Hang Seng Bank Interim 05 Pt1

HSBC Holdings PLC
01 August 2005




                                 HANG SENG BANK LIMITED
                           2005 INTERIM RESULTS - HIGHLIGHTS

   •Total operating income up 8.9 per cent to HK$10,499 million (HK$9,645
    million for the first half of 2004).

   •Operating profit before loan impairment (charges)/releases and other
    credit risk allowances down 2.2 per cent to HK$5,934 million (HK$6,070
    million for the first half of 2004).

   •Attributable profit down 2.3 per cent to HK$6,045 million (HK$6,188
    million for the first half of 2004).

   •Return on average shareholders' funds of 29.7 per cent (32.0 per cent for
    the first half of 2004).

   •Total assets up 4.2 per cent to HK$569.7 billion (HK$547.0 billion at 31
    December 2004).

   •Earnings per share down 2.5 per cent to HK$3.16 (HK$3.24 per share for
    the first half of 2004).

   •Second interim dividend of HK$1.10 per share; total dividends of HK$2.20
    per share for the first half of 2005 (HK$2.20 per share for the first half
    of 2004).

   •Total capital ratio of 12.4 per cent (12.0 per cent at 31 December 2004);
    tier 1 capital ratio of 10.5 per cent (10.8 per cent at 31 December 2004).

   •Cost:income ratio of 26.7 per cent (24.6 per cent for the first half of
    2004).

Note: Certain figures have been restated to reflect the adoption of a number of
new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting
Standards (new HKFRSs'), details of which are set out in note 1 of the
additional information on page 61.

Results Summary

Hang Seng Bank Limited (the bank) and its subsidiaries and associated companies
(the group) reported an unaudited profit attributable to shareholders of
HK$6,045 million for the first half of 2005, representing a decline of 2.3 per
cent compared with the first half of 2004 which benefited from a release of 
HK$698 million in general provisions. Attributable profit increased by 16.8 per 
cent compared with the second half of 2004.

The adoption of a number of new and revised Hong Kong Financial Reporting
Standards and Hong Kong Accounting Standards ('HKFRSs') from 1 January 2005 
required changes in accounting policies as described in detail on page 61.
The resulting changes in accounting treatment and presentation of various profit
and loss and balance sheet items may render certain comparative figures not
strictly comparable.

Total operating income rose by HK$854 million, or 8.9 per cent, over the first
half of 2004 to HK$10,499 million, underpinned by the strong growth of 18.2 per
cent in income from Personal Financial Services and improved net interest
margin. Compared with the second half of 2004, there was an increase of HK$251
million, or 2.4 per cent.

Net interest income rose by HK$549 million, or 11.6 per cent, compared with the
same period last year. The rise was attributable to improved interest spreads on
deposits, growth in commercial banking and consumer lending portfolios, an
increased contribution from net free funds and the inclusion of interest income
from life insurance fund investments. These outweighed the compression of
interest spreads on treasury investment and money market portfolios, which were
affected negatively by the rise in interest costs and the flattening of the
yield curves, and further falls in mortgage portfolio yields. Compared with the
second half of 2004, net interest income rose by HK$284 million, or 5.7 per
cent. Net interest margin improved to 2.13 per cent, 11 basis points and 6 basis
points higher than the first and second halves of 2004 respectively.

Net fee income fell by HK$295 million, or 16.2 per cent, compared with the same
period last year, affected by exceptionally high capital guaranteed fund sales
in the first quarter of 2004, and a change in accounting treatment of credit
facilities fees as interest income instead of fee income with effect from 1
January 2005. These were partially offset by the growth in income from sales of
structured investment products and private banking related investment and
advisory service fees and commissions. Card services fees, insurance agency
commissions and import and export commissions also recorded encouraging growth.
Compared with the second half of 2004, net fee income rose by HK$34 million, or
2.3 per cent.

Trading income fell by HK$125 million, or 22.4 per cent, compared with the first
half of 2004. Foreign exchange income fell by HK$253 million, mainly due to the
decline in customer trade volume, and a loss incurred on foreign exchange
contracts used for hedging on-balance sheet positions. Income from derivatives
trading rose by HK$136 million, mainly attributable to increased sales of
structured investment products to commercial and personal customers. Compared
with the second half of 2004, trading income fell by HK$33 million, or 7.1 per
cent.

Net earned insurance premiums rose by HK$730 million, or 36.5 per cent, over the
first half of 2004. Premiums earned from policy renewal increased substantially
as the portfolio of in-force policies continued to grow. Annualised premiums and
net premiums earned on new policies also reported satisfactory growth. Compared
with the second half of 2004, there was a rise of HK$254 million, or 10.3 per
cent.

Net insurance claims incurred and movement in policyholder liabilities increased
by HK$815 million, or 51.1 per cent, compared with the first half of 2004,
reflecting mainly the growth in liabilities to policyholders of long-term life
insurance business. This was in line with the increase in long-term insurance
policies in-force. Claims for general insurance business remained stable.

Other operating income rose by HK$39 million, or 9.2 per cent, over the first
half of 2004, mainly attributable to the growth in embedded value of long-term
insurance contracts.

Wealth management business related income (as detailed on page 21) fell by HK$54
million, or 3.0 per cent, compared with the first half of 2004. Investment
services related income recorded a fall of HK$142 million, or 11.9 per cent. In
a rising interest rate environment, the focus of the bank's investment services
shifted from capital guaranteed funds to yield enhancement structured
instruments. Private banking business recorded encouraging growth in both
customers and funds under management. Insurance agency and underwriting income, 
including embedded value of long-term life contracts, increased by HK$88 million,
or 14.3 per cent, following the successful launch of new insurance plans with 
cumulative life protection and wealth benefits. Compared with the second half of
2004, wealth management business related income rose by HK$137 million, or 8.4 
per cent, attributable to the growth of 13.7 per cent and 1.4 per cent in 
investment services related income and insurance income respectively.

Net operating income before loan impairment charges and other credit risk
allowances rose 0.5 per cent over the first half of 2004 and was 1.1 per cent
above the second half of 2004.

Loan impairment charges amounted to HK$302 million, compared with net releases
in loan loss allowance of HK$746 million for the first half of 2004 and HK$31
million for the second half of 2004. The overall loan impairment charges on
individually assessed loans amounted to HK$95 million, compared with a net
release of HK$144 million in the first half of 2004. New loan impairment charges
on certain commercial banking accounts were partly offset by net releases from
mortgages and personal loans. Charges on small homogeneous loans collectively
assessed on a portfolio basis amounted to HK$55 million, compared with HK$96
million for the first half of 2004, reflecting further improvement in credit
card charge-offs in the generally stronger economic conditions. Collective
assessment of loans determined not to be individually impaired resulted in a
charge of HK$152 million, following an update of the historical loss rate to
cover the economic cycle. This compared with releases in general provisions of
HK$698 million and HK$114 million for the first and second halves of 2004
respectively.

Operating expenses rose by HK$175 million, or 8.8 per cent, compared with the
same period last year, attributable largely to the rise in personnel expenses.
Average headcount increased by 193, mainly due to recruitment for Personal
Financial Services business and the expansion of the Mainland network. Marketing
expenses to promote cards and insurance products also increased. Compared with
the second half of 2004, operating expenses fell by HK$95 million, or 4.2 per
cent, mainly due to lower marketing expenditure and personnel expenses.

Operating profit before loan impairment (charges)/releases and other credit risk
allowances was down by HK$136 million, or 2.2 per cent, compared with the first
half of 2004 but was up by HK$183 million, or 3.2 per cent, over the second half
of 2004, due to higher net interest income and lower operating expenses.

Operating profit fell by HK$1,184 million, or 17.4 per cent, compared with the
first half of 2004 and was lower by HK$150 million, or 2.6 per cent, compared
with the second half of 2004.

Profit before tax amounted to HK$7,062 million, which was HK$198 million, or 2.7
per cent, lower than the same period last year after accounting for the
following items: (1) profit on disposal of fixed assets and long-term
investments of HK$348 million, which was maintained at the same level as the
first half of 2004; (2) surplus on property revaluation, which amounted to
HK$877 million, and included two components: (i) reversal of revaluation losses
of bank premises previously charged to profit and loss account of HK$148 million
(HK$91 million for the same period last year); and (ii) revaluation gain on
investment properties of HK$729 million, recognised through the profit and loss
account following the change in accounting policy on 1 January 2005 and (3)
share of profits in associated companies (net of taxation), which grew
substantially to HK$205 million, and was mainly contributed by Industrial Bank
Co., Ltd. Compared with the second half of 2004, profit before tax was up by
HK$1,039 million, or 17.3 per cent.

Attributable profit, after taxation and minority interests, fell by HK$143
million, or 2.3 per cent, compared with the same period last year but was up by
HK$869 million, or 16.8 per cent, compared with the second half of 2004.

Total assets grew by HK$22.7 billion, or 4.2 per cent, to HK$569.7 billion at 30
June 2005. Advances to customers recorded encouraging growth of 3.6 per cent,
mainly in residential mortgages, trade finance and corporate lending. Customer
deposits, including certificates of deposit, including those reported under
trading liabilities, fell by 1.0 per cent.

Shareholders' funds (excluding proposed dividends) rose by HK$2,106 million, or
5.6 per cent to HK$39,397 million at 30 June 2005, mainly attributable to the
increase in retained profits and the premises revaluation reserves, reflecting
the rise in the property market.

The return on average total assets was 2.2 per cent (2.5 per cent in the first
half of 2004 and 2.0 per cent in the second half of 2004). The return on average
shareholders' funds was 29.7 per cent, compared with 32.0 per cent and 25.2 per
cent in the first and second halves of 2004 respectively.

The advances to deposits ratio rose to 56.8 per cent at 30 June 2005 compared with
54.3 per cent at 31 December 2004, the result of a growth of 3.6 per cent in customer
advances and a fall of 1.0 per cent in customer deposits during the first half
of 2005. The group continued to maintain a strong liquidity position, with an
average liquidity ratio in the first half of 2005 (calculated in accordance with
the Fourth Schedule of the Hong Kong Banking Ordinance) of 43.6 per cent (48.1
per cent in the first half of 2004 and 46.3 per cent in the second half of
2004).

The total capital ratio at 30 June 2005 was 12.4 per cent (12.8 per cent at
30 June 2004 and 12.0 per cent at 31 December 2004) and the tier 1 capital ratio 
was 10.5 per cent (11.6 per cent at 30 June 2004 and 10.8 per cent at 31 December 
2004).

The cost:income ratio, calculated as total operating expenses to net operating
income before loan impairment (charges)/releases and other credit risk
allowances was 26.7 per cent, higher than the first half of 2004 by 2.1
percentage points but lower by 1.4 percentage points compared with the second
half of 2004.

The Directors have declared a second interim dividend of HK$1.10 per share,
which will be payable on 01 September 2005 to shareholders on the Register of 
Shareholders as of 24 August 2005. Together with the first interim dividends of 
HK$1.10 per share, the total distribution for the first half of 2005 will amount 
to HK$2.20 per share, the same as that in the first half of 2004.

Comment by Michael Smith, Chairman

"In the first half of 2005, Hang Seng's total operating income reached HK$10,499
million, an increase of 8.9 per cent over the same period in 2004. This was
achieved against a backdrop of an increasingly competitive environment.

"Profit attributable to shareholders was HK$6,045 million, representing a fall
of 2.3 per cent compared with the first half of last year which benefited from a
large release in general provisions.

"Net interest income rose by 11.6 per cent to HK$5,264 million. This rise was
due largely to improved interest spread on deposits, growth in commercial
banking and consumer lending portfolios, and contributions from net free funds.
Our net interest margin improved by 11 basis points to 2.13 per cent.

"We also enjoyed solid growth in Personal Financial Services with pre-tax profit
of HK$3,970 million, up 12.8 per cent.

"We have continued to invest in the growth of our businesses. Marketing expenses
increased to promote cards and insurance products. There were also increases in
average headcount, mainly due to recruitment for Personal Financial Services
business and the expansion of our mainland network.

"Our strategy for developing our mainland China business is yielding positive
results, with the first half of 2005 recording an increase in our share of
profits from Industrial Bank Co., Ltd. Along with our own growing network of
mainland outlets, we are well positioned to capitalise on growth opportunities
created by the ongoing financial liberalisation on the Mainland.

"With the rate of economic growth in the second half of 2005 expected to be more
moderate, the competitive banking environment is set to continue. However, our
overall outlook for the year remains positive. The improvement in employment,
coupled with the wealth effects resulting from the sustained economic recovery,
will help ensure that domestic demand maintains momentum. The recent interest
rate rises should continue to have a positive impact on the interest margin,
although further rises may dampen loan demand.

"Hang Seng will continue to focus on diversifying income through expanding our
wealth management, consumer finance and SME services, improving productivity and
exploring business opportunities on the Mainland. This strategy will enable us
to strengthen our profitability and continue to deliver value to our
shareholders."

Contents

The financial information in this news release is based on the unaudited
consolidated accounts of Hang Seng Bank Limited and its subsidiary and
associated companies for the six months ended 30 June 2005.

-    Highlights of Results and Chairman's Comment
-    Contents
-    Consolidated Profit and Loss Account (Unaudited)
-    Consolidated Balance Sheet (Unaudited)
-    Consolidated Statement of Changes in Equity (Unaudited)
-    Economic Profit (Unaudited)
-    Consolidated Cash Flow Statement (Unaudited)
-    Financial Review
     -    Net interest income
     -    Net fee income
     -    Trading income
     -    Net income from financial instruments designated as at fair value
     -    Analysis of income from wealth management business
     -    Loan impairment (charges)/releases and other credit risk allowances
     -    Operating expenses
     -    Profit on disposal of tangible fixed assets and financial investments
     -    Tax expenses
     -    Earnings per share
     -    Dividends per share
     -    Segmental analysis
     -    Analysis of financial assets and liabilities by accounting treatment
     -    Analysis of assets and liabilities by remaining maturity
     -    Cash and short-term funds
     -    Trading securities
     -    Financial assets designated as at fair value through profit or loss
     -    Advances to customers
     -    Loans impairment allowances against advances to customers
     -    Impaired loans to customers and allowances
     -    Overdue advances to customers
     -    Rescheduled advances to customers
     -    Segmental analysis of advances to customers by geographical area
     -    Gross advances to customers by industry sector
     -    Financial investments
     -    Analysis of securities by counterparty and place of listing
     -    Amount due from/to immediate holding company and fellow subsidiary companies
     -    Investments in associated companies
     -    Intangible assets
     -    Other assets
     -    Current, savings and other deposit accounts
     -    Certificates of deposit and other debt securities in issue
     -    Trading liabilities
     -    Other liabilities
     -    Subordinated liabilities
     -    Shareholders' funds
     -    Capital resources management
     -    Liquidity ratio
     -    Reconciliation of cash flow statement
     -    Contingent liabilities, commitments and derivatives
     -    Cross-border claims
     -    Accounting policies
     -    Restatement of profit and loss accounts and balance sheets
     -    Comparative figures
     -    Property revaluation
     -    Market risk
     -    Foreign currency positions
     -    Material related-party transactions
     -    Statutory accounts
     -    Ultimate holding company
     -    Statement of compliance
     -    Register of shareholders
     -    Proposed timetable for the remaining quarterly dividends for 2005
     -    News release
     Appendices 1 - 5
     
Consolidated Profit and Loss Account (Unaudited)

                  Half-year ended      Half-year ended      Half-year ended
                          30Jun05              30Jun04              31Dec04
Figures in HK$m                               restated             restated

Interest income             7,900                5,875                6,597
Interest expenses          (2,636)              (1,160)              (1,617)
Net interest income         5,264                4,715                4,980
Fee income                  1,741                1,974                1,755
Fee expense                  (215)                (153)                (263)
Net fee income              1,526                1,821                1,492
Trading income                433                  558                  466
Net income from 
  financial instruments
  designated as at fair 
  value                        50                    -                    -
Net investment income 
  on assets backing
  policyholder liabilities      -                   83                  346
Dividend income                37                   48                   27
Net earned insurance
  premiums                  2,728                1,998                2,474
Other operating income        461                  422                  463
Total operating income     10,499                9,645               10,248
Net insurance claims
  incurred and movement 
  in policyholder
  liabilities              (2,409)              (1,594)              (2,246)
Net operating income 
  before loan impairment
  (charges)/releases and
  other credit risk                 
  allowances                8,090                8,051                8,002
Loan impairment (charges)/
  releases and other credit 
  risk allowances            (302)                 746                   31
Net operating income        7,788                8,797                8,033
Personnel expenses         (1,125)              (1,056)              (1,178)
General and administrative
  expenses                   (892)                (795)                (939)
Depreciation of business
  premises and equipment     (135)                (126)                (130)
Amortisation of intangible          
  assets                       (4)                  (4)                  (4)
Total operating expenses   (2,156)              (1,981)              (2,251)
Operating profit            5,632                6,816                5,782
Profit on disposal of
  tangible fixed assets 
  and financial investments   348                  349                   93
Net surplus on property
  revaluation                 877                   91                   55
Share of profits in
  associated companies        205                    4                   93
Profit before tax           7,062                7,260                6,023
Tax expenses                 (924)                (992)                (719)
Profit for the period       6,138                6,268                5,304
Profit attributable to
  minority interests          (93)                 (80)                (128)
Profit attributable to
  shareholders              6,045                6,188                5,176

Figures in HK$
Earnings per share           3.16                 3.24                 2.71
Dividends per share          2.20                 2.20                 3.00

Consolidated Balance Sheet (Unaudited)

                                  At 30Jun05   At 30Jun04   At 31Dec04
Figures in HK$m                                  restated     restated

Assets
Cash and short-term funds             50,966       62,213       64,845
Placings with banks maturing
  after one month                     22,832        5,319       17,482
Trading securities                    13,812        3,953        6,000
Financial assets designated as at
  fair value through profit or loss    3,743            -           -
Derivatives financial instruments      1,552        1,209        1,684
Advances to customers                260,512      246,394      251,553
Financial investments                192,951      162,118      182,938
Investments in associated              
  companies                            2,449        2,103        2,299
Intangible assets                      1,426        1,146        1,266
Premises and equipment                 6,559        5,277        5,558
Investment properties                  3,913        3,260        3,383
Other assets                           9,004        9,566        9,980
                                     569,719      502,558      546,988
Liabilities
Current, savings and other 
  deposit accounts                   430,395      418,638      447,460
Deposits from banks                   34,753       13,118       11,934
Trading liabilities                   24,358        2,657        5,840
Financial liabilities designated 
  as at fair value through profit 
  or loss                                995            -            -
Derivatives financial instruments      1,857          961        1,273
Certificates of deposit and other
  debt securities in issue            11,158        9,807       16,055
Liabilities to customers under
  investment contracts                   542            -            -
Other liabilities                      7,866       15,195       20,982
Liabilities to customers under
  insurance contracts                 11,558            -            -
Deferred tax and current tax
  liabilities                          2,310        2,116        1,668
Subordinated liabilities               1,496            -            -
                                     527,288      462,492      505,212
Capital resources
Minority interests                       931          724          852
Share capital                          9,559        9,559        9,559
Reserves                              29,838       27,680       27,732
Proposed dividends                     2,103        2,103        3,633
Shareholders' funds                   41,500       39,342       40,924
                                      42,431       40,066       41,776
                                     569,719      502,558      546,988
Figures in HK$
Net asset value per share              22.19        20.96        21.85

Consolidated Statement of Changes in Equity (Unaudited)

                                  Attributable to shareholders                    Minority           Total
                         Share        Other        Retained         Total        interests          equity
Figures in HK$m        capital     reserves         profits                                       restated

Balance at 01Jan05
- as above               9,559        3,878          27,487        40,924              852          41,776
- opening adjustment
  for the adoption of
  HKAS 39 and IFRS 4         -          535             535         1,070              (14)          1,056
- as restated            9,559        4,413          28,022        41,994              838          42,832

Premises revaluation
  reserve, net of tax                   609              26           635                              635
- unrealised surplus on
  revaluation                           635               -           635                              635
- depreciation charge on
  revaluation                           (26)             26             -                                -

Available-for-sale investments,
  net of tax                         (1,165)                       (1,165)                          (1,165)
- valuation losses taken 
  to equity                            (842)                         (842)                            (842)
- transferred to profit or 
  loss on disposal                     (323)                         (323)                            (323)

Cash flow hedges, net of tax           (265)                         (265)                            (265)
- valuation losses taken
  to equity                            (265)                         (265)                            (265)

Exchange and other adjustments           (4)            (23)          (27)                             (27)

Actuarial loss on defined
  benefit plan                            -              (9)           (9)                              (9)

Share option reserve                     28               -            28                               28

Profit for the period                     -           6,045         6,045               93           6,138

Dividends declared or approved
  during the period                       -          (5,736)       (5,736)               -          (5,736)

Balance at 30Jun05       9,559        3,616          28,325        41,500              931          42,431  

Balance at 01Jul04 
  as above               9,559        3,387          26,396        39,342              724          40,066   

Premises revaluation
  reserve, net of tax                   163             321           484                              484  
- unrealised surplus 
  on revaluation                        220             257           477                              477  
- transfer of investment
  properties reserve 
  from premises reserve                 (32)             32             -                                -  
- depreciation charge on 
  revaluation                           (25)             25             -                                -  
- realisation of revaluation
  surplus on disposal
  of premises                             -               7             7                                7  

Long-term equity investment
  revaluation reserve,
  net of tax                            300                           300                              300  
- valuation gains taken to
  equity                                389                           389                              389  
- transferred to profit or
  loss on disposal                      (89)                          (89)                             (89)  

Exchange and other adjustments            -              10            10                               10  

Actuarial loss on defined
  benefit plan                            -            (210)         (210)                            (210)  

Share option reserve                     28                            28                               28  

Profit for the period                     -           5,176         5,176              128           5,304  

Dividends declared or
  approved during the
  period                                  -          (4,206)       (4,206)               -          (4,206)  

Balance at 31Dec04       9,559        3,878          27,487        40,924              852          41,776  

                   
Balance at 01Jan04
- as previously
  reported               9,559        6,921          23,161        39,641              644          40,285    
- arising on change
  in accounting
  policies                   -       (3,679)          2,255        (1,424)               -          (1,424)  
- as restated            9,559        3,242          25,416        38,217              644          38,861  

Premises revaluation
  reserve, net of tax                   501             390           891                              891 
- unrealised surplus 
  on revaluation                        492             380           872                              872 
- transfer of investment
  properties reserve to
  premises reserve                       32             (32)            -                                -  
- depreciation charge on
  revaluation                           (21)             21             -                                -  
- realisation of revaluation
  surplus on disposal of
  premises                               (2)             21            19                               19  

Long-term equity investment
  revaluation reserve,
  net of tax                           (374)                         (374)                            (374) 
- valuation losses taken
  to equity                             (57)                          (57)                             (57)  
- transferred to profit
  or loss on disposal                  (317)                         (317)                            (317)

Exchange and other adjustments            -              (6)           (6)                              (6)

Actuarial loss on defined
  benefit plan                            -             (48)          (48)                             (48)

Share option reserve                     18               -            18                               18

Profit for the period                     -           6,188         6,188               80           6,268

Dividends declared or approved
  during the period                       -          (5,544)       (5,544)               -          (5,544)
  
Balance at 30Jun04       9,559        3,387          26,396        39,342              724          40,066

Economic Profit (Unaudited)

Economic profit is calculated from post-tax profit, adjusted for surpluses/
deficits on properties revaluation and depreciation attributable to revaluation
surpluses, and takes into account the cost of capital invested by the bank's
shareholders. For the first half of 2005, economic profit was HK$3,268 million,
a decrease of HK$973 million, or 22.9 per cent, over the same period last year.
Post-tax profit, adjusted for surpluses on properties revaluation net of
deferred tax (HK$724 million) and depreciation attributable to revaluation
surpluses (HK$26 million), fell by HK$804 million, due to a large release in
general provisions in the same period last year. Cost of capital rose by HK$169
million, in line with the growth in invested capital with the accumulation of
retained profits. The analysis indicates that the bank continues to create value
for its shareholders.

                Half-year ended      Half-year ended      Half-year ended
                        30Jun05              30Jun04              31Dec04
                                            restated             restated
               HK$m           %     HK$m           %     HK$m           %
Average
  invested
  capital    35,708               33,272               34,825

Return on
  invested
  capital^    5,340        30.1    6,144        37.1    5,182        29.6
Cost of
  capital    (2,072)      (11.7)  (1,903)      (11.5)  (2,038)      (11.6)
Economic
  profit      3,268        18.4    4,241        25.6    3,144        18.0

^Return on invested capital is based on post-tax profit excluding surpluses/
deficits on properties revaluation and depreciation attributable to revaluation
surpluses.

Consolidated Cash Flow Statement (Unaudited)

                             Half-year ended        Half-year ended
                                     30Jun05                30Jun04
Figures in HK$m                                            restated

Net cash inflow from 
operating activities                  10,716                    826

Cash flows from investing 
  activities

Purchase of an interest
  in an associated company                 -                 (1,634)
Dividends received from
  associated companies                    55                      4
Purchase of available-for-sale               
  investments                        (37,944)               (30,345)
Proceeds from sale or 
  redemption of available-
  for-sale investments                11,844                 21,455
Purchase of fixed assets                 (97)                   (58)
Proceeds from sale of
  fixed assets                            94                    141
Interest received from
  available-for-sale                
  investments                          2,190                  1,395
Dividends received from
  available-for-sale                    
  investments                             35                     76
Net cash outflow from
  investing activities               (23,823)                (8,966)  

Cash flows from financing 
  activities
Dividends paid                        (5,736)                (5,544)
Issuance of subordinated debts, 
  including financial liabilities
  designated as at fair value          2,492                      -
Net cash outflow from financing                        
  activities                          (3,244)                (5,544)

Decrease in cash and cash                        
  equivalents                        (16,351)               (13,684)

Cash and cash equivalents at                 
  beginning of period                 67,051                 77,575
Effect of foreign exchange rate         
  changes                               (235)                  (371)
Cash and cash equivalents at
  end of period                       50,465                 63,520

Financial Review

Net interest income

                  Half-year ended   Half-year ended    Half-year ended
                          30Jun05           30Jun04            31Dec04
Figures in HK$m                            restated           restated

Net interest income^        5,264             4,715              4,980
Average interest-earning  
  assets                  497,987           470,141            478,253
Net interest spread          1.99%             1.95%              1.99%
Net interest margin          2.13%             2.02%              2.07%

^Included within net interest income was HK$9 million with respect of interest
income accrued on impaired loans and advances.

Net interest income increased by HK$549 million, or 11.6 per cent, compared with
the first half of 2004, with an increase of HK$27.8 billion, or 5.9 per cent in
average interest-earning assets. Net interest margin improved by 11 basis points
to 2.13 per cent with an increase in net interest spread of 4 basis points to
1.99 per cent. Contribution from net free funds rose by 7 basis points to 0.14
per cent benefiting from the rise in market interest rates.

Deposits spreads benefited as local market interest rates moved up in the second
quarter, after a prolonged period of exceptionally low levels. Net interest
margin also benefited from the growth in customer advances, particularly, higher
yielding card, personal and SME loans and the inclusion of interest income from
the held-to-maturity debt portfolio of life insurance funds.

Treasury securities investment and money market portfolios were negatively
affected by the rise in funding costs and the flattening of the yield curves.
The mortgage portfolio yields continued to fall amidst intense market
competition, although the downward pricing trend started to reverse in the
second quarter.

The impact of individual factors on net interest income and net interest margin
is analysed below:

                                             HK$m      Basis points
                                     Net interest      Net interest
                                           income            margin

Narrowing of spread on treasury
  securities and money market 
  portfolios                                 (148)               (6)
Fall in mortgage portfolio yields            (123)               (5)
Improvement in deposits spreads               173                 7
Contribution from net free funds              173                 7
Interest income from insurance fund           
  assets                                      198                 8
Growth in average interest-earning                            
  assets                                      276                 -
                                              549                11

The average yield on the residential mortgage portfolio, excluding GHOS
mortgages and staff loans, fell to 223 basis points below BLR for the first half
of 2005, before accounting for the effect of cash incentive payments. This
compared with 192 basis points and 211 basis points below BLR in the first and
second halves of 2004 respectively. Following adoption of the new accounting
policies on 1 January 2005, mortgage incentive payments are taken into account
for calculation of effective interest rate and recognised over the expected life
of a mortgage loan together with mortgage interest income. During the first half
of 2005, cash incentive paid amounted to HK$94 million. That part of mortgage
incentive payment (including the unamortised amount carried forward from
previous years) recognised in accordance with the new accounting policy in the
first half of 2005 was HK$55 million. In the first and second halves of 2004,
incentive payments written off against interest income amounted to HK$80 million
and HK$77 million respectively.

Compared with the second half of 2004, net interest income improved by HK$284
million, or 5.7 per cent, with a 6 basis points increase in net interest margin
to 2.13 per cent. Net interest spread remained the same as the second half of
2004 while contribution from net free funds rose by 6 basis points to 0.14 per
cent. Improvement in deposits spreads, growth in average customer advances and
the inclusion of interest income from the held-to-maturity portfolios of life
insurance funds, contributed favourably to net interest spread. Negative factors
included the narrowing in treasury portfolio spread, the fall in mortgage
portfolio yields and the recovery of suspended interest on upgrading of large
doubtful accounts in the second half of 2004.

The impact of individual factors on net interest income and net interest margin
is analysed below:
                                             HK$m      Basis points
                                     Net interest      Net interest
                                           income            margin

Narrowing of spread on treasury
  securities and money market 
  portfolios                                 (198)               (8)
Recovery of suspended interest                (74)               (3)
Fall in mortgage portfolio yields             (49)               (2)
Improvement in deposits spreads               123                 5
Contribution from net free funds              148                 6
Interest income from insurance fund           
  assets                                      198                 8
Growth in average interest-earning                              
  assets                                      136                 -
                                              284                 6

On adoption of HKAS 39, interest income and expenses of financial instruments
for trading and designated as at fair value through profit or loss for the first
half of 2005, are reported as trading income and net income from financial
instruments designated as at fair value respectively with effect from 01 January 
2005. Whereas net interest income from the held-to-maturity debt securities of
insurance funds were reported as net investment income on assets backing
policyholder liabilities in the first and second halves of 2004. The following
table shows the total net interest income from all sources for the three
half-year periods:

                   Half-year ended   Half-year ended   Half-year ended
                           30Jun05           30Jun04           31Dec04
Figures in HK$m                             restated          restated

Net interest income 
  per profit and 
  loss account               5,264             4,715             4,980
Interest income less 
  expenses from:
- trading financial             
  instruments                   44                 -                 -
- fair value financial              
  instruments                   24                 -                 -
- assets backing 
  policyholder liabilities       -               124               186
Total net interest
  income                     5,332             4,839             5,166


Net fee income

             Half-year ended      Half-year ended     Half-year ended
                     30Jun05              30Jun04             31Dec04
Figures in HK$m                          restated            restated

- securities/
  stockbroking           233                  295                 265
- retail investment
  products and
  funds under
  management             670                  869                 630
- insurance               77                   51                  50
- account services       110                  108                 106
- remittance              67                   60                  65
- cards                  334                  283                 315
- credit facilities       41                  123                 117
- import/export          139                  118                 138
- other                   70                   67                  69
Fee income             1,741                1,974               1,755
Fee expense             (215)                (153)               (263)
Net fee income         1,526                1,821               1,492


Net fee income fell by HK$295 million, or 16.2 per cent, compared with the first
half of 2004. Income from stockbroking and securities related income fell by
HK$62 million, or 21.0 per cent. Income from retail investment products and 
funds under management was lower by  HK$199 million, or 22.9 per cent, as 
compared to the exceptionally high capital guaranteed fund sales in the first 
quarter of 2004, although this was partly offset by the strong sales of 
structured investment products and the growth in private banking business in the
first half of 2005. Credit facilities income fell by HK$82 million as all 
corporate loan origination fees are now reported as part of interest income 
under the new accounting policies that came into effect on 1 January 2005. Card 
services income rose by 18.0 per cent, underpinned by 20.6 per cent growth in 
card spending. Insurance agency commissions and trade finance also recorded 
encouraging growth, reflecting the business growth of the Commercial Banking 
Customer Group.

Compared with the second half of 2004, net fee income rose by HK$34 million, or
2.3 per cent, mainly contributed by growth in card services fees and insurance
agency commission.

Trading income
                   Half-year ended   Half-year ended   Half-year ended
                           30Jun05           30Jun04           31Dec04
Figures in HK$m                             restated          restated

Net interest income             44                 -                 -

Dealing profits:
- foreign exchange             277               530               445
- securities,
  derivatives and
  other trading              
  activities                   112                28                21
                               389               558               466
                               433               558               466

Trading income fell by HK$125 million, or 22.4 per cent (a fall of HK$169
million, or 30.3 per cent, excluding interest income and expenses from trading
financial instruments), compared with the first half of 2004. This was mainly
due to the HK$253 million fall in foreign exchange income which included the
revaluation loss of HK$147 million of foreign exchange contracts used for
hedging on-balance sheet positions.

Income from securities, derivatives and other trading activities rose by HK$84
million, mainly due to the rise in profit from derivatives of HK$136 million,
attributable mainly to the packaging of structured investment products for
commercial and personal customers.

Compared with the second half of 2004, trading income fell by HK$33 million, or
7.1 per cent (a fall of HK$77 million, or 16.5 per cent, excluding interest
income and expenses).

Net income from financial instruments designated as at fair value

Net income from financial instruments as at fair value through profit or loss 
amounted to HK$50 million, including net interest income and expenses, 
investment income, and revolution gains and losses.  Financial assets, 
liabilities and derivatives are designated as at fair value through profit and 
loss mainly to achieve economic hedge of market risks and are not for short-term
trading.  Certain long-term insurance fund assets are also designated as at fair 
value through profit and loss to meet policyholders' liabilities.  Before the 
change in accounting policies effective 1 January 2005, these income were 
reported under their respective income categories.



                      This information is provided by RNS
            The company news service from the London Stock Exchange