3/4: Hang Seng 1H03 (3/3)

HSBC Holdings PLC 04 August 2003 Contingent liabilities, commitments and derivatives (continued) Off-balance sheet financial instruments arise from futures, forward, swap and option transactions undertaken in the foreign exchange, interest rate and equity markets. The contract amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date and do not represent amounts at risk. The credit equivalent amount of these instruments is measured as the sum of positive mark-to-market values and the potential future credit exposure in accordance with the Third Schedule of the Hong Kong Banking Ordinance. Figures in HK$m At 30Jun03 At 30Jun02 At 31Dec02 Replacement cost Exchange rate contracts 738 501 485 Interest rate contracts 1,072 879 1,231 Other derivative contracts 1 - 1 1,811 1,380 1,717 The replacement cost of contracts represents the mark-to-market assets on all contracts (including non-trading contracts) with a positive value and which have not been subject to any bilateral netting arrangement. Segmental analysis Segmental information is presented in respect of business and geographical segments. Business segment information, which is more relevant to Hang Seng in making operating and financial decisions, is chosen as the primary reporting format. For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the business or geographical segments by way of internal capital allocation and funds transfer pricing mechanisms. Cost allocation is based on the direct cost incurred by the respective segments and apportionment of management overheads. Rental charges at market rate for usage of premises are reflected as inter-segment income for the 'Other' segment and inter-segment expenses for the respective business segments. (a) By business segment Hang Seng comprises five business segments. Personal financial services provides banking (including deposits, credit cards, mortgages and other retail lending) and wealth management services (including insurance and investment) to personal customers. Commercial banking manages middle market and smaller corporate relationships and provides trade-related financial services. Corporate and institutional banking handles relationships with large corporate and institutional customers. Treasury engages in interbank and capital market activities and proprietary trading. Treasury also manages the funding and liquidity positions of the bank and other market risk positions arising from banking activities. Other mainly represents management of shareholders' funds and investments in premises, investment properties and long-term equities. Personal financial services reported profit before tax of HK$3,038 million, a growth of 2.2 per cent compared with the same period last year. Net interest income fell by 4.4 per cent, as average mortgage yields fell, and there was a contraction in the GHOS mortgage portfolio. This was partly offset by the growth in savings and current accounts. Other operating income rose by 30.9 per cent. Wealth management services remained a growth driver, with the contribution from investment services and insurance business rising by 37.0 per cent and 37.6 per cent respectively. Sales of retail investment funds, including the popular Hang Seng Investment Series, increased by 48.8 per cent. Total funds under management by Hang Seng's asset management and private banking business units grew by HK$7.7 billion, or 18.8 per cent, to HK$48.3 billion at 30 June 2003. Commercial banking reported a growth of 13.0 per cent in profit before tax to HK$652 million. The results benefited from the increase in fee income, mainly trade services related, and the substantial release in bad debt provisions. Although customer advances grew by 13.7 per cent, mainly due to improved external trade, net interest income was affected by the compression in lending and deposit spreads. Corporate and institutional banking suffered a decline of 24.2 per cent in profit before tax to HK$364 million as corporate lending spreads declined and credit facilities income fell, and was also affected by the reduction in release of provisions for bad and doubtful debts. Treasury achieved profit before tax of HK$1,100 million, a growth of 6.3 per cent over the same period last year. Net interest income rose by 4.4 per cent as more funds were re-deployed from interbank placings to capital market investments for enhancement of interest yield, while the fixed rate debt securities portfolio continued to benefit under a low interest rate environment. Other operating income increased by 41.6 per cent, mainly in foreign exchange income. Profit on disposal of debt securities from the investment portfolio, however, was lower. Other showed a decline of 15.1 per cent in profit before tax, mainly attributable to the reduction in contribution from net free funds due to the further decline in market interest rates and the deficit on revaluation of properties. This was partly offset by an increase in profits on disposal of long-term equities. Personal Corporate & Inter- financial Commercial institutional segment Figures in HK$m services banking banking Treasury Other elimination Total Half-year ended 30Jun03 Income and expenses Net interest income 3,186 501 271 901 361 - 5,220 Other operating income 1,705 464 105 228 172 - 2,674 Inter-segment income - - - - 173 (173) - Total operating income 4,891 965 376 1,129 706 (173) 7,894 Operating expenses ^ (1,157) (383) (52) (66) (163) - (1,821) Inter-segment expenses (138) (29) (3) (3) - 173 - Operating profit before Provisions 3,596 553 321 1,060 543 - 6,073 Provisions for bad and Doubtful debts (570) 71 43 - - - (456) Operating profit 3,026 624 364 1,060 543 - 5,617 Profit on tangible fixed Assets and long-term Investments 12 28 - 40 261 - 341 Net deficit on property Revaluation - - - - (48) - (48) Share of profits of Associated company - - - - 18 - 18 Profit on ordinary activities Before tax 3,038 652 364 1,100 774 - 5,928 Operating profit excluding inter-segment 3,164 653 367 1,063 370 - 5,617 transactions ^ Including (63) (11) (1) (1) (95) - (171) depreciation At 30Jun03 Total assets 134,547 28,246 67,731 229,219 22,565 - 482,308 Total liabilities 324,132 71,354 16,948 10,839 17,776 - 441,049 Investments in associated company - - - - 675 - 675 Capital expenditure incurred during the 48 10 2 1 23 - 84 period Personal Corporate & Inter- financial Commercial institutional segment Figures in HK$m services banking banking Treasury Other elimination Total Half-year ended 30Jun02 Income and expenses Net interest income 3,334 507 324 863 425 - 5,453 Other operating income 1,303 426 132 161 190 - 2,212 Inter-segment income - - - - 207 (207) - Total operating income 4,637 933 456 1,024 822 (207) 7,665 Operating expenses ^ (1,179) (353) (54) (61) (169) - (1,816) Inter-segment expenses (167) (33) (4) (3) - 207 - Operating profit before provisions 3,291 547 398 960 653 - 5,849 Provisions for bad and doubtful debts (383) 2 82 - 18 - (281) Operating profit 2,908 549 480 960 671 - 5,568 Profit on tangible fixed assets and long-term investments 21 28 - 75 219 - 343 Share of profits of associated companies 45 - - - 22 - 67 Profit on ordinary activities before tax 2,974 577 480 1,035 912 - 5,978 Operating profit excluding inter-segment 3,075 582 484 963 464 - 5,568 transactions ^ Including (60) (11) (2) (1) (100) - (174) depreciation At 30Jun02 Total assets 136,420 24,752 64,673 219,769 25,064 - 470,678 Total liabilities 309,819 66,064 12,772 11,935 26,472 - 427,062 Investments in associated companies 368 - - - 683 - 1,051 Capital expenditure incurred during the 61 9 1 1 20 - 92 period Personal Corporate & Inter- financial Commercial institutional segment Figures in HK$m services banking banking Treasury Other elimination Total Half-year ended 31Dec02 Income and expenses Net interest income 3,249 516 316 868 403 - 5,352 Other operating income 1,119 455 121 189 186 - 2,070 Inter-segment income - - - - 201 (201) __ Total operating income 4,368 971 437 1,057 790 (201) 7,422 Operating expenses ^ (1,271) (450) (57) (71) (167) - (2,016) Inter-segment expenses (160) (34) (4) (3) - 201 - Operating profit before provisions 2,937 487 376 983 623 - 5,406 Provisions for bad and doubtful debts (402) 46 84 - (18) - (290) Operating profit 2,535 533 460 983 605 - 5,116 Profit on tangible fixed assets and long-term investments - - - (30) 148 - 118 Net deficit on property revaluation - - - - (36) - (36) Share of profits of associated companies 43 - - - 23 - 66 Profit on ordinary activities before tax 2,578 533 460 953 740 - 5,264 Operating profit excluding inter-segment 2,695 567 464 986 404 - 5,116 transactions ^ Including (65) (11) (1) (1) (100) - (178) depreciation At 31Dec02 Total assets 137,762 25,937 64,783 222,879 23,293 - 474,654 Total liabilities 317,076 70,538 11,746 8,360 23,405 - 431,125 Investments in associated companies - - - - 672 - 672 Capital expenditure incurred during the 59 12 3 1 28 - 103 period (b) By geographical region The geographical regions in this analysis are classified by the location of the principal operations of the subsidiary companies or, in the case of the bank itself, by the location of the branches responsible for reporting the results or advancing the funds. Figures in HK$m Hong Kong Americas Other Total Half-year ended 30Jun03 Income and expenses Total operating income 7,196 661 37 7,894 Profit on ordinary activities before tax 5,238 648 42 5,928 At 30Jun03 Total assets 408,425 65,882 8,001 482,308 Total liabilities 426,991 9,718 4,340 441,049 Capital expenditure incurred during the period 78 - 6 84 Contingent liabilities and commitments 106,429 - 1,092 107,521 Half-year ended 30Jun02 Income and expenses Total operating income 6,794 835 36 7,665 Profit on ordinary activities before tax 5,105 833 40 5,978 At 30Jun02 Total assets 360,773 103,615 6,290 470,678 Total liabilities 413,662 9,352 4,048 427,062 Capital expenditure incurred during the period 91 - 1 92 Contingent liabilities and commitments 103,923 - 652 104,575 Figures in HK$m Hong Kong Americas Other Total Half-year ended 31Dec02 Income and expenses Total operating income 6,499 886 37 7,422 Profit on ordinary activities before tax 4,369 866 29 5,264 At 31Dec02 Total assets 394,165 72,359 8,130 474,654 Total liabilities 416,388 9,444 5,293 431,125 Capital expenditure incurred during the period 96 1 6 103 Contingent liabilities and commitments 106,470 - 1,092 107,562 Cross border claims Cross border claims include receivables and loans and advances, balances due from banks and holdings of certificates of deposit, bills, promissory notes, commercial paper and other negotiable debt instruments and also include accrued interest and overdue interest on these assets. Claims are classified according to the location of the counterparties after taking into account the transfer of risk. For a claim guaranteed by a party situated in a country different from the counterparty, the risk will be transferred to the country of the guarantor. For a claim on the branch of a bank or other financial institution, the risk will be transferred to the country where its head office is situated. Claims on individual countries or areas, after risk transfer, amounting to 10 per cent or more of the aggregate cross border claims are shown as follows: Banks & other Public financial sector Figures in HK$m institutions entities Other Total At 30Jun03 Asia-Pacific excluding Hong Kong - Australia 19,793 151 1,304 21,248 - other 21,832 804 3,238 25,874 41,625 955 4,542 47,122 The Americas - Canada 16,608 8,945 264 25,817 - other 8,873 6,524 8,169 23,566 25,481 15,469 8,433 49,383 Western Europe - Germany 20,595 1,069 402 22,066 - United Kingdom 22,395 16 3,551 25,962 - other 46,022 2,071 3,531 51,624 89,012 3,156 7,484 99,652 At 30Jun02 Asia-Pacific excluding Hong Kong - Australia 16,875 480 2,159 19,514 - other 28,714 954 3,269 32,937 45,589 1,434 5,428 52,451 The Americas - Canada 14,311 5,590 150 20,051 - other 6,969 4,859 6,969 18,797 21,280 10,449 7,119 38,848 Western Europe - Germany 26,277 1,209 120 27,606 - United Kingdom 21,595 83 2,624 24,302 - other 50,056 1,675 2,535 54,266 97,928 2,967 5,279 106,174 Banks & other Public financial sector Figures in HK$m institutions entities Other Total At 31Dec02 Asia-Pacific excluding Hong Kong - Australia 19,259 2,819 2,265 24,343 - other 24,228 841 3,175 28,244 43,487 3,660 5,440 52,587 The Americas - Canada 11,105 7,699 440 19,244 - other 6,136 4,557 7,199 17,892 17,241 12,256 7,639 37,136 Western Europe - Germany 21,349 1,312 548 23,209 - United Kingdom 22,623 - 4,051 26,674 - other 47,654 2,557 2,810 53,021 91,626 3,869 7,409 102,904 Additional information 1. Accounting policies This news release has been prepared on a basis consistent with the accounting policies adopted in the 2002 financial statements except for the following. Income Tax In prior years, deferred tax liabilities were provided for using the liability method in respect of the taxation effect arising from all material timing differences between the accounting and tax treatment of income and expenditure, which were expected with reasonable probability to crystallise in the foreseeable future. Deferred tax assets were not recognised unless their realisation was assured beyond reasonable doubt. With effect from 1 January 2003, Hang Seng has changed its policy for deferred tax in order to comply with Hong Kong Statement of Standard Accounting Practice 12 (revised) (HKSSAP 12) on 'Income Taxes' issued by the Hong Kong Society of Accountants. Details of the new policy are set out in the note on Taxation on page 18. The major components of deferred tax assets and liabilities recorded in the consolidated balance sheet, and the movements during the first half of 2003 showing the impact of the adoption of HKSSAP 12, are as follows: Depreciation Revaluation Allowances of in excess properties of related and General Figures in HK$m depreciation equities provisions Other Total At 1Jan03 20 685 (177) 34 562 Charged/(credited) to profit and loss account - without adopting HKSSAP 12 - - - 37 37 - adopting HKSSAP 12 5 (10) (16) (11) (32) Credited to reserves - (21) - - (21) At 30Jun03 25 654 (193) 60 546 The balances of deferred tax assets and deferred tax liabilities in the consolidated balance sheet at 30 June 2003 were HK$55 million and HK$601 million respectively (HK$73 million and HK$635 million respectively at 31 December 2002). The adoption of HKSSAP 12 represents a change in accounting policy which has been applied retrospectively. The change in accounting policy has been reflected by way of a prior period adjustment and the comparative figures for 2002 have been restated to conform with the current period's presentation accordingly. Consolidated Profit and Loss Account Half-year ended Half-year ended Figures in HK$m 30Jun02 31Dec02 Tax on profit on ordinary activities - as previously reported (758) (508) - adoption of HK SSAP 12 3 (44) - as restated (755) (552) Consolidated Balance Sheet Premises and Long-term investment equity properties investment Deferred Deferred Retained revaluation revaluation tax tax Figures in HK$m profits reserves reserve assets liabilities 31Dec02 As previously reported 19,242 7,324 1,031 21 104 Adoption of HKSSAP 12 198 (657) (20) 52 531 As restated 19,440 6,667 1,011 73 635 30Jun02 As previously reported 20,756 8,069 1,651 34 - Adoption of HKSSAP 12 249 (750) (32) 72 605 As restated 21,005 7,319 1,619 106 605 31Dec01 As previously reported 19,499 8,119 2,323 34 - Adoption of HKSSAP 12 254 (766) (49) 77 638 As restated 19,753 7,353 2,274 111 638 2. Comparative figures Certain comparative figures have been reclassified to conform with the current period's presentation. 3. Property revaluation A revaluation of Hang Seng's premises and investment properties in the Hong Kong SAR was performed in June 2003 to reflect property market movements in the first half of 2003. The valuation was conducted by Chesterton Petty Limited, an independent professional valuer, and carried out by qualified valuers who are members of the Hong Kong Institute of Surveyors. The basis of valuation of premises was open market value for existing use. The basis of the valuation for investment properties was open market value. Of the total revaluation deficit of HK$768 million arising from the June revaluation, HK$720 million was accounted for as a reduction in property revaluation reserves while the balance of HK$48 million, representing the reduction in value below the original acquisition cost (less depreciation) of bank premises was charged to the profit and loss account for the first half of 2003. 4. Market risk Market risk is the risk that the movements in interest rates, foreign exchange rates or equity and commodity prices will result in profits or losses to Hang Seng. Market risk arises on financial instruments which are valued at current market prices (mark-to-market basis) and those valued at cost plus any accrued interest (accrual basis). Hang Seng's market risk arises from customer-related business and from position taking. Market risk is managed within risk limits approved by the Board of Directors. Risk limits are set by product and risk type with market liquidity being a principal factor in determining the level of limits set. Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits, as well as value at risk (VAR) limits at a portfolio level. Hang Seng adopts the risk management policies and risk measurement techniques developed by the HSBC Group. The daily risk monitoring process measures actual risk exposures against approved limits and triggers specific action to ensure the overall market risk is managed within an acceptable level. VAR is a technique which estimates the potential losses that could occur on risk positions taken due to movements in market rates and prices over a specified time horizon and to a given level of confidence. The model used by Hang Seng calculates VAR on a variance/covariance basis, using historical movements in market rates and prices, a 99 per cent confidence level and a 10-day holding period, and generally takes account of correlations between different markets and rates. The movement in market prices is calculated by reference to market data for the last two years. Aggregation of VAR from different risk types is based upon the assumption of independence between risk types. Hang Seng has obtained approval from the Hong Kong Monetary Authority (HKMA) for the use of its VAR model to calculate market risk for capital adequacy reporting. The HKMA is also satisfied with Hang Seng's market risk management process. Hang Seng's VAR for all interest rate risk and foreign exchange risk positions and on individual risk portfolios during the first halves of 2003 and 2002 are shown in the tables below. VAR Minimum Maximum Average during during for the the the Figures in HK$m At 30Jun03 period period period VAR for all interest rate risk and foreign exchange risk 409 187 409 276 VAR for foreign exchange risk (trading) 3 2 4 3 VAR for interest rate risk - trading 8 1 11 4 - accrual 402 187 402 275 VAR Minimum Maximum Average during during for the the the Figures in HK$m At 30Jun02 period period period VAR for all interest rate risk and foreign exchange risk 285 194 442 297 VAR for foreign exchange risk (trading) 4 3 5 4 VAR for interest rate risk - trading 2 - 8 2 - accrual 284 192 441 296 The average daily revenue earned from market risk-related treasury activities for the first half of 2003, including accrual book net interest income and funding related to dealing positions, was HK$8 million (HK$8 million for the first half of 2002). The standard deviation of these daily revenues was HK$4 million (HK$4 million for the first half of 2002). No loss was recorded out of 121 trading days in the first half of 2003. The most frequent result was a daily revenue of between HK$6 million and HK$10 million, with 103 occurrences. The highest daily revenue was HK$29 million. Hang Seng's foreign exchange exposures mainly comprise foreign exchange dealing by Treasury and currency exposures originated by its banking business. The latter are transferred to Treasury where they are centrally managed within foreign exchange position limits approved by the Board of Directors. The average one-day foreign exchange profit for the first half of 2003 was HK$2 million (HK$2 million for the first half of 2002). Interest rate risk arises in both the treasury dealing portfolio and accruals books, which are managed by Treasury under limits approved by the Board of Directors. The average daily revenue earned from treasury-related interest rate activities for the first half of 2003 was HK$6 million (HK$6 million for the first half of 2002). 5. Foreign currency positions Foreign currency exposures include those arising from dealing, non-dealing and structural positions. At 30 June 2003, the US dollar was the only currency in which Hang Seng had a non-structural foreign currency position which exceeded 10 per cent of the total net position in all foreign currencies. Figures in HK$m At 30Jun03 At 30Jun02 At 31Dec02 US dollar non-structural position Spot assets 158,081 238,064 173,129 Spot liabilities (149,899) (210,627) (156,175) Forward purchases 44,594 44,644 35,222 Forward sales (41,066) (63,634) (39,974) Net options positions - - - Net long non-structural position 11,710 8,447 12,202 At 30 June 2003, Hang Seng's major structural foreign currency positions were US dollar and Renminbi. At 30Jun03 At 30Jun02 At 31Dec02 % of % of % of total net total net total net structural structural structural HK$m position HK$m position HK$m position Structural position US dollar 887 85.7 792 84.3 792 84.2 Renminbi 95 9.2 95 10.1 95 10.1 6. Material related-party transactions (a) Immediate holding company and fellow subsidiary companies During the first half of 2003, Hang Seng entered into transactions with its immediate holding company and fellow subsidiary companies in the ordinary course of its interbank activities including the acceptance and placement of interbank deposits, correspondent banking transactions and off-balance sheet transactions. The activities were priced at the relevant market rates at the time of the transactions. Hang Seng participated, in its ordinary course of business, in certain structured finance deals arranged by its immediate holding company. Hang Seng used the IT and shared an automated teller machine network with its immediate holding company and used certain processing services of a fellow subsidiary on a cost recovery basis. Hang Seng also maintained a staff retirement benefit scheme for which a fellow subsidiary company acts as insurer and administrator, and acted as agent for the marketing of Mandatory Provident Fund products for a fellow subsidiary company. The aggregate amount of income and expenses arising from these transactions during the period, the balances of amounts due to and from the relevant related parties, and the total contract sum of off-balance sheet transactions at the period-end are as follows: Income and expenses for the period Half-year ended Half-year ended Half-year ended Figures in HK$m 30Jun03 30Jun02 31Dec02 Interest income 96 126 137 Interest expense 5 9 6 Other operating income 39 38 40 Operating expenses 296 276 294 Balances at period-end Figures in HK$m At 30Jun03 At 30Jun02 At 31Dec02 Total amount due from 7,596 10,425 7,471 Total amount due to 757 1,896 1,615 Total contract sum of off-balance sheet transactions 33,172 28,664 25,558 (b) Associated companies Hang Seng maintained an interest-free shareholders' loan to an associated company. The balance at 30 June 2003 was HK$217 million (HK$208 million at 30 June 2002 and 31 December 2002). Prior to Hang Seng Life Limited (HSLL) becoming a subsidiary (formerly an associated company) of the bank in November 2002, the agency commission for the marketing of life insurance products paid by HSLL to the bank amounted to HK$142 million and HK$113 million for the first and second halves of 2002 respectively. (c) Ultimate holding company During the first half of 2003, no transaction was conducted with the bank's ultimate holding company (same as 2002). (d) Key management personnel During the first half of 2003, no material transaction was conducted with key management personnel of Hang Seng and its holding companies and parties related to them (same as 2002). 7. Statutory accounts The information in this news release is unaudited and does not constitute statutory accounts. The statutory accounts for the year ended 31 December 2002 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 3 March 2003. The Annual Report and Accounts for the year ended 31 December 2002, which includes the statutory accounts, can be obtained on request from the Company Secretary Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from Hang Seng Bank's website http://www.hangseng.com. 8. Ultimate holding company Hang Seng Bank is an indirectly-held, 62.14 per cent-owned subsidiary of HSBC Holdings plc. 9. Statement of compliance This press release has been prepared in accordance with Hong Kong Statement of Standard Accounting Practice 25 'Interim Financial Reporting'. It also complies with the module on 'Interim Financial Disclosure by Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority in November 2002. 10. Register of shareholders The Register of Shareholders of Hang Seng Bank will be closed on Tuesday, 26 August 2003 and Wednesday, 27 August 2003, during which no transfer of shares can be registered. In order to qualify for the first interim dividend, all transfers, accompanied by the relevant 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 not later than 4:00 pm on Monday, 25 August 2003. The first interim dividend will be payable on Thursday, 4 September 2003 to shareholders on the Register of Shareholders of the bank on Wednesday, 27 August 2003. 11. News release Copies of this news release may be obtained from the Company Secretary Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from Hang Seng's website http://www.hangseng.com. The 2003 Interim Report will be available from the same website on Monday, 4 August 2003 and will also be published on the website of The Stock Exchange of Hong Kong Limited in due course. Printed copies of the 2003 Interim Report will be sent to shareholders in late August. This information is provided by RNS The company news service from the London Stock Exchange

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