Hang Seng Bank pt 5/6

HSBC Holdings PLC
30 July 2007


Financial investments

                                   At 30Jun07       At 30Jun06        At 31Dec06
Figures in HK$m

Available-for-sale at fair value:
- debt securities                     230,075          197,934           209,463
- equity shares                         2,802            1,656             2,110
Held-to-maturity debt securities
  at amortised cost                    18,314           12,365            16,137
                                      251,191          211,955           227,710

Fair value of held-to-maturity
  debt securities                      17,556           11,853            16,551

Treasury bills                          3,629               78             1,088
Certificates of deposit                25,635           25,572            25,020
Other debt securities                 219,125          184,649           199,492
Debt securities                       248,389          210,299           225,600
Equity shares                           2,802            1,656             2,110
                                      251,191          211,955           227,710

Available-for-sale investments include treasury bills, certificates of deposit,
other debt securities and equity shares intended to be held for an indefinite
period of time, but which may be sold in response to needs for liquidity or
changes in the market environment. Available-for-sale investments are carried at
fair value with the gains and losses from change in fair value recognised
through equity reserves.

Held-to-maturity debt securities are stated at amortised cost. Where debt
securities have been purchased at a premium or discount, the carrying value of
the security is adjusted to reflect the effective interest rate of the debt
security taking into account such premium or discount.

Investments in associates

                                  At 30Jun07        At 30Jun06        At 31Dec06
Figures in HK$m

Share of net assets                    5,007             2,945             3,158
Goodwill                                 272               322               330
                                       5,279             3,267             3,488

On 5 February 2007, Industrial Bank ('IB') issued 1,001 million new shares in an
IPO for a total consideration of RMB15,996 million. The bank did not subscribe
for any additional shares and, thus, its interest in the equity of IB decreased
from 15.98 per cent to 12.78 per cent. The dilution in investment resulted in a
gain of HK$1,465 million, as represented in the bank's increase in share of the
net assets of IB, which had risen as a result of the issue of the new shares.
The gain on dilution was recognised in the income statement in the first half of
2007.

The decrease of the bank's interest in the equity of IB does not affect the
bank's influence over this associate, as there has been no change in the
composition of major shareholders in IB or in the bank's representation in its
Board of Directors or Executive Committee. The bank will continue to have the
power to participate in the financial and operating policy decisions of IB, and
will continue to account for its results using the equity method.

Current, savings and other deposit accounts

                                                 At 30Jun07       At 30Jun06       At 31Dec06
Figures in HK$m

Current, savings and
  other deposit accounts:
- as stated in consolidated
  balance sheet                                     512,450          448,097          482,821
- structured deposits reported as
  trading liabilities                                27,571           33,414           35,066
                                                    540,021          481,511          517,887
By type:
- demand and current accounts                        36,555           26,579           29,594
- savings accounts                                  227,101          195,488          223,255
- time and other deposits                           276,365          259,444          265,038
                                                    540,021          481,511          517,887

Certificates of deposit and other debt securities in issue

                                                 At 30Jun07       At 30Jun06       At 31Dec06
Figures in HK$m

Certificates of deposit and
  other debt securities in issue:
- as stated in consolidated balance sheet             7,282            8,312            7,595
- structured certificates of deposit
  and other debt securities in issue
  reported as trading liabilities                    11,116           15,056           14,821
                                                     18,398           23,368           22,416
By type:
- certificates of deposit in issue                   13,504           19,893           18,075
- other debt securities in issue                      4,894            3,475            4,341
                                                     18,398           23,368           22,416

Customer deposits and certificates of deposit and other debt securities in issue
stood at HK$558.4 billion at 30 June 2007, a rise of 3.4 per cent over the end
of 2006 and 10.6 per cent year-on-year. Higher growth was recorded in savings
and current account balances, reflecting customer preference for liquidity in an
active investment market.

Subordinated liabilities

                                                     At 30Jun07       At 30Jun06       At 31Dec06
Figures in HK$m

Nominal value           Description

Amount owed to third parties

HK$1,500 million        Callable floating rate
                         subordinated notes
                         due June 2015                    1,496            1,491            1,496

HK$1,000 million        4.125 per cent callable
                         fixed rate subordinated
                         notes due June 2015                969              950              987

US$450 million          Callable floating rate
                         subordinated notes
                         due July 2016                    3,503            3,495            3,483

US$300 million          Callable floating rate
                         subordinated notes
                         due July 2017                    2,342                -                -

Amount owed to HSBC Group undertakings

US$260 million          Callable floating rate
                         subordinated loan
                         debt due December 2015           2,032            2,019            2,021
                                                         10,342            7,955            7,987

Representing: 
- measured at amortised cost                              9,373            7,005            7,000
- designated at fair value                                  969              950              987
                                                         10,342            7,955            7,987

The bank contracted to issue floating-rate subordinated notes amounting to
US$300 million in July 2007, which will mature in July 2017 with a one-time call
option exercisable by the bank in July 2012. The notes will be issued at the
price of 99.868 per cent, bearing interest at the rate of three-month US dollar
LIBOR plus 0.25 per cent, payable quarterly from the issue date to the call
option date. Thereafter, if the notes are not redeemed on the call option date,
the interest rate will be reset to three-month US dollar LIBOR plus 0.75 per
cent payable quarterly. The notes qualify as tier 2 capital and will serve to
help the bank maintain a more balanced capital structure. The proceeds of the
notes will be used to support business growth and may be used to finance the
proposed acquisition of 50 per cent of the shares in Hang Seng Life Limited.

Shareholders' funds

                               At 30Jun07      At 30Jun06      At 31Dec06
Figures in HK$m

Share capital                       9,559           9,559           9,559
Retained profits                   32,706          28,627          29,044
Premises revaluation reserve        3,621           3,522           3,491
Cash flow hedges reserve             (206)           (532)           (220)
Available-for-sale
  investment reserve                1,020              37             923
Capital redemption reserve             99              99              99
Other reserves                      2,129             303             452
Total reserves                     39,369          32,056          33,789
                                   48,928          41,615          43,348
Proposed dividends                  2,103           2,103           3,633
Shareholders' funds                51,031          43,718          46,981

Return on average
  shareholders' funds                36.6%           29.0%           25.8%

Shareholders' funds (excluding proposed dividends) increased by HK$5,580
million, or 12.9 per cent, to HK$48,928 million at 30 June 2007. Retained
profits rose by HK$3,662 million, reflecting the growth in attributable profit
during the period. Other reserves rose by HK$1,677 million, due mainly to the
gain on the dilution of investment in Industrial Bank.

The return on average shareholders' funds was 36.6 per cent, compared with 29.0
per cent for the first half of 2006 and 25.8 per cent for the second half of
2006. Excluding the gain on dilution, the return on average shareholders' funds
was 30.5 per cent.

In accordance with the HKMA guideline Impact of the New Hong Kong Accounting
Standards on Authorised Institutions' Capital Base and Regulatory Reporting, the
group has earmarked a 'regulatory reserve' of HK$572 million from retained
profits.

Save for the US$300 million subordinated notes contracted to issue in July 2007,
there was no purchase, sale or redemption of the group's listed securities by
the bank or any of its subsidiaries during the first half year of 2007.

Capital resources management

Analysis of capital base and risk-weighted assets

                                                  At 30Jun07       At 30Jun06       At 31Dec06
Figures in HK$m

Capital base
Tier 1 capital:
- Share capital                                        9,559            9,559            9,559
- Retained profits                                    27,546           25,101           25,823
- Classified as regulatory reserve                      (572)            (511)            (518)
- Less: goodwill                                        (272)            (322)            (330)
- Less: 50 per cent of total unconsolidated 
  investments and other deductions                    (2,416)               -                -
- Total                                               33,845           33,827           34,534
Tier 2 capital:
- Fair value gains on the revaluation of
  property                                             3,328            4,443            4,259
- Fair value gains on the revaluation
  of available-for-sale investment and
  equity                                                 599               24              542
- Collective impairment allowances                       572              511              518
- Regulatory reserve                                     572              511              518
- Term subordinated debt                              10,343            7,955            7,988
- Less: 50 per cent of total unconsolidated 
  investments and other deductions                    (2,416)               -                -
- Total                                               12,998           13,444           13,825
Unconsolidated investments and other deductions            -           (3,779)          (4,242)
Total capital base after deductions                   46,843           43,492           44,117

Risk-weighted assets
- Credit risk                                        348,698          303,519          321,677
- Market risk                                          1,313            3,149            2,330
- Operational risk                                    30,377                -                -
                                                     380,388          306,668          324,007

Capital adequacy ratios
- Tier 1                                                8.9%            11.0%            10.7%
- Total                                                12.3%            14.2%            13.6%

Capital ratios at 30 June 2007 were compiled in accordance with the Banking
(Capital) Rules ('the Capital Rules') issued by the HKMA under section 98A of
the Hong Kong Banking Ordinance for the implementation of the 'Basel II' capital
accord, which became effective on 1 January 2007. In accordance with the Capital
Rules, the bank has adopted the 'standardised approach' for the calculation of
the risk-weighted assets for credit risk and operational risk and the 'internal
models approach' for the calculation of market risk.

The basis of consolidation for calculation of capital ratios under the Capital
Rules follows the basis of consolidation for financial reporting with the
exclusion of subsidiaries which are 'regulated financial entities' (e.g.
insurance and securities companies) as defined by the Capital Rules.
Accordingly, the investment costs of these unconsolidated regulated financial
entities are deducted from the capital base.

The capital ratios at 30 June and 31 December 2006 were compiled in accordance
with the then Third Schedule of the Hong Kong Banking Ordinance ('the Third
Schedule') under the 'Basel I' capital accord. As there are significant
differences between the Capital Rules and the Third Schedule on requirements in
the scope of consolidation and the calculation of capital base and risk weighted
assets, the capital ratios are not directly comparable.

In accordance with the HKMA guideline Impact of the New Hong Kong Accounting
Standards on Authorised Institutions' Capital Base and Regulatory Reporting, the
group has earmarked a 'regulatory reserve' of HK$572 million from retained
profits. This regulatory reserve is included as tier 2 capital together with the
group's collective impairment allowances.

Liquidity ratio

The average liquidity ratio for the periods indicated, calculated in accordance
with the Fourth Schedule of the Hong Kong Banking Ordinance, is as follows:

                               Half-year ended     Half-year ended     Half-year ended
                                       30Jun07             30Jun06          31Dec06

The bank and its subsidiaries
  designated by the HKMA                 52.9%               50.9%            53.0%













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