3/5: Hang Seng Bk 2002 (1/2)

HSBC Holdings PLC 03 March 2003 HANG SENG BANK LIMITED 2002 RESULTS - HIGHLIGHTS * Operating profit before provisions down 2.2 per cent to HK$11,255 million (HK$11,503 million in 2001). * Pre-tax profit down 2.4 per cent to HK$11,242 million (HK$11,514 million in 2001). * Attributable profit down 1.5 per cent to HK$9,961 million (HK$10,114 million in 2001). * Return on average shareholders' funds of 22.9 per cent (23.0 per cent in 2001). * Total assets of HK$474.6 billion (HK$474.8 billion at 31 December 2001). * Earnings per share down 1.5 per cent to HK$5.21 (HK$5.29 per share in 2001). * Dividend per share of HK$5.40, including a special interim dividend of HK$0.50 per share (HK$4.90 per share in 2001). * Total capital ratio of 14.2 per cent (15.3 per cent at 31 December 2001); tier 1 capital ratio of 11.9 per cent (12.3 per cent at 31 December 2001). * Cost:income ratio of 25.4 per cent (26.3 per cent in 2001). Hang Seng Bank attributable profit down 1.5 per cent to HK$9,961 million Hang Seng Bank Limited (the bank) and its subsidiary and associated companies (Hang Seng) reported a profit attributable to shareholders of HK$9,961 million for 2002, a decrease of 1.5 per cent compared with 2001. Earnings per share of HK$5.21 were 1.5 per cent lower than in 2001. Operating profit before provisions fell by HK$248 million, or 2.2 per cent, to HK$11,255 million. The positive effects of an 8.5 per cent increase in other operating income and a 6.6 per cent reduction in operating expenses were outweighed by a 7.3 per cent reduction in net interest income, mainly attributable to the decline in contribution from net free funds. Operating profit decreased by 3.6 per cent to HK$10,684 million, after accounting for a 34.7 per cent increase in the net charge for bad and doubtful debts. Profit before tax amounted to HK$11,242 million, which was HK$272 million, or 2.4 per cent, lower than 2001, despite the increase in profits on disposal of long-term investments and the inclusion of the bank's share of the value of the long-term assurance business of Hang Seng Life Limited (HSLL). Total assets of HK$474.6 billion were in line with 31 December 2001. Customer deposits were almost flat with a continued shift of time deposits to savings under the persistently low interest rate environment. Advances to customers grew by 1.0 per cent during 2002, mainly in residential mortgages, corporate lending and trade advances while mortgages under the Government Home Ownership Scheme fell. Investment in debt securities also rose, with funds re-deployed from lower yielding interbank placements. Shareholders' funds (excluding proposed dividends) declined by HK$2,463 million, or 6.2 per cent, to HK$37,255 million at 31 December 2002. This was mainly attributable to a decrease in retained profits after appropriation, a reduction in the long-term equity investment revaluation reserve due to the disposal of and the fall in fair value of long-term equities, and lower property revaluation reserves reflecting the result of the annual property revaluation exercise. The return on average total assets was maintained at 2.1 per cent (2.1 per cent in 2001). The return on average shareholders' funds was 22.9 per cent, compared with 23.0 per cent in 2001. The advances to deposits ratio rose to 54.3 per cent at 31 December 2002 from 53.7 per cent at 31 December 2001, the effect of a modest growth in customer advances against stable customer deposits. Hang Seng continued to maintain a strong liquidity position, with the average liquidity ratio in 2002 (calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance) at 44.4 per cent (45.6 per cent in 2001). The total capital ratio at 31 December 2002 was 14.2 per cent (15.3 per cent at 31 December 2001) and the tier 1 capital ratio was 11.9 per cent (12.3 per cent at 31 December 2001). The cost:income ratio fell by 0.9 percentage point to 25.4 per cent, compared with 26.3 per cent for 2001. Second interim and special interim dividend The Directors have declared a second interim dividend of HK$2.80 per share (HK$2.80 per share for 2001) and a special interim dividend of HK$0.50 per share to mark the bank's 70th anniversary, which will be payable on Thursday, 27 March 2003 to shareholders on the Register of Shareholders as of Thursday, 20 March 2003. Together with the first interim dividend of HK$2.10 per share already paid, the total distribution for 2002 will amount to HK$5.40 per share (HK$4.90 per share for 2001). Excluding the special interim dividend, which was paid out of retained profits, total dividends for the year represent 94 per cent of the attributable profit for 2002 (93 per cent in 2001). This should not be taken as an indication of future dividend levels. Comment by David Eldon, Chairman "Hang Seng's results for 2002 demonstrate resilience in a year marked by continuing deflation in Hong Kong and an economy constrained by a lack of domestic consumption. Attributable profit fell by 1.5 per cent to HK$9,961 million. "The outlook for the economy in 2003 is clouded by the international political situation. Nonetheless, the performance of Hong Kong will remain export-led, looking to the United States and mainland China for growth impetus. Domestic demand will remain subdued, with continuing deflation, high unemployment and weak asset prices. The banking sector will continue to face the challenges of intense competition, weak loan demand and narrowing margins. "On the occasion of our 70th anniversary, we renew our commitment to service excellence and enhancing shareholder value. To mark the occasion we have declared a special interim dividend of HK$0.50 per share. In 2003, we shall continue to expand our wealth management business and services for small and medium-sized businesses. We shall increase our presence in the Mainland to meet the demands of our customers." Contents The financial information in this news release is based on the audited consolidated accounts of Hang Seng Bank Limited and its subsidiary and associated companies for the year ended 31 December 2002. Highlights of Results and Chairman's Comment Contents Consolidated Profit and Loss Account Consolidated Balance Sheet Consolidated Statement of Changes in Equity Economic Profit Consolidated Cash Flow Statement Financial Review Net interest income Other operating income Operating expenses Provisions for bad and doubtful debts Profit on tangible fixed assets and long-term investments Taxation Earnings per share Dividends per share Cash and short-term funds Placings with banks maturing after one month Certificates of deposit Securities held for dealing purposes Advances to customers Provisions against advances to customers Non-performing advances to customers and provisions Overdue advances to customers Rescheduled advances to customers Repossessed assets Segmental analysis of advances to customers by geographical area Gross advances to customers by industry sector Long-term investments Other assets Current, savings and other deposit accounts Deposits from banks Other liabilities Shareholders' funds Capital resources management Liquidity ratio Reconciliation of cash flow statement Contingent liabilities, commitments and derivatives Segmental analysis Cross border claims Additional Information Accounting policies Comparative figures Property revaluation Market risk Foreign currency positions Material related-party transactions Statutory accounts Ultimate holding company Register of shareholders News release Consolidated Profit and Loss Account Year ended 31Dec Figures in HK$m 2002 2001 Interest income 14,960 24,509 Interest expense (4,155 ) (12,849 ) Net interest income 10,805 11,660 Other operating income 4,282 3,947 Operating income 15,087 15,607 Operating expenses (3,832 ) (4,104 ) Operating profit before provisions 11,255 11,503 Provisions for bad and doubtful debts (571 ) (424 ) Operating profit 10,684 11,079 Profit on tangible fixed assets and long-term investments 461 393 Net deficit on property revaluation (36 ) (14 ) Share of profits of associated companies 133 56 Profit on ordinary activities before tax 11,242 11,514 Tax on profit on ordinary activities (1,266 ) (1,400 ) Profit on ordinary activities after tax 9,976 10,114 Minority interests (15 ) __ Profit attributable to shareholders 9,961 10,114 Retained profits at 1 January - as previously reported 19,618 18,732 - arising on change in accounting policies (119 ) __ - as restated 19,499 18,732 Transfer of depreciation to premises revaluation reserve 94 100 Realisation on disposal of premises and investment properties 9 42 Exchange adjustments 3 (2 ) Dividends - dividends paid in respect of the current year (4,015 ) (4,015 ) - proposed dividends (6,309 ) (5,353 ) Retained profits at 31Dec 19,242 19,618 Figures in HK$ Earnings per share 5.21 5.29 Dividends per share 5.40 4.90 Consolidated Balance Sheet Figures in HK$m At 31Dec02 At 31Dec01 Assets Cash and short-term funds 77,784 111,099 Placings with banks maturing after one month 30,919 43,666 Certificates of deposit 30,120 23,203 Securities held for dealing purposes 1,198 2,167 Advances to customers 224,562 222,436 Amounts due from immediate holding company and fellow subsidiary companies 7,471 8,297 Long-term investments 79,169 43,262 Investments in associated companies 672 774 Tangible fixed assets 10,439 11,323 Other assets 12,268 8,560 474,602 474,787 Liabilities Current, savings and other deposit accounts 413,693 414,328 Deposits from banks 1,072 2,622 Amounts due to immediate holding company and fellow subsidiary companies 1,615 1,051 Other liabilities 14,214 11,715 430,594 429,716 Capital resources Minority interests 444 __ Share capital 9,559 9,559 Reserves 27,696 30,159 Proposed dividends 6,309 5,353 Shareholders' funds 43,564 45,071 44,008 45,071 474,602 474,787 Consolidated Statement of Changes in Equity Figures in HK$m At 31Dec02 At 31Dec01 Shareholders' funds at 1 January - as previously reported 45,071 45,937 - change in accounting policies -- net transitional liabilities on defined benefit schemes (189 ) __ -- value on long-term assurance business 206 __ -- provision for accumulated paid leave (136 ) __ (119 ) __ - as restated 44,952 45,937 Unrealised deficit on revaluation of premises (409 ) (209 ) Unrealised deficit on revaluation of investment properties - bank and subsidiary companies (270 ) (211 ) - associated company (13 ) (61 ) Long-term equity investment revaluation reserve - unrealised deficit on revaluation (869 ) (850 ) - realisation on disposal (423 ) (279 ) Exchange adjustments 3 (2 ) Net losses recognised in shareholders' funds for the year (1,981 ) (1,612 ) Profit attributable to shareholders for the year 9,961 10,114 Dividends paid (9,368 ) (9,368 ) Shareholders' funds at 31Dec 43,564 45,071 Economic profit Economic profit is calculated from profit after tax, adjusted for non-cash items, and takes into account the cost of capital invested by Hang Seng's shareholders. For consistency, the benchmark cost of capital of 15.0 per cent was applied. This is, in Hang Seng management's view, above its true cost of capital under the current low interest rate environment. The trend of economic profits in this analysis shows that Hang Seng continues to create value for its shareholders. Year ended 31Dec Figures in HK$m 2002 2001 Average invested capital 31,698 31,061 Return on invested capital ^ 10,083 10,222 Cost of capital (4,747 ) (4,667 ) Economic profit 5,336 5,555 ^ Return on invested capital represents profit after tax adjusted for non-cash items. Consolidated cash flow statement Year ended 31Dec Figures in HK$m 2002 2001 Net cash inflow/(outflow) from operating activities 3,504 (2,853 ) Cash flows from investing activities Net cash outflow from investment in an associated company (35 ) (40 ) Purchase of long-term investments (96,052 ) (43,180 ) Proceeds from sale or redemption of long-term investments 61,213 38,903 Purchase of tangible fixed assets (195 ) (193 ) Proceeds from sale of tangible fixed assets 14 104 Dividends received from an associated company 38 41 Interest received from long-term investments 1,908 2,258 Dividend received from long-term investments 98 93 Net cash outflow from investing activities (33,011 ) (2,014 ) Cash flows from financing activities Dividends paid (9,368 ) (9,368 ) Contribution from minority shareholders 25 __ Net cash outflow from financing activities (9,343 ) (9,368 ) Decrease in cash and cash equivalents (38,850 ) (14,235 ) Cash and cash equivalents at 1Jan 141,103 157,511 Effect of foreign exchange rate changes 3,284 (2,173 ) Cash and cash equivalents at 31Dec 105,537 141,103 Financial Review Net interest income Figures in HK$m 2002 2001 Net interest income 10,805 11,660 Average interest-earning assets 439,736 454,937 Net interest spread 2.36 % 2.28 % Net interest margin 2.46 % 2.56 % Net interest income decreased by HK$855 million, or 7.3 per cent, mainly attributable to the fall in contribution from net free funds due to lower market interest rates. There was a reduction in average interest-earning assets of HK$15.2 billion, or 3.3 per cent, plus a compression in net interest margin of 10 basis points to 2.46 per cent, the net effect of a rise of 8 basis points in net interest spread and a reduction of 18 basis points in the contribution from net free funds. Net interest spread improved by 8 basis points to 2.36 per cent, which benefited by 11 basis points from improved spreads on the holding of investment securities and gained 5 and 4 basis points respectively from the growth in lower cost savings deposits and a wider spread earned on time deposits. These were partly offset by a further decline in the average yield on the mortgage portfolio (including those under the Government Home Ownership Scheme), which reduced net interest spread by 12 basis points. The contribution from net free funds fell by 18 basis points to 0.10 per cent, which accounted for a reduction of about HK$850 million in net interest income. As a result of the continued reduction in the pricing of new mortgages and the re-pricing of existing loans, the average yield on the residential mortgage portfolio, excluding Government Home Ownership Scheme mortgages and staff loans, fell from 84 basis points below BLR in 2001 to 149 basis points below BLR in 2002. This was before accounting for the effect of cash incentive payments. Compared with the first half of 2002, net interest income in the second half of 2002 fell by HK$101 million, or 1.9 per cent, with a 6 basis point fall in net interest margin to 2.43 per cent. Net interest spread decreased by 5 basis points to 2.33 per cent, mainly due to the further decline in the average yield on the mortgage portfolio. The contribution from net free funds was one basis point lower at 0.10 per cent. Other operating income Figures in HK$m 2002 2001 Dividend income - listed investments 82 86 - unlisted investments 17 7 99 93 Fees and commissions - securities/stockbroking 244 220 - retail investment funds 700 370 - insurance 343 424 - account services 255 280 - remittance 128 123 - cards 598 633 - credit facilities 270 305 - import/export 217 214 - other 147 127 Fees and commissions receivable 2,902 2,696 Fees and commissions payable ( 297 ) (288 ) 2,605 2,408 Dealing profits - foreign exchange 604 531 - securities and other trading activities 16 (1 ) 620 530 Insurance underwriting 333 226 Rental income from investment properties 225 245 Other 400 445 4,282 3,947 Other operating income rose by HK$335 million, or 8.5 per cent, and contributed 28.4 per cent of total operating income, compared with 25.3 per cent in 2001. Net fees and commissions increased by HK$197 million, or 8.2 per cent, mainly attributable to the increase of HK$330 million, or 89.2 per cent, in fees from the distribution and management of retail investment funds. Insurance fees and commissions fell by HK$81 million, or 19.1 per cent, mainly affected by a reduction in commissions from Mandatory Provident Fund (MPF) services due to higher commissions received from new customers in the previous year. Commissions from credit facilities and card services also decreased by 11.5 per cent and 5.5 per cent respectively. Dealing profits grew by HK$90 million, or 17.0 per cent, with improvements in foreign exchange income and securities and other trading results. Insurance underwriting profit increased by HK$107 million, or 47.3 per cent, mainly due to consolidation of the underwriting profit of HSLL which became a subsidiary of the bank in November 2002. Other income fell by HK$45 million, or 10.1 per cent, mainly due to lower loan redemption fees. Income from wealth management services, comprising income from investment (securities broking and related services, investment funds distribution and management, margin trading and private banking) and insurance (underwriting and distribution of life and non-life insurance products and MPF services), grew strongly by 32.6 per cent to HK$1,608 million, indicating increased product cross-selling to customers. It represented 37.6 per cent of total other operating income. Operating expenses Figures in HK$m 2002 2001 Staff costs - salaries and other costs 1,867 1,834 - retirement benefit costs 192 434 2,059 2,268 Depreciation 352 386 Premises and equipment - rental expenses 171 164 - other 641 703 812 867 Other operating expenses 609 583 3,832 4,104 Cost:income ratio 25.4 % 26.3 % Staff numbers (full-time equivalent) 7,279 7,488 Operating expenses fell by HK$272 million, or 6.6 per cent, to HK$3,832 million. Staff costs decreased by HK$209 million, or 9.2 per cent, mainly due to the non-recurrence of a special top-up contribution for the staff retirement benefit scheme made in 2001. Depreciation charges dropped by HK$34 million, or 8.8 per cent, reflecting a lower level of capital expenditure. Premises and equipment expenses decreased by HK$55 million, or 6.3 per cent, attributable to a reduction in IT expenditure after the spending in previous years on the development of e-banking initiatives. Other operating expenses increased by HK$26 million, or 4.5 per cent, mainly in marketing expenditure for the promotion of personal financial services products. The cost:income ratio fell by 0.9 percentage point to 25.4 per cent, compared with 26.3 per cent for 2001. Provisions for bad and doubtful debts Figures in HK$m 2002 2001 Net charge/(release) for bad and doubtful debts Advances to customers Specific provisions - new provisions 1,231 1,135 - releases (285 ) (597 ) - recoveries (45 ) (114 ) 901 424 General provisions (330 ) __ Net charge to profit and loss account 571 424 The net charge for bad and doubtful debts amounted to HK$571 million, an increase of HK$147 million, or 34.7 per cent, compared with the previous year. New and additional specific provisions rose by HK$96 million, or 8.5 per cent, to HK$1,231 million, with the reduction in specific charges for corporate accounts and residential mortgages more than offset by the rise in specific charges for card advances and personal loans due to the rise in personal bankruptcies. Releases and recoveries reduced by HK$381 million, or 53.6 per cent, to HK$330 million, mainly in taxi loans and corporate accounts. There was a release in general provisions of HK$330 million, reflecting a reduction in Hang Seng's estimate of the latent loan losses, which had occurred at the balance sheet date but which had not yet been reflected through the establishment of specific provisions. The estimate of these latent losses reflects Hang Seng's historical experience of the rate at which such losses occur and are identified, the structure of Hang Seng's loan portfolio and the economic and credit conditions prevailing at the balance sheet date. Profit on tangible fixed assets and long-term investments Figures in HK$m 2002 2001 Profit on disposal of long-term equity investments - realisation of amounts previously recognised in revaluation reserves at 1 January 528 365 - loss arising in current year (105 ) (86 ) 423 279 Profit less loss on disposal of held-to-maturity debt securities 46 120 Profit less loss on disposal of tangible fixed assets 1 5 Provision for impairment of long-term investments (9 ) (11 ) 461 393 Profit on disposal of tangible fixed assets and long-term investments rose by HK$68 million, or 17.3 per cent, to HK$461 million, reflecting increased profits on the disposal of locally-listed equities partly offset by lower profits on the disposal of debt securities. Taxation Taxation in the consolidated profit and loss account represents: Figures in HK$m 2002 2001 Provision for Hong Kong profits tax 1,228 1,407 Taxation outside Hong Kong 6 6 Deferred taxation 12 (21 ) 1,246 1,392 Share of associated companies' taxation 20 8 Total charge for taxation 1,266 1,400 Effective tax rate 11.3 % 12.2 % The provision for Hong Kong profits tax was made at 16.0 per cent (the same rate as for 2001) based on an estimate of the assessable profits for the year ended 31 December 2002. Similarly, taxation provisions for subsidiary companies and branches outside the Hong Kong SAR were made at the appropriate rates of taxation prevailing in the countries in which they operate. The effective tax rate was 11.3 per cent, compared with 12.2 per cent for 2001, mainly due to the increase in non-taxable capital gains on the disposal of locally-listed equities and the release of general debt provisions which is not subject to tax. Earnings per share The calculation of earnings per share is based on earnings of HK$9,961 million (HK$10,114 million in 2001) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from 2001). Dividends per share 2002 2001 HK$ HK$m HK$ HK$m per share per share First interim 2.10 4,015 2.10 4,015 Second interim 2.80 5,353 2.80 5,353 Special interim 0.50 956 __ __ 5.40 10,324 4.90 9,368 Cash and short-term funds Figures in HK$m At 31Dec02 At 31Dec01 Cash in hand and balances with banks and other financial institutions 3,518 3,729 Money at call and placings with banks maturing within one month 67,170 101,293 Treasury bills 7,096 6,077 77,784 111,099 Remaining maturity of treasury bills: - within three months 5,777 3,385 - one year or less but over three months 1,319 2,692 7,096 6,077 Placings with banks maturing after one month Figures in HK$ At 31Dec02 At 31Dec01 Remaining maturity: - three months or less but over one month 27,996 29,835 - one year or less but over three months 2,923 13,831 30,919 43,666 Certificates of deposit Figures in HK$m At 31Dec02 At 31Dec01 Remaining maturity: - three months or less but not repayable on demand 1,772 2,395 - one year or less but over three months 7,312 6,096 - five years or less but over one year 21,036 14,705 - over five years __ 7 30,120 23,203 Securities held for dealing purposes Figures in HK$m At 31Dec02 At 31Dec01 Debt securities by remaining maturity: - three months or less but not repayable on demand 97 662 - one year or less but over three months 90 920 - five years or less but over one year 890 516 - over five years 121 69 1,198 2,167 Advances to customers Figures in HK$m At 31Dec02 At 31Dec01 Gross advances to customers 227,475 225,926 Specific provisions (1,805 ) (2,052 ) General provisions (1,108 ) (1,438 ) 224,562 222,436 Remaining maturity: - repayable on demand 11,983 12,062 - three months or less but not repayable on demand 18,128 13,213 - one year or less but over three months 21,243 24,815 - five years or less but over one year 84,466 82,065 - over five years 84,273 86,789 - overdue for more than one month 1,301 808 - non-performing advances 6,081 6,174 Gross advances to customers 227,475 225,926 Provisions for bad and doubtful debts (2,913 ) (3,490 ) 224,562 222,436 Included in advances to customers are: - trade bills 2,180 1,882 - provisions for bad and doubtful debts (78 ) (61 ) 2,102 1,821 Advances to customers (after deduction of interest in suspense and provisions) recorded a modest growth of HK$2,126 million, or 1.0 per cent, to HK$224.6 billion at 31 December 2002, as loan demand remained subdued under the uncertain economic environment. Provisions against advances to customers Suspended Figures in HK$m Specific General Total interest At 1Jan02 2,052 1,438 3,490 509 Amounts written off (1,193 ) __ (1,193 ) (182 ) Recoveries of advances written off in previous years 45 __ 45 __ Net charge/release to profit and loss account 901 (330 ) 571 __ Interest suspended during the year __ __ __ 150 Suspended interest recovered __ __ __ (73 ) At 31Dec02 1,805 1,108 2,913 404 Suspended interest comprises both suspended interest netted against 'Advances to customers' and suspended interest netted against accrued interest receivable in 'Prepayments and accrued income'. Total provisions as a percentage of gross advances to customers are as follows: At 31Dec02 At 31Dec01 % % Specific provisions 0.79 0.91 General provisions 0.49 0.64 Total provisions 1.28 1.55 Total provisions as a percentage of gross advances to customers fell to 1.28 per cent at 31 December 2002, compared with 1.55 per cent at the end of 2001. Specific provisions as a percentage of gross advances decreased by 0.12 percentage point to 0.79 per cent, despite the increase in the net charge for specific provisions. The reduction mainly reflects the writing-off of irrecoverable balances and the upgrading of rescheduled advances and doubtful accounts to performing status. General provisions fell by 0.15 percentage point to 0.49 per cent of gross advances to customers, compared with 0.64 per cent at the end of 2001, taking into account the release in general provisions. Non-performing advances to customers and provisions Non-performing advances to customers on which interest has been placed in suspense or on which interest has ceased to accrue are as follows: Figures in HK$m At 31Dec02 At 31Dec01 Gross non-performing advances on which interest: - has been placed in suspense 5,767 6,084 - accrual has ceased 429 251 6,196 6,335 Suspended interest (115 ) (161 ) Gross non-performing advances ^ (page 20) 6,081 6,174 Specific provisions (1,805 ) (2,052 ) Net non-performing advances 4,276 4,122 Specific provisions as a percentage of gross non-performing advances ^ 29.7 % 33.2 % Gross non-performing advances ^ as a percentage of gross advances to customers 2.7 % 2.7 % ^ Stated after deduction of interest in suspense. Non-performing advances to customers are those advances where full repayment of principal or interest is considered unlikely and are so classified as soon as such a situation becomes apparent. Non-performing advances may include advances that are not yet overdue for more than three months but are considered doubtful. Except in certain limited circumstances, all advances on which principal or interest is overdue for more than three months are classified as non-performing. Specific provisions are made after taking into account the value of collateral held in respect of such advances. Gross non-performing advances (after deduction of interest in suspense) fell by HK$93 million, or 1.5 per cent, to HK$6,081 million, compared with the end of 2001. The ratio of gross non-performing advances to gross advances to customers was maintained at 2.7 per cent, the same level as at the end of 2001. Overdue advances to customers The amounts of advances to customers which are overdue for more than three months and their expression as a percentage of gross advances to customers are as follows: At 31Dec02 At 31Dec01 HK$m % HK$m % Gross advances to customers ^ which have been overdue with respect to either principal or interest for periods of: - six months or less but over three months 934 0.4 1,338 0.6 - one year or less but over six months 1,097 0.5 894 0.4 - over one year 2,734 1.2 3,203 1.4 4,765 2.1 5,435 2.4 Overdue advances to customers (as above) 4,765 2.1 5,435 2.4 Less: overdue advances on which interest is still being accrued (1,131 ) (0.5 ) (622 ) (0.3 ) Add: advances overdue for periods of three months or less, or which are not yet overdue, and on which interest has been placed in suspense - included in rescheduled advances 1,814 0.8 484 0.2 - other 633 0.3 877 0.4 Gross non-performing advances (page 19) 6,081 2.7 6,174 2.7 ^ Stated after deduction of interest in suspense. Advances with a specific repayment date are classified as overdue when the principal or interest is overdue and remains unpaid at the year-end. Advances repayable by regular instalments are treated as overdue when an instalment payment is overdue and remains unpaid at the year-end. Advances repayable on demand are classified as overdue either when a demand for repayment has been served on the borrower but repayment has not been made in accordance with the demand notice, or when the advances have remained continuously outside the approved limit advised to the borrower for more than the overdue period in question. Rescheduled advances to customers The amount of rescheduled advances and its expression as a percentage of gross advances to customers are as follows: At 31Dec02 At 31Dec01 HK$m % HK$m % Rescheduled advances to customers ^ 1,831 0.8 512 0.2 ^ Stated after deduction of interest in suspense. Rescheduled advances are those advances which have been restructured or renegotiated because of deterioration in the financial position of the borrower leading to an inability to meet the original repayment schedule. Rescheduled advances to customers are stated net of any advances that have subsequently become overdue for over three months and are included in overdue advances to customers (page 20). Rescheduled advances to customers increased by HK$1,319 million to HK$1,831 million at the year-end, representing 0.8 per cent of gross advances to customers, mainly attributable to a limited number of corporate accounts which have undergone debt restructuring. Repossessed assets In the recovery of non-performing advances, the bank may take repossession of the collateral assets through court proceedings or voluntary delivery of possession by the borrowers. In accordance with the bank's accounting policy, specific provisions for non-performing advances are maintained after taking into account the net realisable value of the related collateral which is revalued periodically. Upon repossession of the collateral assets, the advances are adjusted to the net realisable value of the repossessed assets, usually resulting in a partial write-off of the advances against specific provisions. Advances with repossessed collateral assets will continue to be accounted for as customer advances and classified as non-performing. The total value of repossessed assets at 31 December 2002, which mainly related to residential mortgages, amounted to HK$638 million (HK$853 million at 31 December 2001). Segmental analysis of advances to customers by geographical area Advances to customers by geographical area are classified according to the location of the counterparties after taking into account the transfer of risk. In general, risk transfer applies when an advance is guaranteed by a party located in an area which is different from that of the counterparty. At 31 December 2002, over 90 per cent of Hang Seng's advances to customers and the related non-performing advances and overdue advances were classified under the area of Hong Kong (unchanged from the position at 31 December 2001). Gross advances to customers by industry sector The analysis of gross advances to customers (after deduction of interest in suspense) by industry sector based on categories and definitions used by the Hong Kong Monetary Authority is as follows: Figures in HK$m At 31Dec02 At 31Dec01 Gross advances to customers for use in Hong Kong Industrial, commercial and financial sectors Property development 19,300 20,237 Property investment 31,507 29,403 Financial concerns 2,071 1,991 Stockbrokers 219 115 Wholesale and retail trade 3,941 3,737 Manufacturing 2,037 1,683 Transport and transport equipment 9,238 9,687 Other 19,521 17,109 87,834 83,962 Individuals Advances for the purchase of flats under the Government Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme 35,050 39,295 Advances for the purchase of other residential properties 78,518 77,537 Credit card advances 5,578 5,262 Other 6,251 6,050 125,397 128,144 Total gross advances for use in Hong Kong 213,231 212,106 Trade finance 9,751 9,434 Gross advances for use outside Hong Kong 4,493 4,386 Gross advances to customers 227,475 225,926 Lending to the industrial, commercial and financial sectors grew by HK$3,872 million, or 4.6 per cent, mainly in lending to property investment companies and the 'Other' sector which includes working capital financing of large corporations in public utility and civil engineering businesses. Excluding the fall of HK$4,245 million in advances under the Government Home Ownership Scheme which has been suspended and other Government subsidised home purchasing schemes, total lending to individuals rose slightly by HK$1,498 million, or 1.7 per cent. Residential mortgages and credit card advances recorded moderate growth amidst intense market competition. Hang Seng gained market share of total loans and loans for use in Hong Kong in 2002. Trade finance rose by HK$317 million, or 3.4 per cent, benefiting from the improvement in Hong Kong's re-export trade. Long-term investments Carrying value Figures in HK$m At 31Dec02 At 31Dec01 Held-to-maturity debt securities Issued by public bodies - central governments and central banks 10,664 3,324 - other public sector entities 9,219 6,510 19,883 9,834 Issued by other bodies - banks and other financial institutions 40,011 15,234 - corporate entities 16,960 14,537 56,971 29,771 76,854 39,605 Equity investments Issued by corporate entities 2,315 3,657 79,169 43,262 Held-to-maturity debt securities - listed in Hong Kong 2,340 311 - listed outside Hong Kong 19,551 9,762 21,891 10,073 - unlisted 54,963 29,532 76,854 39,605 Equity investments - listed in Hong Kong 1,603 2,848 - listed outside Hong Kong 70 95 1,673 2,943 - unlisted 642 714 2,315 3,657 79,169 43,262 Held-to-maturity debt securities are stated at cost, adjusted for the amortisation of premiums and accretion of discounts over the period from the date of purchase to the date of redemption. Equity investments are stated at fair value, less provision for impairment. This information is provided by RNS The company news service from the London Stock Exchange

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