HK&S Bank Corp Interim 05 Pt1

HSBC Holdings PLC
01 August 2005



             THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
                 2005 INTERIM CONSOLIDATED RESULTS - HIGHLIGHTS

•Operating profit excluding loan impairment charges and other credit risk
 provisions up 7.7 per cent to HK$23,759 million (HK$22,058 million in the
 first half of 2004; up 16.9 per cent from HK$20,316 million in the second
 half of last year).

•Pre-tax profit up 2.2 per cent to HK$24,163 million (HK$23,644 million in
 the first half of 2004; up 21.5 per cent from HK$19,891 million in the
 second half of last year).

•Attributable profit up 1.6 per cent to HK$17,564 million (HK$17,287
 million in the first half of 2004; up 18.2 per cent from HK$14,860 million
 in the second half of last year).

•Return on average shareholders' funds of 39.7 per cent (50.1 per cent and
 37.0 per cent in the first and second half of 2004 respectively).

•Assets up 3.7 per cent to HK$2,582 billion (HK$2,489 billion at the end
 of 2004).

•Total capital ratio of 12.2 per cent; tier 1 capital ratio of 11.4 per
 cent (11.9 per cent and 11.4 per cent at 31 December 2004).

•Cost:income ratio of 38.4 per cent (36.7 per cent and 41.0 per cent for
 the first and second half of 2004 respectively).

Comparative 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, details of which are set out in the appendix.

Comment by Vincent Cheng, Chairman

In the first half of 2005, The Hongkong and Shanghai Banking Corporation
continued to make progress developing its customer group businesses. Operating
profit excluding loan impairment provisions was 7.7 per cent higher than in the
comparable period in 2004 at HK$23,759 million. The results reflect a
significant improvement in net interest income in Hong Kong on wider deposit
margins against a backdrop of rising interest rates. The bank's performance was
affected by higher costs in Corporate, Investment Banking and Markets that
include the acquisition of Bank of Bermuda operations in Hong Kong. More
difficult trading conditions also affected treasury revenues. Pre-tax profit for
the group was up 2.2 per cent, reflecting higher net charges for impairment
provisions. Highlights include:

•In Personal Financial Services, net interest income increased by HK$2,937
 million or 29.7 per cent over the first half of 2004.
•In Hong Kong, HSBC remained the number one card issuer with 3.6 million
 cards in force.
•In the rest of Asia-Pacific, cards in issue increased by 41.6 per cent to
 4.2 million.
•Overall insurance income from personal customers rose by 11.7 per cent to
 HK$1,905 million.
•In Commercial Banking, net interest income increased by HK$1,846 million
 or 57.4 per cent, reflecting 10.0 per cent growth in advances over the same
 period last year.
•Net fee income in Commercial Banking was 7.9 per cent higher at HK$2,207
 million, supported by strong trade activity in Hong Kong and mainland China.
•In Corporate, Investment Banking and Markets, trading income increased by
 20.8 per cent over the first half of 2004.
•HSBC acted as the joint global co-ordinator of the HK$16.8 billion
 initial public offering by Bank of Communications and of the HK$9.5 billion
 IPO of China COSCO Holdings, two of the three largest IPOs in Asia, ex-Japan, 
 this year.

In the first half of the year, we continued to invest in the future of our
business. Personal Financial Services increased headcount to support business
expansion across the region, and a number of marketing campaigns targeted at the
personal lending and wealth management sector added to costs. Investment in
technology has also risen as the group has expanded and upgraded the
infrastructure necessary to support the increased product range offered to
customers. In Commercial Banking, the number of relationship managers and
support staff increased. There was significant growth in operating expenses
within Corporate, Investment Banking and Markets, reflecting the inclusion of
the Asia-Pacific operations of Bank of Bermuda and increased headcount to
support business expansion.

Building on the investments in Bank of Communications, Ping An and Bank of
Shanghai, we have made significant progress in the development of our China
strategy. We acquired 1.34 billion shares in Bank of Communications on its
listing in Hong Kong in order to maintain our 19.9 per cent stake in the bank.
In May, we undertook a soft launch, with Bank of Communications, of a co-branded
credit card, the Pacific Credit Card, which is denominated in renminbi and the
US dollar. In respect of Ping An, we have reached an agreement to acquire a
further 9.91 per cent which, added to the existing stake, will lift HSBC's
holding in the company to 19.9 per cent. This agreement is subject to
shareholder and regulatory approval. When these investments have been completed,
HSBC will have invested around US$5 billion in China.

Although we anticipate moderate growth in mainland China and Hong Kong in the
second half of the year, the success of the United States in correcting the
recent slow-down in its economy provides encouragement for the countries and
territories of the Asia-Pacific region. However, the outlook remains challenging
with strong competition and continuing subdued loan demand in Hong Kong. In
these circumstances, the investments made by the customer groups ensure that The
Hongkong and Shanghai Banking Corporation is well positioned to pursue its
strategy of organic growth and to take advantage of business opportunities in
the region.

Results by Customer Group

                                       Corporate,
                                       Investment
               Personal                   Banking
Figures in    Financial  Commercial           and   Private
      HK$m     Services     Banking       Markets   Banking       Other        Total


Half-year ended
  30Jun05

Net interest
  income         12,819       5,062         5,034        29      (1,534)      21,410

Net fee income    4,152       2,207         2,452        29          34        8,874
 
Trading income      449         276         3,701         3        (233)       4,196

Net income from
  financial 
  instruments
  designated at
  fair value        163        (342)          152         -         (29)        (56)

Gains less losses
  from financial
  investments         3          23           (35)        -         356         347

Dividend income       3           2           106         -         138         249

Net earned
  insurance
  premiums        6,546         356            73         -           -       6,975

Other operating
  income^         1,028         150           472         7       1,063       2,720

Total operating
  income         25,163       7,734        11,955        68        (205)     44,715

Net insurance 
  claims incurred 
  and movement in
  policyholder
  liabilities    (5,932)       (168)          (39)        -           -      (6,139)

Net operating
  income before
  loan impairment
  charges and other 
  credit risk
  provisions     19,231       7,566        11,916        68        (205)     38,576

Loan impairment
  charges and
  other credit
  risk provisions   (60)       (510)           54         -           -        (516)

Net operating        
  income         19,171       7,056        11,970        68        (205)     38,060

Operating
  expenses^      (7,912)     (2,560)       (4,701)      (52)        408     (14,817)

Operating
  profit         11,259       4,496         7,269        16         203      23,243

Share of profit 
  in associates      93         566           231         -          30         920

Profit before 
  tax            11,352       5,062         7,500        16         233      24,163

Share of pre-tax
  profit           47.0%       21.0%         31.0%        -         1.0%      100.0%


                                         Corporate,
                                         Investment
                Personal                    Banking
Figures in     Financial   Commercial           and   Private                    Total
      HK$m      Services      Banking       Markets   Banking       Other     restated

Half-year ended
  30Jun04

Net interest 
  income           9,882        3,216         5,993        15      (1,041)      18,065

Net fee income     4,082        2,045         2,225        22          13        8,387

Trading income       276          231         3,063         3         256        3,829

Net investment
  income on
  assets backing
  policyholder
  liabilities         52          175             -         -        (133)          94

Gains less losses 
  from financial
  investments         (9)           3            47         -         541          582

Dividend income       15            4             6         -          86          111

Net earned insurance
  premiums         6,398        2,268            69         -           -        8,735

Other operating
  income^          1,145          207           330         1         722        2,405

Total operating
  income          21,841        8,149        11,733        41         444       42,208

Net insurance 
  claims incurred 
  and movement in
  policyholder
  liabilities     (5,197)      (2,114)          (45)        -           -       (7,356)

Net operating
  income before
  loan impairment
  charges and other 
  credit risk
  provisions      16,644        6,035        11,688        41         444       34,852

Loan impairment
  charges and
  other credit
  risk provisions   (637)       1,570           635         -          (6)       1,562

Net operating
  income          16,007        7,605        12,323        41         438       36,414

Operating 
  expenses^       (7,490)      (2,316)       (3,375)      (33)        420      (12,794)

Operating profit   8,517        5,289         8,948         8         858       23,620

Share of profit 
  in associates       15            -             -         -           9           24

Profit before tax  8,532        5,289         8,948         8         867       23,644

Share of pre-tax 
  profit            36.1%        22.4%         37.8%        -         3.7%       100.0%


                                                Corporate,
                                                Investment
                Personal                           Banking
Figures in     Financial    Commercial                 and    Private                    Total
HK$m            Services       Banking             Markets    Banking       Other     restated

Half-year ended 31Dec04

Net interest 
  income          10,903         3,849               5,265         20      (1,132)      18,905

Net fee income     3,442         2,066               2,787         20        (421)       7,894

Trading income       341           289               2,732          2        (190)       3,174

Net investment
  income on assets 
  backing 
  policyholder
  liabilities      1,036         1,428                   -          -        (138)       2,326

Gains less losses 
  from financial
  investments         (4)           (2)                 17          -         904          915

Dividend income        3             2                  11          -          36           52

Net earned insurance
  premiums         6,788         2,620                  79          -           -        9,487

Other operating
  income^          1,294           242                 553          -        (380)       1,709

Total operating
  income          23,803        10,494              11,444         42      (1,321)      44,462

Net insurance
  claims incurred 
  and movement in
  policyholder
  liabilities     (6,244)       (3,736)                (48)         -           -      (10,028)

Net operating
  income before
  loan impairment
  charges and other
  credit risk
  provisions      17,559         6,758              11,396         42      (1,321)      34,434

Loan impairment
  charges and other
  credit risk
  provisions        (653)         (932)                884          -           1         (700)

Net operating
  income          16,906         5,826              12,280         42      (1,320)      33,734

Operating
  expenses^       (8,169)       (2,468)             (3,913)       (41)        473      (14,118)

Operating profit   8,737         3,358               8,367          1        (847)      19,616

Share of profit in
  associates          58           170                  20          -          27          275

Profit before tax  8,795         3,528               8,387          1        (820)      19,891

Share of pre-tax 
  profit            44.2%         17.7%               42.2%         -        (4.1)%      100.0%

^   Other operating income and operating expenses in 'other' include an
    adjustment of HK$2,283 million to eliminate intra-group items (first half of
    2004: HK$2,412 million; second half of 2004: HK$2,541 million).

Personal Financial Services reported profit before tax of HK$11,352 million,
which was HK$2,820 million, or 33.1 per cent, higher than the first half of
2004. This reflected strong growth in Hong Kong of HK$2,475 million, or 30.7 per
cent, in profit before tax, driven primarily by the widening of deposit margins
subsequent to the rises in Hong Kong dollar interest rates this year. In the
rest of Asia-Pacific, profit before tax increased by 70.8 per cent to HK$830
million, reflecting continued expansion across the region, particularly in
credit cards and mortgage loans.

Net interest income increased by HK$2,937 million, or 29.7 per cent, compared
with the first half of 2004. In Hong Kong, net interest income improved by
HK$2,257 million, or 30.1 per cent. During the first half of 2005, interest
rates in Hong Kong rose significantly reflecting rising US dollar interest
rates. In addition, adjustments to the HK$:US$ Linked Exchange Rate Mechanism
removed the likelihood of an upward realignment of the Hong Kong dollar,
prompting a reversal of much of the inward flows from investors in 2004 that had
depressed local market rates. This led to a widening of deposit spreads to more
normal levels compared with the exceptionally low levels experienced in 2004.
Competition in the local mortgage market remained intense and margins were
impacted by the rising cost of funds. In the rest of Asia-Pacific, net interest
income rose by HK$680 million, or 28.6 per cent, reflecting strong asset growth
across the region. Mortgage lending increased in Australia, Taiwan, Korea,
Singapore and India, benefiting from increased use of a direct sales force and
successful promotional campaigns. Interest earned on credit cards was higher,
notably in Indonesia, the Philippines, India and Taiwan, reflecting strong
growth in receivables. Net interest income also includes income of HK$400
million from held-to-maturity investments in the insurance business; such income
was included in 'Other operating income' in prior periods.

Net fee income of HK$4,152 million was 1.7 per cent higher than the first half
of 2004, largely attributable to strong growth in the sales of wealth management
and insurance products throughout the rest of Asia-Pacific and higher credit
card fee income. Fee income from unit trust sales fell by 30.0 per cent, driven
by a change in market sentiment in Hong Kong, as in the higher interest rate
environment and with a flattening yield curve, investors reduced their demand
for capital guaranteed funds. Sales of structured products in Hong Kong,
however, remained strong as income grew by 258.9 per cent to HK$361 million,
reflecting increased marketing effort and an enhanced product range.

Fee income from credit cards was HK$190 million, or 21.1 per cent, higher than
the first half of 2004, as the group maintained its position as the largest card
issuer in Hong Kong. In the rest of Asia-Pacific, cards in issue grew by 41.6
per cent. Innovative and targeted promotional campaigns, together with an
enhanced rewards programme, led to increased card spending which grew by HK$13.4
billion across the region.

The group has continued to grow and develop its insurance business throughout
the region. Overall, insurance income from personal customers rose by 11.7 per
cent to HK$1,905 million. In Hong Kong, revenues from general insurance and the
mandatory provident fund business were higher, although demand fell for life
assurance and investment-linked products.

Operating expenses increased by HK$422 million, or 5.6 per cent, over the first
half of 2004. Headcount rose to support business expansion across the region and
included the recruitment of additional financial planning managers in Hong Kong
and sales staff in the rest of Asia-Pacific. Performance-related pay rose in
line with the increase in sales revenues. The various growth initiatives also
incurred higher marketing costs, particularly for mortgages, credit cards,
insurance and investment products, and increased investment in technology to
support higher business volumes and new product lines. The increase was partly
mitigated by the impact of a change in the allocation of certain centrally borne
expenses to customer groups.

The charge for impairment provisions fell markedly, by HK$577 million to HK$60
million, with lower provisions in the credit card, mortgage and other personal
lending portfolios, reflecting the improved credit conditions across much of the
region. In particular, credit conditions improved in Hong Kong as the economy
continued to recover with falling unemployment, lower bankruptcies and higher
residential property prices, while in the rest of Asia-Pacific, provisions
remained relatively flat against a backdrop of significant asset growth.

Income from associates largely represents the share of profits from Bank of
Communications attributable to Personal Financial Services for the six months to
31 March 2005.

Commercial Banking reported profit before tax of HK$5,062 million, a decrease of
4.3 per cent over the first half of 2004, attributable primarily to a net charge
for impairment provisions compared with a net release last year. Operating
profit excluding provisions grew in Hong Kong by 37.8 per cent to HK$3,985
million, and in the rest of Asia-Pacific to HK$1,019 million from HK$830
million.

Net interest income increased by HK$1,846 million, or 57.4 per cent, compared
with the first half of 2004, reflecting a 10.0 per cent growth in advances since
the end of 2004, and improvements in deposit spreads following rises in Hong
Kong dollar interest rates, coupled with increased active management of the
Commercial Banking deposit base. The benefit was, however, partly offset by
competitive pressure on lending margins. In Hong Kong, advances to the
manufacturing, trading and retail sectors grew, with higher new lending and
increased utilisation of existing facilities. The introduction of Core Business
Banking Centres in 2004, together with an increase in the number of dedicated
relationship managers to serve key accounts, and the implementation of a
pre-approved lending programme for small and medium-sized enterprises,
contributed to the growth in lending and deposits. The group continued to
benefit from the growth in international trade and the expansion of the Chinese
economy. Business links between Hong Kong and mainland China continue to be
developed. Throughout the region, the sales force and number of relationship
managers have increased to take advantage of cross-selling opportunities for
insurance and investment products, as well as expanding lending and
deposit-taking activities. In the rest of Asia-Pacific, net interest income
increased, notably in Singapore, mainland China and Taiwan, as a result of asset
and deposit growth and improved deposit spreads. Net interest income also
includes income of HK$350 million from held-to-maturity investments in the
insurance business; this was included in 'Other operating income' in prior
periods.

Net fee income at HK$2,207 million was 7.9 per cent higher than the same period
in 2004. Trade finance activity in Hong Kong and mainland China remained strong,
and fee income rose despite increasing market competition. The marketing of
foreign exchange products to Hong Kong customers engaged in international trade
was also successful in contributing to revenues. Income from the sale of wealth
management products fell, reflecting a fall in demand for unit trusts in Hong
Kong. Net fee income in 2005 additionally includes fees relating to retirement
and other investment schemes; these were included in 'Net earned insurance
premiums' and 'Net insurance claims incurred and movement in policyholder
liabilities' in prior periods.

Operating expenses rose by HK$244 million, or 10.5 per cent, as the number of
relationship managers and support staff increased, although savings were made
from initiatives to handle business via low cost channels, including the further
enhancement of Internet banking. A change in the allocation of certain centrally
borne expenses to customer groups pushed cost growth into double digits.

There was a swing of HK$2,080 million in impairment provisions to a net charge
of HK$510 million from a net credit of HK$1,570 million in the first half of 
2004, with higher new specific provisions, and lower releases and recoveries, in 
the bank in Hong Kong and Hang Seng Bank.

Income from associates represents the share of profits from Bank of
Communications and Industrial Bank attributable to Commercial Banking for the
six months to 31 March 2005.

Corporate, Investment Banking and Markets reported profit before tax of HK$7,500
million, 16.2 per cent lower than the first half of 2004, as a result of a
decline in net interest income in Global Markets which more than offset a strong
trading performance.

Net interest income fell by HK$959 million, or 16.0 per cent, compared with the
first half of last year. In Corporate and Institutional Banking, deposit spreads
improved following rises in Hong Kong dollar interest rates, which together with
a modest growth in loans, contributed to the increase in net interest income of
33.6 per cent. In addition, Korea, Taiwan and India benefited from the growth in
deposits from securities custody and clearing customers. In Global Markets, the
adoption of new accounting standards affected trading income through the
reclassification of interest and dividend income on trading assets and
liabilties that was formerly recorded as 'Net interest income' and 'Dividend
income', to 'Trading income'. This added HK$568 million to net interest income,
but was, however, more than offset by the maturity of higher yielding assets,
rising short-term rates and flatter yield curves, resulting in less profitable
reinvestment opportunities. In Singapore and Japan, net interest income
declined, due similarly to the maturity of high yielding assets and less
profitable reinvestment opportunities.

Trading income increased by HK$638 million, or 20.8 per cent, over the first
half of 2004, despite the impact of the inclusion of the net interest expense of
HK$568 million on trading assets and liabilities this year. Debt securities
trading benefited from correct positioning, with tightening in short-term
corporate spreads in the low Hong Kong dollar interest rate environment in the
first quarter of 2005. This was, however, partly offset by losses on certain
high yield bonds, following the downgrading of certain companies in the
automobile sector during the second quarter.

In Hong Kong, investments made in enhancing the structured products platform
resulted in increased revenues in foreign exchange options, equity derivatives,
structured credit derivatives and interest rate derivatives, partly offset by
lower revenues generated from capital-guaranteed investment solutions as
investors switched to deposit products in the rising interest rate environment.

In the rest of Asia-Pacific, excellent progress was made in the roll-out of
structured products, particularly in Korea, Singapore and Thailand, with
revenues doubling over the same period last year. Foreign exchange revenues also
improved, benefiting from currency volatility and the group's growing customer
franchise in the region.

Net fee income rose by 10.2 per cent to HK$2,452 million, principally due to the
inclusion of the first six months' results for Bank of Bermuda, which
contributed HK$361 million to revenues. Corporate and Institutional Banking saw
an increase in fees and commissions from the securities custody and clearing
business, which benefited from increased stock market activity across the
region, notably in Korea and India. Investment Banking revenues declined,
reflecting a quiet market in the early part of 2005, although recovery commenced
in the second quarter, particularly in cross-border transactions and advisory
business, with HSBC acting as joint global co-ordinator of the HK$16.8 billion
initial public offering by Bank of Communications and of the HK$9.5 billion IPO
of China COSCO Holdings, two of the three largest IPOs in Asia, ex-Japan, this
year.

Operating expenses increased by 39.3 per cent compared with the first half of
2004, reflecting higher staff costs and the inclusion of costs relating to the
Asia-Pacific operations of Bank of Bermuda. Headcount increased to support
business expansion, including the build up of the investment banking division
and the recruitment of senior relationship managers to extend coverage along
industry sector lines. The cost base was further impacted by a change in the 
allocation of certain centrally allocated overheads to customer groups and a 
rise in cost recharges in respect of global management functions.

There was a net release of impairment provisions of HK$54 million, HK$581
million lower than in the first half of 2004. New specific individual provisions
were lower, reflecting the benign credit environment in Hong Kong, although
releases and recoveries fell and there was an increase in collective provisions
compared with a release last year.

Income from associates largely represents the share of profits from Bank of
Communications and Industrial Bank attributable to Corporate, Investment Banking
and Markets for the six months to 31 March 2005.

Other includes income and expenses relating to staff housing loans, certain
property activities and investment and other activities that are not allocated
to other customer groups.

Net interest income was lower, reflecting an increase in preference shares
issued coupled with higher funding costs. The surplus on property revaluation
and profits from property sales were higher, offset by lower gains on the
disposal and revaluation of long-term investments.

Consolidated Income Statement

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

Interest income                     35,859             27,451             30,496
Interest expense                   (14,449)            (9,386)           (11,591)
Net interest income                 21,410             18,065             18,905
Fee income                          10,579              9,883              9,593
Fee expense                         (1,705)            (1,496)            (1,699)
Net fee income                       8,874              8,387              7,894
Trading income                       4,196              3,829              3,174
Net loss from financial
  instruments designated 
  at fair value                        (56)                 -                  -
Net investment income on assets
  backing policyholder liabilities       -                 94              2,326
Gains less losses from financial
  investments                          347                582                915
Dividend income                        249                111                 52
Net earned insurance premiums        6,975              8,735              9,487
Other operating income               2,720              2,405              1,709
Total operating income              44,715             42,208             44,462
Net insurance claims incurred
  and movement in policyholder
  liabilities                       (6,139)            (7,356)           (10,028)
Net operating income before loan
  impairment charges and other
  credit risk provisions            38,576             34,852             34,434
Loan impairment charges and
  other credit risk provisions        (516)             1,562               (700)
Net operating income                38,060             36,414             33,734
Employee compensation and benefits  (8,425)            (7,253)            (7,512)
General and administrative
  expenses                          (5,402)            (4,622)            (5,669)
Depreciation of property, plant
  and equipment                       (927)              (870)              (885)
Amortisation of intangible assets      (63)               (49)               (52)
Total operating expenses           (14,817)           (12,794)           (14,118)
Operating profit                    23,243             23,620             19,616
Share of profit in associates          920                 24                275
Profit before tax                   24,163             23,644             19,891
Tax charge                          (4,248)            (4,027)            (2,961)
Profit after tax                    19,915             19,617             16,930
Profit attributable
  to minority interests             (2,351)            (2,330)            (2,070)
Profit attributable to 
  shareholders                      17,564             17,287             14,860

Extract from the Consolidated Balance Sheet

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

Assets
Cash and short-term funds       493,159         417,031           510,644
Placings with banks maturing 
  after one month                94,560         114,738            74,711
Certificates of deposit          55,427          51,980            51,743
Hong Kong SAR Government
  certificates of indebtedness   94,804          85,674            92,334
Trading assets                  159,447         113,415           109,899
Financial assets designated
  at fair value                  35,647               -                 -
Derivatives                      77,137          60,759            94,398
Advances to customers           973,637         849,944           919,192
Financial investments           410,442         418,533           450,165
Amounts due from fellow
  subsidiary companies           67,243          43,488            82,592
Investments in associates        20,508           2,387            16,343
Goodwill and intangible assets    6,222           4,128             5,329
Property, plant and equipment    32,978          29,182            30,425
Deferred tax assets               1,238           1,628             1,711
Retirement benefits               1,229           1,561             1,307
Other assets                     58,620          53,424            47,851
                              2,582,298       2,247,872         2,488,644
Liabilities
Hong Kong SAR currency
  notes in circulation           94,804          85,674            92,334
Deposits by banks               115,254          75,640            74,980
Customer accounts             1,671,433       1,570,851         1,728,111
Trading liabilities             218,652          35,810            37,281
Financial liabilities 
  designated at fair value        2,187               -                 -
Derivatives                      75,929          57,603            92,362
Debt securities in issue         59,600         131,688           155,162
Retirement benefit liabilities      359             383               327
Amounts due to fellow
  subsidiary companies           23,367          31,997            17,568
Amounts due to ultimate holding 
  company                           748             660               553
Other liabilities                65,380          56,770            60,610
Liabilities to policyholders
  under long-term assurance 
  business                            -          46,829            54,938
Liabilities to customers under 
  investment contracts           29,380               -                 -
Liabilities to customers under 
  insurance contracts issued     32,525               -                 -
Current taxation                  4,085           3,828             2,333
Deferred taxation                 3,540           3,530             3,715
Subordinated liabilities         12,569          12,777            11,142
Preference shares                62,978          47,212            55,602
                              2,472,790       2,161,252         2,387,018

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

Capital resources
Share capital               22,494           16,254           22,494
Other reserves               5,963            3,988            6,525
Retained profits            58,759           46,215           51,497
Proposed dividend            6,000            4,750            4,800
Shareholders' funds         93,216           71,207           85,316
Minority interests          16,292           15,413           16,310
                           109,508           86,620          101,626
                         2,582,298        2,247,872        2,488,644

Consolidated Statement of Changes in Equity

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

Called up share capital
Balance at the beginning of
  the period
- Balance previously 
  reported                     74,213                    51,603                    59,570
- Effect of transition 
  to HKFRS                    (51,719)                  (35,349)                  (43,316)
- As restated                  22,494                    16,254                    16,254
New ordinary shares issued          -                         -                     6,240
Balance at the end of 
  the period                   22,494                    16,254                    22,494

Property revaluation reserves
Balance at the beginning of
  the period
- Balance previously reported  11,907                     7,135                    10,856
- Effect of transition to 
  HKFRS                        (8,346)                   (4,817)                   (7,649)
- As restated                   3,561                     2,318                     3,207
Unrealised surplus on
  revaluation                   2,007                     1,301                       537
Transfer of depreciation from
  retained profits                (65)                      (62)                      (96)
Realisation on disposal of 
  property                       (438)                     (370)                      (47)
Other movements                     -                        20                       (40)
Balance at the end of the 
  period                         5,065                     3,207                     3,561

Other reserves
Balance at the beginning of
  the period
- Balance previously reported    5,492                     5,060                     4,966
- Effect of transition to
  HKFRS (excluding the effect 
  of HKAS 39 and HKFRS 4)       (2,528)                   (3,697)                   (4,185)
- As restated                    2,964                     1,363                       781
- Effect of adoption of HKAS 39 
  and HKFRS 4                    1,333                         -                         -
- As restated                    4,297                     1,363                       781
Long-term equity investments:
  Valuation gains taken to equity    -                       160                     1,406
  Transfer to profit or loss on 
    disposal                         -                      (221)                     (811)
Available-for-sale investments:
  Valuation losses taken to 
    equity                        (746)                        -                         -
  Transfer to profit or loss 
    on disposal                   (301)                        -                         -
  Transfer to profit or loss on
    change in fair value of 
    hedged items                   306                         -                         -
Share of associates' available-
  for-sale reserve                (111)                        -                         -
Cash flow hedges:
  Losses taken to equity        (2,132)                        -                         -
Exchange differences arising
  on monetary items that form 
  part of a net investment in
  a foreign operation             (540)                     (614)                    1,457
Employees' options granted cost 
  free by ultimate holding
  company                          125                        93                       131
Balance at the end of the 
  period                           898                       781                     2,964

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

Retained profits
Balance at the beginning of the 
  period
- Balance previously reported            51,083                        37,764                      44,204
- Effect of transition to HKFRS 
  (excluding the effect of HKAS 39
  and HKFRS 4)                              414                         1,371                       2,011
- As restated                            51,497                        39,135                      46,215
- Effect of adoption of HKAS 39 and
  HKFRS 4                                   (39)                            -                           -
- As restated                            51,458                        39,135                      46,215
Profit for the period attributable to
  shareholders                           17,564                        17,287                      14,860
Dividends                               (10,600)                      (10,750)                     (9,550)
Transfer of depreciation to property
  revaluation reserves                       65                            62                          96
Realisation on disposal of property         438                           393                          38
Actuarial losses on defined benefit 
  plans                                    (168)                         (110)                       (250)
Other movements                               2                           198                          88
Balance at the end of the period         58,759                        46,215                      51,497

Dividend declared but not yet approved    6,000                         4,750                       4,800

Shareholders' funds at the beginning of 
  the period                             81,810                        59,070                      66,457
Proposed dividend                         4,800                         8,450                       4,750
                                         86,610                        67,520                      71,207
Net change in shareholders' funds         5,406                         7,387                      14,059
Increase/(decrease) in proposed dividend  1,200                        (3,700)                         50
Shareholders' funds at the end of the
  period                                 93,216                        71,207                      85,316

Movements in reserves and retained profits are stated net of deferred tax where
applicable.

Consolidated Cash Flow Statement

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

Operating activities
Cash generated from operations              2,921            22,804
Interest received on long-term
  investments                               6,313             6,091
Dividends received on long-term
  investments                                 228               104
Dividends received from associates             22                25
Interest paid on loan capital                (213)             (256)
Dividends paid to minority interests       (3,160)           (2,178)
Ordinary dividends paid                    (9,400)          (14,450)
Taxation paid                              (1,971)           (2,006)

Net cash (outflow)/inflow from
  operating activities                     (5,260)           10,134

Investing activities
Purchase of long-term investments        (140,786)         (147,807)
Proceeds from sale or redemption
  of long-term investments                153,904           132,586
Purchase of tangible fixed assets            (634)             (425)
Proceeds from sale of tangible
  fixed assets                                837               692
Net cash outflow in respect of
  acquisition of and increased 
  shareholding in subsidiary companies     (1,247)             (972)
Net cash inflow in respect of sales of
  subsidiary companies                        323                 -
Purchase of interest in associates         (1,166)           (2,010)


Net cash inflow/(outflow) from
  investing activities                     11,231           (17,936)

Net cash inflow/(outflow) before
  financing                                 5,971            (7,802)

Financing
Issue of cumulative irredeemable
  preference share capital                  7,376             7,784
Issue of subordinated debt                  2,392                 -

Net cash inflow from financing              9,768             7,784

Increase/(decrease) in cash and
  cash equivalents                         15,739               (18)

Additional Information

1. Net interest income
                                      Half-year ended    Half-year ended      Half-year ended
                                              30Jun05            30Jun04              31Dec04
Figures in HK$m                                                 restated             restated

Net interest income                            21,410             18,065               18,905
Average interest-earning assets             2,008,241          1,888,690            1,961,003
Net interest spread                              1.95%              1.82%                1.81%
Net interest margin                              2.15%              1.92%                1.92%

Net interest income of HK$21,410 million was HK$3,345 million, or 18.5 per cent,
higher than the first half of 2004.

Net interest income from the Personal Financial Services business rose by
HK$2,937 million, or 29.7 per cent, primarily due to improved deposit spreads
resulting from rises in Hong Kong dollar interest rates this year. This was
coupled with strong growth in net interest income in the rest of Asia-Pacific,
driven by increased mortgage lending in Australia, Taiwan, Korea, Singapore and
India, and significant growth in credit card receivables and improved margins in
Indonesia, the Philippines, India and Taiwan. Net interest income from the
Commercial Banking business was HK$1,846 million, or 57.4 per cent, higher than
last year, mainly due to growth in lending and deposits and improved deposit
spreads, notably in Hong Kong, Singapore, mainland China and Taiwan. Net
interest income from Corporate, Investment Banking and Markets fell by HK$959
million, or 16 per cent, largely due to the maturity of high yielding treasury
assets in Hong Kong, and flat yield curves that gave limited opportunity for
position-taking. This was partly offset by the effect of the reclassification
this year of net interest expense of HK$568 million on trading assets and
liabilities to 'Trading income'. In addition, there was loan growth of HK$7
billion in corporate lending, and an increase in customer deposits of HK$8
billion. Included in net interest income this year is income earned on
held-to-maturity investments in the insurance businesses of HK$762 million,
which last year was classified as 'Net investment income on assets backing
policyholder liabilities'.

Average interest-earning assets rose by HK$120 billion, or 6.3 per cent, to
HK$2,008 billion. Average advances to customers grew by HK$112 billion, or 13.4
per cent, with strong growth in mortgage lending in Australia, Singapore,
Taiwan, Korea and India, and increases in commercial lending and trade finance
in Hong Kong and mainland China. Credit card receivables rose in most countries,
notably Hong Kong, Taiwan, Australia and Indonesia. Average loans to banks were
HK$91 billion higher, principally in the bank in Hong Kong, offset by the 
reclassification of certain interest-earning assets to 'Trading Assets'.

The group's net interest margin of 2.15 per cent for the first half of 2005 was
23 basis points higher than the comparable period in 2004. Spread widened by 13
basis points, largely due to the exclusion in 2005 of the net interest expense
on trading assets and liabilities. The inclusion of net interest income on
held-to-maturity investments in the insurance businesses increased the margin by
three basis points, while the rise in the number of preference shares issued and
higher funding costs thereon resulted in a fall of five basis points.

For the banking operations in Hong Kong (excluding Hang Seng Bank), net interest
margin increased by 46 basis points to 2.22 per cent for the first half of 2005.
Spread improved by 37 basis points to 2.04 per cent. This increase was
principally due to the reclassification of net interest expense on net trading
liabilities to trading profits. Wholesale rates increased significantly since
the first half of 2004, resulting in higher spreads on Hong Kong dollar and
foreign currency current, savings and deposit accounts. However, spreads on
mortgages and corporate lending were adversely impacted by a higher cost of
funds and competitive pressures on margins. The average yield on the residential
mortgage portfolio, excluding GHOS and staff loans, was 233 basis points below
BLR in the first half of 2005 compared with 187 basis points below BLR in the
same period last year. The contribution from net free funds rose by nine basis
points compared with the first half of 2004.

In Hang Seng Bank, net interest margin improved by 11 basis points to 2.13 per
cent with an increase in spread of four basis points due to the rise in deposit
spreads and inclusion of interest income from the held-to-maturity investment
portfolios held by life assurance funds. Spreads on treasury products narrowed
and mortgage portfolio yields continued to be affected by intense market
competition. The average yield on the residential mortgage portfolio, excluding
GHOS and staff loans, fell to 223 basis points below BLR for the first half of
2005, compared with 192 basis points for the same period last year. The
contribution from net free funds rose by seven basis points, benefiting from the
rise in market interest rates.

In the rest of Asia-Pacific, net interest margin at 2.00 per cent for 2005 was
five basis points higher than for the comparable period in 2004. Spread improved
by eight basis points to 1.86 per cent, with rises in several countries
including mainland China, Australia, Thailand and Taiwan, which benefited from
higher deposit spreads, and increased credit card margins in Indonesia. These
were partly offset by lower margins on non-trading treasury assets in Singapore
and India. The contribution from net free funds was three basis points lower.

2. Net fee income
                                         Half-year ended      Half-year ended       Half-year ended
                                                 30Jun05              30Jun04               31Dec04
Figures in HK$m                                                      restated              restated

Fees and commissions
- Account services                                   642                  597                   609
- Credit facilities                                  584                  736                   711
- Import/export                                    1,345                1,264                 1,412
- Remittances                                        591                  520                   583
- Securities/stockbroking                          1,595                1,494                 1,348
- Cards                                            2,027                1,615                 1,824
- Insurance                                          161                  104                   113
- Unit trusts                                        959                1,588                   900
- Funds under management                           1,017                  586                   630
- Other                                            1,658                1,379                 1,463

Fees and commissions receivable                   10,579                9,883                 9,593

Fees and commissions payable                      (1,705)              (1,496)               (1,699)

                                                   8,874                8,387                 7,894

Net fee income was HK$487 million, or 5.8 per cent, higher than the first half
of 2004. Credit card fees rose by 25.5 per cent, reflecting the increase in the
number of cards in issue in the rest of Asia-Pacific, and higher cardholder
spending. Revenues from trade finance also grew, notably in Hang Seng Bank and
in the bank in mainland China and India, attributable to strong regional trade
flows. Customer appetite for wealth management products slowed this year in Hong
Kong, although the fall in demand for unit trusts was partially offset by
increased sales of structured products. Bank of Bermuda contributed HK$361
million to net fee income, following its integration into the group during the
second half of last year.

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

Dealing profits
- Foreign exchange                     2,578                      2,681               1,999
- Interest rate derivatives            1,476                      1,254               1,126
- Debt securities                        318                       (136)               (124)
- Equities and other trading             338                         30                 173
                                       4,710                      3,829               3,174

Net interest expense on trading
 assets and liabilities                 (568)                         -                   -

Dividend income from trading 
  securities                              54                          -                   -

                                       4,196                      3,829               3,174

Trading income rose by 9.6 per cent to HK$4,196 million. Debt securities trading
benefited from correct positioning as short-term spreads on Hong Kong dollar
bonds contracted in the low interest rate environment in the earlier part of
2005, but this was partly offset by losses on certain high yield bonds following
the downgrading of companies in the automobile sector during the second quarter.
Interest rate derivatives trading performed strongly, reflecting an enhanced
capability in structured products in Hong Kong, Korea and Singapore, which more
than offset the fall in demand for wealth management products in Hong Kong as
customers switched to deposit products in the rising interest rate environment.
Credit and equity derivatives revenues also grew, and revaluation gains were
made on private equity investments.

Net interest expense on trading assets and liabilities largely represents
interest payable on the group's own debt and structured deposits managed in the
trading book, partly offset by interest income on debt securities. All such
interest was classified under 'Net interest income' in prior years.









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