, as more of the commercial surplus was deployed to customer lending.
18. Other liabilities and provisions
At | At | ||
30 June | 31 December | ||
2012 | 2011 | ||
HK$m | HK$m | ||
Accruals and deferred income | 19,489 | 23,286 | |
Liabilities held for sale | 9,572 | 21,970 | |
Provisions for liabilities and charges | 2,439 | 1,686 | |
Acceptances and endorsements | 36,077 | 31,750 | |
Share based payment liability to HSBC Holdings plc | 2,522 | 2,729 | |
Other liabilities | 41,078 | 26,893 | |
111,177 | 108,314 |
19. Contingent liabilities and commitments
At 30 June 2012 | At31 December 2011 | ||
HK$m | HK$m | ||
Contract amount: | |||
Contingent liabilities | 213,447 | 192,787 | |
Commitments | 1,545,687 | 1,472,638 | |
1,759,134 | 1,665,425 |
20. Fair value of financial instruments
The following table provides an analysis of the basis for the valuation of financial assets and financial liabilities measured at fair value in the consolidated financial statements:
Valuation techniques | |||||||||||
Quoted market price Level 1 | using observable inputs Level 2 | with significant non- observable inputs Level 3 | Third party total | Amounts with HSBC entities | Total | ||||||
At 30 June 2012 | HK$m | HK$m | HK$m | HK$m | HK$m | HK$m | |||||
Assets | |||||||||||
Trading assets | 274,812 | 169,439 | 734 | 444,985 | - | 444,985 | |||||
Financial assets designated atfair value | 40,196 | 18,828 | 2,969 | 61,993 | - | 61,993 | |||||
Derivatives | 4,580 | 291,079 | 1,355 | 297,014 | 88,552 | 385,566 | |||||
Available-for-sale investments | 610,831 | 407,120 | 14,999 | 1,032,950 | - | 1,032,950 | |||||
Liabilities | |||||||||||
Trading liabilities | 70,420 | 114,396 | 12,315 | 197,131 | - | 197,131 | |||||
Financial liabilities designatedat fair value | - | 41,171 | - | 41,171 | - | 41,171 | |||||
Derivatives | 6,585 | 283,821 | 1,037 | 291,443 | 94,189 | 385,632 | |||||
At 31 December 2011 | |||||||||||
Assets | |||||||||||
Trading assets | 306,444 | 140,294 | 1,230 | 447,968 | - | 447,968 | |||||
Financial assets designatedat fair value | 33,552 | 20,637 | 3,481 | 57,670 | - | 57,670 | |||||
Derivatives | 3,146 | 286,765 | 1,408 | 291,319 | 85,977 | 377,296 | |||||
Available-for-sale investments | 544,954 | 459,528 | 17,085 | 1,021,567 | - | 1,021,567 | |||||
Liabilities | |||||||||||
Trading liabilities | 53,214 | 103,703 | 14,514 | 171,431 | - | 171,431 | |||||
Financial liabilities designatedat fair value | - | 40,392 | - | 40,392 | - | 40,392 | |||||
Derivatives | 6,117 | 285,427 | 1,045 | 292,589 | 90,663 | 383,252 | |||||
During the first half of 2012, the amounts of financial assets transferred in and out of Level 3 in the fair value hierarchy were HK$433m and HK$2,860m respectively (Second half 2011: HK$1,174m and HK$2,842m). The amounts of financial liabilities transferred in and out of Level 3 were HK$315m and HK$3,563m respectively (Second half 2011: HK$399m and HK$5,293m). There were no significant transfers between Level 1 and Level 2 in the period.
21. Accounting policies
The accounting policies and methods of computation adopted by the group for this news release are consistent with those described on pages 36 to 57 of the 2011 Annual Report and Accounts. A number of new and revised Hong Kong Financial Reporting Standards have become effective in 2012. None has a material impact on the group.
Following the amendment to HKAS 12 issued by the Hong Kong Institute of Certified Public Accountants in December 2010, deferred taxes on investment property, carried under the fair value model in HKAS 40, will be measured on the presumption that an investment property is recovered entirely through sale. The presumption is rebutted if the investment property is held within a business whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. This amendment is effective in 2012.
The application of the amendment to HKAS 12 does not have a material effect on the group's consolidated financial statements and, consequently, has been applied prospectively. Accordingly, the tax expense for the six months ended 30 June 2012 has been reduced by a write back of HK$667m and the share of profit in associates and joint ventures has been increased by a write back of HK$220m, both in respect of prior periods.
22. Additional information
Additional financial information, including the group's capital ratios, relating to the period ended 30 June 2012, prepared in accordance with the Banking (Disclosure) Rules made under section 60A of the Banking Ordinance, will be made available on our website: www.hsbc.com.hk . A further press release will be issued to announce the availability of this information.
23. Statutory accounts
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 2011 which have been delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 27 February 2012. The Annual Report and Accounts for the year ended 31 December 2011, which include the statutory accounts, can be obtained on request from Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong, and may be viewed on our website: www.hsbc.com.hk .
24.Ultimate holding company
The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc.
25. Post balance sheet events
Further to the announcement of 7 March 2012, Hang Seng Bank Limited completed, on 9 July 2012, the sale of its wholly owned subsidiary, Hang Seng General Insurance (Hong Kong) Company Limited. The disposal gain of about HK$350m will be recognised in the second half of 2012.
On 26 July 2012, The Hongkong and Shanghai Banking Corporation Limited announced that it had entered into an agreement to sell its 44% shareholding in Global Payments Asia-Pacific Limited (GPAP), a card processing joint venture, to partner Global Payments Inc., for a consideration of US$242m in cash. The transaction, which is subject to regulatory approvals and the agreement of the terms of ancillary commercial contracts, is expected to complete during the second half of 2012.
26. Statement of compliance
The information in this news release for the half-year ended 30 June 2012 complies with HKAS 34, Interim Financial Reporting.
Media enquiries to: Gareth Hewett Telephone no: + 852 2822 4929
Helen Lam Telephone no: + 852 2822 4992
Margrit Chang Telephone no: + 852 2822 4983
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