Hang Seng Bk Ltd pt 5/6

HSBC Holdings PLC 03 March 2008 Financial investments Figures in HK$m At 31Dec07 At 31Dec06 Available-for-sale at fair value: - debt securities 220,998 209,463 - equity shares 4,299 2,110 Held-to-maturity debt securities at amortised cost 18,997 16,137 244,294 227,710 Fair value of held-to-maturity debt securities 19,526 16,551 Treasury bills 3,089 1,088 Certificates of deposit 30,247 25,020 Other debt securities 206,659 199,492 Debt securities 239,995 225,600 Equity shares 4,299 2,110 244,294 227,710 Debt securities: - listed in Hong Kong 5,234 6,672 - listed outside Hong Kong 71,997 70,905 77,231 77,577 - unlisted 162,764 148,023 239,995 225,600 Equity shares: - listed in Hong Kong 3,449 1,702 - listed outside Hong Kong 188 150 3,637 1,852 - unlisted 662 258 4,299 2,110 244,294 227,710 Fair value of listed financial investments 80,898 79,442 Debt securities: Issued by public bodies: - central governments and central banks 8,526 8,321 - other public sector entities 5,688 7,044 14,214 15,365 Issued by other bodies: - banks and other financial institutions 211,568 192,751 - corporate entities 14,213 17,484 225,781 210,235 239,995 225,600 Equity shares: Issued by corporate entities 4,299 2,110 244,294 227,710 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 changes 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. Amounts due from/to immediate holding company and fellow subsidiary companies At balance sheet dates, the amounts due from/to the bank's immediate holding company and fellow subsidiary companies included in the assets and liabilities balances of the consolidated balance sheet are as follows: Figures in HK$m At 31Dec07 At 31Dec06 Amounts due from: Cash and balances with banks and other financial institutions 861 1,665 Placings with and advances to banks and other financial institutions 5,777 4,573 Financial assets designated at fair value 3,672 2,842 Derivative financial instruments 386 194 Financial investments 909 1,023 Other assets 128 79 11,733 10,376 Amounts due to: Customer accounts 1,930 199 Deposits from banks 3,471 5,724 Derivative financial instruments 1,773 333 Subordinated liabilities 2,028 2,022 Other liabilities 316 473 9,518 8,751 Investments in associates Figures in HK$m At 31Dec07 At 31Dec06 Share of net assets 5,894 3,158 Goodwill 283 330 6,177 3,488 On 5 February 2007, Industrial Bank 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 its interest in the equity of Industrial Bank therefore decreased from 15.98 per cent to 12.78 per cent. The dilution of investment resulted in a gain of HK$1,465 million, as represented in the increase in the bank's share of the net assets of Industrial Bank which had risen as a result of the issue of the new shares. The gain on dilution was recognised in the bank's income statement in 2007. The decrease of the bank's interest in the equity of Industrial Bank does not affect the bank's influence over this associate, as there has been no change in the composition of major shareholders in Industrial Bank or in the bank's representation on its Board of Directors or Executive Committee. The bank will continue to have the power to participate in the financial and operating policy decisions of Industrial Bank, and will continue to account for its results using the equity method. Intangible assets Figures in HK$m At 31Dec07 At 31Dec06 Present value of in-force long-term insurance business 2,324 1,927 Internally developed software 212 129 Acquired software 24 14 Goodwill 329 _ 2,889 2,070 Goodwill arising from the acquisition of the remaining 50 per cent of issued capital of Hang Seng Life Limited amounted to HK$329 million as at 31 December 2007 and was recognised at group level. Other assets Figures in HK$m At 31Dec07 At 31Dec06 Items in the course of collection from other banks 6,193 6,036 Prepayments and accrued income 4,433 3,520 Deferred tax assets 1 1 Assets held for sale 199 256 Acceptances and endorsements 3,294 2,855 Other accounts 1,346 2,218 15,466 14,886 Current, savings and other deposit accounts Figures in HK$m At 31Dec07 At 31Dec06 Current, savings and other deposit accounts: - as stated in consolidated balance sheet 546,653 482,821 - structured deposits reported as trading liabilities 24,162 35,066 570,815 517,887 By type: - demand and current accounts 34,130 29,594 - savings accounts 254,976 223,255 - time and other deposits 281,709 265,038 570,815 517,887 Certificates of deposit and other debt securities in issue Figures in HK$m At 31Dec07 At 31Dec06 Certificates of deposit and other debt securities in issue: - as stated in consolidated balance sheet 5,685 7,595 - structured certificates of deposit and other debt securities in issue reported as trading liabilities 14,087 14,821 19,772 22,416 By type: - certificates of deposit in issue 9,212 18,075 - other debt securities in issue 10,560 4,341 19,772 22,416 Customer deposits and certificates of deposit and other debt securities in issue rose by 9.3 per cent to HK$590.6 billion, notably in Hong Kong dollar current and savings accounts and time deposits. In tandem with the expanding scope of renminbi banking services offered by HACN, deposits from mainland branches registered impressive growth of 188.6 per cent. HACN will continue to expand its number of outlets and provide premium customer service and comprehensive renminbi services to grow its customer base. In order to further grow our personal banking and wealth management business, a variety of investment-linked deposit products are being offered to customers on the Mainland. Trading liabilities Figures in HK$m At 31Dec07 At 31Dec06 Structured certificates of deposit and other debt securities in issue 14,087 14,821 Structured deposits 24,162 35,066 Short positions in securities and other 9,902 10,206 48,151 60,093 Trading liabilities include customer deposits and certificates of deposit with embedded options or other derivatives, the market risk of which is managed in the trading book. Other liabilities Figures in HK$m At 31Dec07 At 31Dec06 Items in the course of transmission to other banks 8,407 6,469 Accruals 3,836 2,641 Acceptances and endorsements 3,294 2,855 Other 2,313 4,158 17,850 16,123 Subordinated liabilities Figures in HK$m At 31Dec07 At 31Dec06 Nominal value Description Amount owed to third parties HK$1,500 million Callable floating rate subordinated notes due June 2015 1,497 1,496 HK$1,000 million 4.125 per cent callable fixed rate subordinated notes due June 2015 989 987 US$450 million Callable floating rate subordinated notes due July 2016 3,497 3,483 US$300 million Callable floating rate subordinated notes due July 2017 2,332 _ Amount owed to HSBC Group undertakings US$260 million Callable floating rate subordinated loan debt due December 2015 2,028 2,021 10,343 7,987 Representing: - measured at amortised cost 9,354 7,000 - designated at fair value 989 987 10,343 7,987 During the year, the bank issued floating-rate subordinated notes amounting to US$300 million that mature in July 2017 with a one-time call option exercisable by the bank in July 2012. The notes were issued at the price of 99.868 per cent, bearing interest at the rate of three-month US dollar LIBOR plus 0.25 per cent, payable quarterly from the issue date to the call option date. Thereafter, if the notes are not redeemed on the call option date, the interest rate will be reset to three-month US dollar LIBOR plus 0.75 per cent payable quarterly. The notes, which qualify as supplementary capital, serve to help the bank maintain a more balanced capital structure and support business growth. Shareholders' funds Figures in HK$m At 31Dec07 At 31Dec06 Share capital 9,559 9,559 Retained profits 32,873 29,044 Premises revaluation reserve 3,639 3,491 Cash flow hedges reserve 144 (220) Available-for-sale investments reserve 1,892 923 Capital redemption reserve 99 99 Other reserves 2,514 452 Total reserves 41,161 33,789 50,720 43,348 Proposed dividends 5,736 3,633 Shareholders' funds 56,456 46,981 Return on average shareholders' funds 35.4% 27.4% Shareholders' funds (excluding proposed dividends) grew by HK$7,372 million, or 17.0 per cent, to HK$50,720 million at 31 December 2007. Retained profits rose by HK$3,829 million, reflecting the growth in attributable profit during the year. The premises revaluation reserve increased by HK$148 million, attributable to the improved property market. The available-for-sale investments reserve rose by HK$969 million, reflecting the buoyant equity market. Other reserves rose by HK$2,062 million, due mainly to the gain on the dilution of investment in Industrial Bank. The return on average shareholders' funds was 35.4 per cent, compared with 27.4 per cent in 2006, reflecting the strong profit growth recorded for 2007. Save for the issuance of subordinated notes of US$300 million, there was no purchase, sale or redemption by the bank, or any of its subsidiaries, of the bank's listed securities during 2007. Capital resources management Analysis of capital base and risk-weighted assets Figures in HK$m At 31Dec07 At 31Dec06 Capital base Core capital: - Share capital 9,559 9,559 - Retained profits 29,437 25,823 - Classified as regulatory reserve (911) (518) - Less: goodwill (283) (330) - Less: 50 per cent of total unconsolidated investments and other deductions (5,875) _ - Total core capital 31,927 34,534 Supplementary capital: - Fair value gains on the revaluation of property 3,466 4,259 - Fair value gains on the revaluation of available-for-sale investment and equity 823 542 - Collective impairment allowances 636 518 - Regulatory reserve 911 518 - Term subordinated debt 10,354 7,988 - Less: 50 per cent of total unconsolidated investments and other deductions (5,875) _ - Total supplementary capital 10,315 13,825 Unconsolidated investments and other deductions _ (4,242) Total capital base after deductions 42,242 44,117 Risk-weighted assets - Credit risk 342,798 321,677 - Market risk 2,166 2,330 - Operational risk 33,558 _ 378,522 324,007 Capital adequacy ratio 11.2% 13.6% Core capital ratio 8.4% 10.7% Capital ratios at 31 December 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, 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 bank has also obtained approval from the HKMA to adopt the 'foundation internal ratings-based approach' to calculate the risk-weighted assets for credit risk effective 1 January 2008. 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 31 December 2006 were compiled in accordance with the now repealed 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$911 million from retained profits. This regulatory reserve is included as supplementary capital together with the group's collective impairment allowances. This information is provided by RNS The company news service from the London Stock Exchange

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