Hang Seng Bank - Pt2 Results

HSBC Hldgs PLC 26 February 2001 HSBC Hldgs PLC News Release 4 Part(2)of(2) Hang Seng Bank Limited Financial Review (continued) Rescheduled advances to customers The amount of rescheduled advances and its expression as a percentage of gross advances to customers are as follows: At 31Dec00 At 31Dec99 HK$m % HK$m % Rescheduled advances to customers^ 2,756 1.2 1,761 0.9 ^Stated after deduction of interest in suspense. Rescheduled advances are those advances which have been restructured or renegotiated because of a deterioration in the financial position of the borrower, or because of the inability of the borrower 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 18). 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 in an area which is different from that of the counterparty. At 31 December 2000, 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 (the same as the position at 31 December 1999). 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 31Dec00 At 31Dec99 Gross advances to customers for use in Hong Kong Industrial, commercial and financial sectors Property development 19,079 16,508 Property investment 29,579 23,231 Financial concerns 2,979 3,715 Stockbrokers 97 340 Wholesale and retail trade 4,066 4,504 Manufacturing 1,825 1,890 Transport and transport equipment 8,471 8,411 Other 19,073 17,443 85,169 76,042 Individuals Advances for the purchase of flats under the Government Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme 35,971 31,936 Advances for the purchase of other residential properties 78,005 73,854 Credit card advances 4,745 3,835 Other 4,875 4,514 123,596 114,139 Total gross advances for use in Hong Kong 208,765 190,181 Trade finance 9,013 8,787 Gross advances for use outside Hong Kong 4,195 3,276 Gross advances to customers 221,973 202,244 Lending to the industrial, commercial and financial sectors grew by HK$9,127 million, or 12.0 per cent. The 15.6 per cent growth in the property development sector was mainly from lending to large developers for residential development projects and general working capital. Property investment lending rose by 27.3 per cent, mainly to finance the holding of completed residential development projects by the developers and the acquisition of residential properties for rental purpose by property investment companies. Advances to individuals rose by HK$9,457 million, or 8.3 per cent. Residential mortgages and Government Home Ownership Scheme mortgages continued to expand amid severe price competition. Credit card advances also showed satisfactory growth as a result of the expansion in the card base and the improvement in consumer sentiment. Long-term investments Carrying Value Figures in HK$m At 31Dec00 At 31Dec99 Held-to-maturity debt securities Issued by public bodies - Central governments and central banks 3,459 2,720 - Other public sector entities 7,381 6,055 10,840 8,775 Issued by other bodies - Banks and other financial institutions 15,480 9,753 - Corporate entities 8,517 3,868 23,997 13,621 34,837 22,396 Equity investments Issued by corporate entities 4,433 4,921 39,270 27,317 Held-to-maturity debt securities - Listed in Hong Kong 419 703 - Listed outside Hong Kong 4,881 2,062 5,300 2,765 - Unlisted 29,537 19,631 34,837 22,396 Equity investments - Listed in Hong Kong 4,139 4,766 - Listed outside Hong Kong 114 85 4,253 4,851 - Unlisted 180 70 4,433 4,921 39,270 27,317 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. Long-term investments rose by HK$11,953 million, or 43.8 per cent, compared with the end of 1999. The portfolio of held-to- maturity debt securities expanded by HK$12,441 million, or 55.6 per cent, comprising securities issued by governments, banks and other financial institutions and corporations. Equity investments were HK$488 million, or 9.9 per cent lower, due to disposals and a reduction in fair value. Long-term investments (continued) The following table shows the fair value of held-to-maturity debt securities: Fair Value Figures in HK$m At 31Dec00 At31Dec99 Held-to-maturity debt securities Issued by public bodies - Central governments and central banks 3,471 2,712 - Other public sector entities 7,537 6,057 11,008 8,769 Issued by other bodies - Banks and other financial 15,510 9,735 institutions - Corporate entities 8,595 3,841 24,105 13,576 35,113 22,345 Held-to-maturity debt securities - Listed in Hong Kong 425 707 - Listed outside Hong Kong 4,940 2,057 5,365 2,764 - Unlisted 29,748 19,581 35,113 22,345 Other assets Figures in HK$m At 31Dec00 At 31Dec99 Unrealised gains on off-balance sheet interest rate, exchange rate and other derivative contracts which are marked to market 1,800 1,270 Items in the course of collection from other banks 4,472 4,017 Prepayments and accrued income 3,849 3,094 Other accounts 1,206 809 11,327 9,190 Current, savings and other deposit accounts Figures in HK$m At 31Dec00 At 31Dec99 Customer accounts 414,875 364,038 Certificates of deposit in issue 14,730 11,673 429,605 375,711 Current, savings and other deposit accounts rose by HK$53.9 billion, or 14.3 per cent, to HK$429.6 billion, compared with HK$375.7 billion at 31 December 1999. The growth was mainly in US dollar time deposits and HK dollar time deposits and savings accounts. Certificates of deposit in issue increased by HK$3.1 billion, or 26.2 per cent, to HK$14.7 billion at 31 December 2000. Shareholders' funds Figures in HK$m At 31Dec00 At 31Dec99 Share capital 9,559 9,559 Retained profits 18,732 17,729 Premises and investment properties revaluation reserves 8,742 8,228 Long-term equity investment revaluation reserve 3,452 3,959 Capital redemption reserve 99 99 Reserves 31,025 30,015 Shareholders' funds 40,584 39,574 Return on average shareholders' funds 23.6% 17.6% There was no purchase, sale or redemption of the bank's listed securities by the bank or any of its subsidiaries during the year. Shareholders' funds grew by HK$1,010 million to HK$40,584 million at 31 December 2000, mainly from profit after appropriation for the year. The long-term equity investment revaluation reserve decreased by HK$507 million, due to realisation on disposals and the fall in fair value of locally- listed equities at 31 December 2000. The premises and investment properties revaluation reserves increased by HK$514 million, reflecting a rebound in the commercial property market. The return on average shareholders' funds for 2000 improved substantially to a record high of 23.6 per cent, compared with 17.6 per cent for 1999, benefiting from the growth in attributable profit for the year and lower average shareholders' funds following the distribution of the special interim dividend in November 1999. Capital resources management Analysis of capital base and risk-weighted assets Figures in HK$m At 31Dec00 At 31Dec99 Capital base Tier 1 capital - Share capital 9,559 9,559 - Retained profits 18,455 17,489 - Capital redemption reserve 99 99 - Total 28,113 27,147 Tier 2 capital - Premises and investment properties revaluation reserves 5,860 5,786 - Long-term equity investment revaluation reserve 2,043 2,266 - General loan provisions 1,437 1,440 - Total 9,340 9,492 Unconsolidated investments and other deductions (1,346) (1,350) Total capital base after deductions 36,107 35,289 Risk-weighted assets On-balance sheet 220,037 193,541 Off-balance sheet 13,982 9,783 Total risk-weighted assets 234,019 203,324 Total risk-weighted assets adjusted for market risk 235,453 204,141 Capital adequacy ratios After adjusting for market risk - Tier 1^ 11.9% 13.3% - Total^ 15.3% 17.3% Before adjusting for market risk - Tier 1 12.0% 13.4% - Total 15.4% 17.4% ^The capital ratios take into account market risks in accordance with the relevant Hong Kong Monetary Authority guideline. The total capital ratio was 15.3 per cent at 31 December 2000, compared with 17.3 per cent at 31 December 1999. The tier 1 capital ratio was 11.9 per cent (13.3 per cent at 31 December 1999). The capital base recorded a moderate growth of 2.3 per cent. Risk-weighted assets adjusted for market risk, on the other hand, grew by 15.3 per cent, mainly attributable to the rise in advances to customers, interbank assets and debt securities. Liquidity ratio The average liquidity ratio for the year, calculated in accordance with the Fourth Schedule of the Banking Ordinance, is as follows: 2000 1999 The bank and its major banking subsidiaries 43.3% 42.4% Reconciliation of cash flow statement (a) Reconciliation of operating profit to net cash flow from operating activities Figures in HK$m 2000 1999 Operating profit 11,344 9,646 Provisions for bad and doubtful debts 196 1,419 Depreciation 388 378 Amortisation of long-term investments (571) (368) Advances written off net of recoveries (707) (993) Income receivable on long-term investments (1,863) (1,280) Net cash inflow from trading activities 8,787 8,802 Change in cash and short-term funds (8,377) 7,267 Change in placings with banks repayable after three months 95 (617) Change in certificates of deposit (5,333) (2,147) Change in securities held for dealing purposes (4,206) (6) Change in advances to customers (19,729) 569 Change in amounts due from immediate holding company and fellow subsidiary companies 1,093 (355) Change in other assets (1,896) (1,871) Change in customer accounts 50,837 22,465 Change in certificates of deposit in issue 3,057 958 Change in deposits from banks (3,087) (1,908) Change in amounts due to immediate holding company and fellow subsidiary companies (782) 520 Change in other liabilities 6,391 2,633 Elimination of exchange differences and other non-cash items 1,913 (2,336) Net cash inflow from operating activities 28,763 33,974 Reconciliation of cash flow statement (continued) (b) Analysis of the changes in cash and cash equivalents during the year Figures in HK$m 2000 1999 Balance at 1 January 150,579 134,205 Net cash inflow before the effect of foreign exchange movements 8,472 15,125 Effect of foreign exchange movements (1,540) 1,249 Balance at 31 December 157,511 150,579 (c) Analysis of the balances of cash and cash equivalents Figures in HK$m At 31Dec00 At31Dec99 Cash in hand and balances with banks and other financial institutions 4,330 5,122 Money at call and placings with banks maturing within one month 113,626 110,795 Treasury bills 1,522 771 Placings with banks repayable between one to three months 37,136 33,221 Certificates of deposit 897 670 157,511 150,579 Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31 December 2000 Contingent liabilities: Guarantees 3,829 3,763 2,963 Commitments: Documentary credits and short-term trade-related transactions 5,801 1,168 1,160 Undrawn formal standby facilities, credit lines and other commitments to lend: - Under one year 59,665 - - - One year and over 18,438 9,219 8,975 83,904 10,387 10,135 Exchange rate contracts: Spot and forward foreign exchange 169,896 2,886 647 Other exchange rate contracts 6,504 174 37 176,400 3,060 684 Interest rate contracts: Interest rate swaps 46,951 842 201 Other interest rate contracts 6,229 - - 53,180 842 201 Contingent liabilities, commitments and derivatives (continued) Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31 December 1999 Contingent liabilities: Guarantees 2,267 2,183 1,171 Commitments: Documentary credits and short- term trade-related transactions 5,778 1,156 1,156 Undrawn formal standby facilities, credit lines and other commitments to lend: - Under one year 51,432 - - - One year and over 14,716 7,358 6,926 71,926 8,514 8,082 Exchange rate contracts: Spot and forward foreign exchange 132,608 2,484 547 Other exchange rate contracts 786 20 3 133,394 2,504 550 Interest rate contracts: Interest rate swaps 21,250 178 39 Other interest rate contracts 7,921 1 - 29,171 179 39 The tables above give the nominal contract, credit equivalent and risk-weighted amounts of off-balance sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted amounts. These are assessed in accordance with the Third Schedule of the Banking Ordinance on capital adequacy and depend on the status of the counterparty and the maturity characteristics. The risk weights used range from 0 per cent to 100 per cent for contingent liabilities and commitments, and from 0 per cent to 50 per cent for exchange rate, interest rate and other derivative contracts. Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers. These transactions are, therefore, subject to the same credit origination, portfolio maintenance and collateral requirements as for customers applying for loans. As the facilities may expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements. Off-balance sheet financial instruments arise from futures, forward, swap and option transactions undertaken in the foreign exchange, interest rate and equity markets. The contract amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date and do not represent amounts at risk. The credit equivalent amount of these instruments is measured as the sum of positive mark-to-market values and the potential future credit exposure in accordance with the Third Schedule of the Banking Ordinance. Figures in HK$m At 31Dec00 At 31Dec99 Replacement cost Exchange rate contracts 1,491 1,487 Interest rate contracts 722 127 2,213 1,614 The replacement cost of contracts represents the mark-to-market assets on all contracts (including non-trading contracts) with a positive value and which have not been subject to any bilateral netting arrangement. Segmental analysis by geographical region The information concerning geographical analysis has been classified by the location of the principal operations of the subsidiary companies or, in the case of the bank itself, by the location of the branches responsible for reporting the results or advancing the funds. 2000 1999 HK$m % HK$m % Total operating income (net of interest expense) Hong Kong 14,482 95 14,229 96 Americas 741 5 548 4 Other 42 - 31 - 15,265 100 14,808 100 Profit on ordinary activities before tax Hong Kong 10,937 94 9,578 98 Americas 720 6 556 6 Other 18 - (350) (4) 11,675 100 9,784 100 At 31Dec00 At 31Dec99 HK$m % HK$m % Total assets Hong Kong 431,574 86 384,524 87 Americas 63,055 13 52,388 12 Other 6,155 1 5,158 1 500,784 100 442,070 100 Total liabilities Hong Kong 445,058 97 389,358 97 Americas 10,630 2 9,717 2 Other 4,512 1 3,421 1 460,200 100 402,496 100 Contingent liabilities and commitments Hong Kong 84,939 97 71,678 97 Americas 414 - 509 1 Other 2,380 3 2,006 2 87,733 100 74,193 100 Additional information 1. Accounting policies This news release has been prepared on a basis consistent with the accounting policies adopted in the 1999 financial statements. 2. Property revaluation The bank's premises and investment properties were revalued by HSBC Property (Asia) Limited, which is a fellow subsidiary company of the bank, as at 30 November 2000. The valuations were carried out by qualified valuers who are members of the Hong Kong Institute of Surveyors. The basis of the valuation for premises was open market value for existing use. The basis of the valuation for investment properties was open market value. The property revaluation has resulted in a surplus of HK$612 million, of which HK$584 million has been credited to the bank's revaluation reserves at 31 December 2000. The remaining amount of HK$28 million has been credited to the profit and loss account. This represented the reversal of revaluation deficits of the same properties which had been previously charged to the profit and loss account when their market values fell below depreciated historical costs. 3. Market risk Market risk is the risk that the movements in interest rates, foreign exchange rates or equity and commodity prices will result in profits or losses to Hang Seng. Market risk arises on financial instruments which are valued at current market prices (mark-to-market basis) and those valued at cost plus any accrued interest (accrual basis). Hang Seng's market risk arises from customer-related business and from position taking. Market risk is managed within risk limits approved by the Board of Directors. Risk limits are set by product and risk type with market liquidity being a principal factor in determining the level of limits set. Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits, as well as value at risk (VaR) limits at a portfolio level. Hang Seng follows the risk management policies and risk measurement techniques developed by the HSBC Group. The daily risk monitoring process measures actual risk exposures against approved limits and triggers specific action to ensure the overall market risk is managed within an acceptable level. VaR is a technique which estimates the potential losses that could occur on risk positions taken due to movements in market rates and prices over a specified time horizon and to a given level of confidence. The model used by Hang Seng calculates VaR on a variance/covariance basis, using historical movements in market rates and prices, a 99 per cent confidence level and a 10- day holding period, and generally takes account of correlations between different markets and rates. The movement in market prices is calculated by reference to market data for the last two years. Aggregation of VaR from different risk types is based upon the assumption of independence between risk types. Hang Seng has obtained approval from the Hong Kong Monetary Authority (HKMA) for the use of its VaR model to calculate market risk for capital adequacy reporting. The HKMA is also satisfied with Hang Seng's market risk management process. The VaR for all interest rate risk and foreign exchange risk positions at 31 December 2000 was HK$213 million, compared with HK$199 million at 31 December 1999. The average value at risk for 2000 was HK$179 million, with a maximum of HK$243 million and minimum of HK$119 million in the year. On an individual portfolio basis, the values at risk at 31 December 2000 relating to the trading portfolio and accrual portfolio were HK$7 million (HK$18 million at 31 December 1999) and HK$212 million (HK$198 million at 31 December 1999) respectively. The average daily revenue earned from market risk-related treasury activities in 2000, including accrual book net interest income and funding related to dealing positions, was HK$5 million (HK$7 million for 1999). The standard deviation of these daily revenues was HK$3 million (HK$4 million for 1999). An analysis of the frequency distribution of daily revenues shows that out of 247 trading days in 2000, losses were recorded on only 5 days and the maximum daily loss was HK$5 million. The most frequent result was a daily revenue of between HK$2 million and HK$6 million, with 175 occurrences. The highest daily revenue was HK$23 million. Hang Seng's foreign exchange exposures mainly comprise foreign exchange dealing by Treasury and currency exposures originated by its banking business. The latter are transferred to Treasury where they are centrally managed within foreign exchange position limits approved by the Board of Directors. The VaR relating to foreign exchange positions was HK$6 million at 31 December 2000 (HK$18 million at 31 December 1999) and the average amount for 2000 was HK$8 million, with a maximum of HK$20 million and a minimum of HK$0.1 million in the year. The average one-day foreign exchange profit for 2000 was HK$1 million (HK$2 million for 1999). Interest rate risk arises in both the treasury dealing portfolio and accruals books, which are managed by Treasury under limits approved by the Board of Directors. The VaR relating to interest rate exposures was HK$213 million at 31 December 2000 (HK$198 million at 31 December 1999) and the average amount for 2000 was HK$178 million, with a maximum of HK$243 million and a minimum of HK$119 million in the year. The average daily revenue earned from treasury-related interest rate activities for 2000 was HK$4 million (HK$5 million for 1999). Structural interest rate risk arises primarily from the employment of non-interest bearing liabilities, such as shareholders' funds and some current accounts, as well as fixed rate loans and liabilities other than those generated by the treasury business. Structural interest rate risk is monitored by Hang Seng's Asset and Liability Management Committee. 4. Material related-party transactions (a) Immediate holding company and fellow subsidiary companies In 2000, Hang Seng entered into transactions with its immediate holding company and fellow subsidiary companies in the ordinary course of its interbank activities including the acceptance and placement of interbank deposits, correspondent banking transactions and off-balance sheet transactions. The activities were priced at the relevant market rates at the time of the transactions. Hang Seng used the IT services of, and shared an automated teller machine network with, its immediate holding company on a cost recovery basis. Hang Seng also maintained a staff retirement benefit scheme for which a fellow subsidiary company acts as insurer and administrator. The aggregate amount of income and expenses arising from these transactions during the year, and the balances of amounts due to and from relevant related parties and the total contract sum of off-balance sheet transactions at the end of the year are as follows: Income and expenses for the year Year ended 31 December Figures in HK$m 2000 1999 Interest income 702 671 Interest expense 81 61 Operating expenses 537 470 Balances at the year-end Figures in HK$m At 31Dec00 At 31Dec99 Total amount due from 10,383 12,154 Total amount due to 1,999 2,781 Total contract sum of off-balance sheet transactions 41,510 23,531 (b) Associated companies Hang Seng maintains an interest-free shareholders' loan to an associated company. The balance at 31 December 2000 was HK$208 million (HK$208 million at 31 December 1999). Hang Seng acts as agent for the marketing of life insurance products for an associated company. Total agency commissions received during the year ended 2000 amounted to HK$171 million (HK$54 million for 1999). (c) Ultimate holding company In 2000, no transaction was conducted with the bank's ultimate holding company (same for the year 1999). (d) Key management personnel In 2000, no material transaction was conducted with key management personnel of Hang Seng and its holding companies and parties related to them (same for the year 1999). 5. Statutory accounts The information in this news release does not constitute statutory accounts. Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2000, which will be delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 26 February 2001. 6. Ultimate holding company Hang Seng Bank is an indirectly-held, 62.14 per cent-owned subsidiary of HSBC Holdings plc. 7. Statement of compliance This news release complies with the 'Financial Disclosure by Locally Incorporated Authorised Institutions' issued by the Hong Kong Monetary Authority on 23 November 2000. 8. Register of shareholders The Register of Shareholders of Hang Seng Bank will be closed on Wednesday, 14 March 2001 and Thursday, 15 March 2001, during which no transfer of shares can be registered. In order to qualify for the second interim dividend, all transfers, accompanied by the relevant share certificates, must be lodged with the bank's Registrars, Central Registration Hong Kong Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration not later than 4:00 pm on Tuesday, 13 March 2001. The second interim dividend will be payable on Thursday, 22 March 2001 to shareholders on the Register of Shareholders of the bank on Thursday, 15 March 2001. Additional information (continued) 9. News release Copies of this news release can be obtained from the Company Secretary Department, Level 10, 83 Des Voeux Road Central, Hong Kong. The news release and the statutory accounts for the year ended 31 December 2000 may be obtained from Hang Seng's website http://www.hangseng.com. The 2000 Annual Report and Accounts will be available from the same website by 19 March 2001 and will also be published in the website of The Stock Exchange of Hong Kong Limited in due course. Printed copies of the 2000 Annual Report and Accounts will be sent to shareholders in late-March 2001.

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