Hang Seng Bk Ltd pt 3/6

HSBC Holdings PLC 03 March 2008 Financial Review Net interest income Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Net interest income/(expense) arising from: - financial assets and liabilities that are not at fair value through profit and loss 16,404 13,689 - trading assets and liabilities (1,753) (2,039) - financial instruments designated at fair value 68 44 14,719 11,694 Average interest-earning assets 661,469 578,588 Net interest spread 1.84% 1.66% Net interest margin 2.23% 2.02% Net interest income rose by HK$3,025 million, or 25.9 per cent, to HK$14,719 million with a 14.3 per cent increase in average interest-earning assets. Average customer advances rose 10.4 per cent, with notable increases in mainland loans, higher yielding card advances, personal loans and trade finance. Ample liquidity in Hong Kong continued to exert downward pressure on corporate loan margins. Although activity in the local property market increased, intense market competition continued to drive down mortgage pricing. Overall, the total loan portfolio contributed HK$427 million to the growth in net interest income. Deposit products contributed HK$1,017 million of the increase in net interest income, benefiting from the 10.4 per cent growth in average customer deposits, mainly in low cost savings balances, as well as improved deposit spreads. The contribution from net free funds added HK$468 million to the increase in net interest income, arising mainly from increases in both market interest rates and the level of free funds (including non-interest-bearing account balances and net shareholders' funds). The debt securities portfolio of life insurance fund investments grew by 41.2 per cent, adding HK$283 million to net interest income. Treasury balance sheet management income improved as lower-yielding securities gradually matured and were replaced by higher-yielding securities, which resulted in an HK$830 million increase in net interest income. Net interest margin rose by 21 basis points to 2.23 per cent. Net interest spread increased by 18 basis points to 1.84 per cent, benefiting from wider deposit spreads and better yields on Treasury balance sheet management portfolios. The contribution from net free funds rose by three basis points to 0.39 per cent. Including the net increase of HK$357 million in funding swap costs- which were recognised as foreign exchange losses under trading income- net interest income increased by HK$2,668 million, or 23.0 per cent, and net interest margin improved by 16 basis points to 2.16 per cent. Compared with first half of 2007, net interest income in the second half recorded encouraging growth of HK$1,327 million, or 19.8 per cent, with a 6.8 per cent growth in average interest-earning assets. Net interest margin improved by 22 basis points. The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as 'Net trading income'. That arising from financial instruments designated at fair value through profit and loss is reported as 'Net income from financial instruments designated at fair value' (other than for debt securities in issue and subordinated liabilities, together with derivatives managed in conjunction with them). The table below presents the net interest income of Hang Seng, as included within the HSBC Group accounts: Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Net interest income 16,358 13,639 Average interest-earning assets 643,655 564,027 Net interest spread 1.98% 1.83% Net interest margin 2.54% 2.42% Net fee income Year ended Year ended Figures in HK$m 31Dec07 31Dec06 - Stockbroking and related services 1,985 805 - Retail investment funds 1,676 796 - Structured investment products 661 94 - Insurance 115 108 - Account services 284 274 - Private banking 1,000 331 - Remittances 193 161 - Cards 1,048 860 - Credit facilities 110 111 - Trade services 406 380 - Other 204 154 Fee income 7,682 4,074 Fee expense (796) (577) 6,886 3,497 Net fee income rose by HK$3,389 million, or 96.9 per cent, compared with 2006, to HK$6,886 million. In the second half of 2007, net fee income was HK$1,162 million, or 40.6 per cent, higher than in the first half. Investment services expanded significantly, capturing the opportunities provided by the buoyant stock market and favourable investment market sentiment in Hong Kong. Stockbroking and related services income rose 146.6 per cent, reflecting the higher transaction volume, and the customer base grew by 19.7 per cent. Income from retail investment funds increased by 110.6 per cent to reach a record HK$1,676 million, achieved in large part through the launch of new funds, particularly those focusing on China stocks. Fund turnover reached a record HK$68.5 billion. Income from sales of structured investment products grew by 603.2 per cent, mainly reflecting sales of equity-linked instruments. Private banking investment services income achieved strong results and rose by 202.1 per cent. Card services income grew by 21.9 per cent, due to the 8.9 per cent increase in the number of cards in circulation and the 21.1 per cent rise in cardholder spending. Remittance, trade services and account services fees grew by 19.9 per cent, 6.8 per cent and 3.6 per cent respectively. Trading income Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Trading income: - foreign exchange 861 1,178 - securities, derivatives and other trading activities 818 152 1,679 1,330 Trading income rose by HK$349 million, or 26.2 per cent, to HK$1,679 million, compared with 2006. The HK$317 million fall in foreign exchange income was attributable mainly to two specific items not related to normal foreign exchange trading. First, an exchange loss of HK$461 million was incurred in 2007 (HK$104 million in 2006) on forward contracts used in 'funding swap' activities^ in the balance sheet management portfolios. Second, capital funds of HACN injected in US dollars pending approval to convert into renminbi were recorded at historical rate. The subsequent revaluation loss of the US dollar funds against the renminbi, amounting to HK$171 million in 2007, was recognised as a foreign exchange loss. Excluding these two items, efforts to expand proprietary trading and customer-driven business saw normal foreign exchange trading rise by HK$211 million, or 16.5 per cent. Income from securities, derivatives and other trading grew significantly by HK$666 million, or 438.2 per cent, attributable to the improvement in trading results and the growth in trading volume. Profit earned on equity-linked products structured for customers accounted for HK$470 million of the growth. For the second half of 2007, trading income grew by HK$511 million, or 87.5 per cent, to HK$1,095 million, attributable mainly to the rise in normal foreign exchange profit and profit earned on equity-linked structured products. ^Treasury from time to time employs foreign exchange swaps for its funding activities, which in essence involve swapping a currency ('original currency') into another currency ('swap currency') at the spot exchange rate for short-term placement and simultaneously entering into a forward exchange contract to convert the funds back to the original currency on maturity of the placement. In accordance with HKAS39, the exchange difference of the spot and forward contracts is required to be recognised as foreign exchange gain/loss, while the corresponding interest differential between the original and swap funding is reflected in net interest income. Net income from financial instruments designated at fair value Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Net income on assets designated at fair value which back insurance and investment contracts 1,903 910 Net change in fair value of other financial instruments designated at fair value 4 (11) 1,907 899 Financial instruments designated at fair value reported a net income of HK$1,907 million, compared with HK$899 million in 2006, reflecting the remarkable investment performance and growth of the life insurance fund portfolios. Other operating income Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Rental income from investment properties 139 186 Movement in present value of in-force long-term insurance business 397 363 Other 211 296 747 845 Analysis of income from wealth management business Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Investment income: - retail investment funds 1,676 796 - structured investment products^ 1,492 513 - private banking^^ 1,009 340 - securities broking and related services 1,985 805 - margin trading and others 78 65 6,240 2,519 Insurance income: - life insurance 2,055 1,476 - general insurance and others 348 318 2,403 1,794 Total 8,643 4,313 ^Income from structured investment products includes income reported under net fee income on the sales of third-party structured investment products. It also includes profit generated from the selling of structured investment products in issue, reported under trading income. ^^Income from private banking includes income reported under net fee income on investment services and profit generated from selling of structured investment products in issue, reported under trading income. Wealth management income increased by an impressive 100.4 per cent to HK$8,643 million. Investment services income grew by 147.7 per cent, reflecting record investment product sales and a high level of stock market activity, while insurance business income rose by 33.9 per cent. The buoyant stock market stimulated demand for investment fund sales, which reached a record HK$68.5 billion, representing a 149.5 per cent increase over 2006. This achievement was facilitated by the bank's efforts to offer a wide choice of funds from both Hang Seng Investment Management and third-party providers - ranging from high-growth China and emerging market equity funds to fixed-income funds - to meet the various investment strategies and risk appetites of different customers. The successful launch of new funds under the Hang Seng investment fund series (for example, the Hang Seng Consumer Sector FlexiPower Fund, which was the first consumer sector fund focusing on the Mainland and Hong Kong securities which are listed on the Stock Exchange of Hong Kong) and the good performance of existing thematic funds, particularly the Hang Seng China Equity Fund, also boosted investment fund income. Funds under management (excluding private banking) rose by 32.3 per cent to HK$82.1 billion compared with 2006 year-end. As a result of this outstanding performance, investment fund income (including sales commission and management fees) rose a significant 110.6 per cent to reach a record HK$1,676 million. The bank continued to make good progress with sourcing and distributing competitive structured products packaged by both Hang Seng and third-party providers, registering a 12.1 per cent rise in turnover and a record 190.8 per cent increase in structured investment product income, primarily related to equity-linked instruments. The bank continued to expand its e-service channels and mobile communication services to better cater for the needs of customers. A mobile phone trading service was launched during the year to capture more business opportunities and help customers to manage their securities investment portfolios more easily and effectively in the buoyant investment conditions. Riding on a spate of IPO activity in Hong Kong, the bank further enhanced its IPO subscription services to meet customers' needs and participated in certain IPO activities by leveraging its extensive network, customer base and funding capabilities. Through effective marketing campaigns and personalised services, the bank grew its number of securities accounts by 19.7 per cent and successfully boosted its trading volume by 148.4 per cent. The positioning of the bank's business increased stockbroking and related service income by 146.6 per cent to HK$1,985 million. Private banking continued to make remarkable progress, supported by the further strengthening of its relationship management team and investment services support. Investment services income for 2007 was more than double that reported for 2006. Customer base and assets under management rose by 19.8 per cent and 39.8 per cent respectively. Life insurance registered encouraging income growth of 39.2 per cent to reach HK$2,055 million (analysed in the table below). Life insurance business ranked number one in Hong Kong in terms of new regular premiums on non-linked insurance products for the first three quarters of 2007 and premium income grew by 24.7 per cent. The bank advanced its strategy to capture a greater share of the retirement planning market by expanding its product range, launching the 'Critical Illness Life Insurance Plan' and 'Flexi-Income Life Insurance Plan' during the year. Investment returns were higher, reflecting the growing portfolio size and higher equity returns from the buoyant stock market. The increase in movement in policyholders' liabilities is largely in line with the increase in premium income. General insurance income also increased by 9.4 per cent to HK$348 million, due mainly to the growth in premiums earned from general accident protection. Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Life insurance: - net interest income and fee income 943 665 - investment returns on life insurance funds 1,903 910 - net earned insurance premiums 9,394 7,534 - claims, benefits and surrenders paid (1,285) (1,014) - movement in policyholders' liabilities^ (9,315) (6,991) - reinsurers' share of claims incurred and movement in policyholders' liabilities 18 9 - movement in present value of in-force long-term insurance business 397 363 2,055 1,476 General insurance and others 348 318 Total 2,403 1,794 ^Including premium and investment reserves Loan impairment charges and other credit risk provisions Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Loan impairment (charges)/releases: - individually assessed (250) (107) - collectively assessed (326) (145) (576) (252) Of which: - new and additional (702) (423) - releases 64 106 - recoveries 62 65 (576) (252) Other provision _ (12) Loan impairment charges and other credit risk provisions (576) (264) Loan impairment charges and other credit risk provisions increased by HK$312 million, or 118.2 per cent, to HK$576 million. There was an increase of HK$143 million in individually assessed provisions, due mainly to higher charges and lower releases for several commercial customers. Of the collectively assessed charges, HK$253 million was made on the card and personal loan portfolio, representing a rise of 82.0 per cent over 2006 but due mainly to the 34.2 per cent growth of this portfolio. The delinquency rate and level of loan losses continued to be satisfactory. A charge of HK$73 million was made on advances not identified individually as impaired, compared with a charge of HK$6 million made in 2006, reflecting the 10.4 per cent growth in gross advances to customers and the update of the historical loss rates used for 2007. Operating expenses Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Employee compensation and benefits: - salaries and other costs 2,443 2,188 - performance-related pay 1,095 382 - retirement benefit costs 47 124 3,585 2,694 General and administrative expenses: - rental expenses 379 267 - other premises and equipment 820 829 - marketing and advertising expenses 601 447 - other operating expenses 884 671 2,684 2,214 Depreciation of business premises and equipment 348 323 Amortisation of intangible assets 33 10 6,650 5,241 Cost efficiency ratio 26.6% 29.0% Staff numbers^ by region At 31 Dec07 At 31Dec06 Hong Kong 8,033 7,748 Mainland 1,097 661 Others 60 55 Total 9,190 8,464 ^Full-time equivalent Operating expenses rose by HK$1,409 million, or 26.9 per cent, compared with 2006. Of the 33.1 per cent increase in employee compensation and benefits, salaries and other costs increased by 11.7 per cent, in line with the increase in headcount and annual salary increment. The important contributions of Bank staff in achieving significant growth in total operating income led to a 186.6 per cent increase in performance-related pay. General and administrative expenses increased by 21.2 per cent. Rental expenses rose due to increases in rents for branches in Hong Kong and new branches on the Mainland, as well as additional rental costs after the disposal of the Hang Seng Building in May 2006 and the renting of the new 'megasite' back office centre. Marketing expenditure was higher, with increased promotion of credit cards and investment and insurance products as well as brand-building initiatives both in Hong Kong and on the Mainland. Depreciation charges rose by 7.7 per cent, mainly the result of the increase in fair value of business premises. The bank's mainland operations, which expanded its network from 15 to 25 outlets and its staff from 661 to 1,097 members during 2007, also contributed to the increase in operating expenses. The number of full-time equivalent staff rose by 726 compared with 2006 year-end. New staff in Hong Kong accounted for 39.3 per cent of the increase in headcount, with new talent hired to further expand private banking's financial advisory team and PFS and CMB's relationship management and wealth management teams as well as to support IT systems development and enhancement. The number of staff at mainland branches accounted for 60.1 per cent of the rise in headcount, attributable mainly to the establishment of HACN and expansion of its network of outlets. The cost efficiency ratio for 2007 was 26.6 per cent, compared with 29.0 per cent in 2006. Profit on disposal of fixed assets and financial investments Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Profit on disposal of available-for-sale securities 449 338 Profit less loss on disposal of fixed assets 267 505 716 843 Profit on disposal of available-for-sale financial investments was HK$111 million higher than in 2006. Profit on disposal of fixed assets, mainly properties, fell to HK$267 million, due to the non-recurring gain made on the disposal of the Hang Seng Building at 77 Des Voeux Road Central in 2006. Gain on dilution of investment in associate During the year, the bank's associate, Industrial Bank Co., Ltd ('Industrial Bank') issued new shares. The bank did not subscribe for any additional shares issued under this offer and, as a result, its interest in Industrial Bank's equity decreased from 15.98 per cent to 12.78 per cent. The net assets of Industrial Bank increased substantially when it received the proceeds from the new issue. After the new issue, the group's share of the net assets of Industrial Bank increased by HK$1,465 million compared to the share of the net assets immediately before the IPO. This increase in the group's share of net assets was regarded as a gain arising from deemed disposal of part of its interests in Industrial Bank and has been presented in the consolidated income statement. The gain resulting from the dilution of the group's investment in Industrial Bank was HK$1,465 million. The dilution of the interest does not affect the classification of the group's investment as an investment in an associate. Tax expense Taxation in the consolidated income statement represents: Year ended Year ended Figures in HK$m 31Dec07 31Dec06 Current tax - provision for Hong Kong profits tax Tax for the year 2,771 2,188 Current tax - taxation outside Hong Kong Tax for the year 29 36 Deferred tax Origination and reversal of temporary differences 65 (175) Total tax expense 2,865 2,049 The current tax provision is based on the estimated assessable profit for 2007, and is determined for the bank and its subsidiaries operating in Hong Kong by using the Hong Kong profits tax rate of 17.5 per cent (the same rate as in 2006). For subsidiaries and branches operating in other jurisdictions, the appropriate tax rates prevailing in the relevant countries are used. Earnings per share The calculation of earnings per share in 2007 is based on earnings of HK$18,242 million (HK$12,038 million in 2006) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from 2006). Dividends per share Year ended Year ended 31Dec07 31Dec06 HK$ HK$m HK$ HK$m per share per share First interim 1.10 2,103 1.10 2,103 Second interim 1.10 2,103 1.10 2,103 Third interim 1.10 2,103 1.10 2,103 Fourth interim 3.00 5,736 1.90 3,633 6.30 12,045 5.20 9,942 This information is provided by RNS The company news service from the London Stock Exchange

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