HK&S Banking Corp Rel PT 2

HSBC Holdings PLC 31 July 2006 1. Net interest income Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Net interest income 23,590 21,410 22,081 Average interest-earning assets 2,179,207 2,008,241 2,054,010 Net interest spread 1.76% 1.95% 1.83% Net interest margin 2.18% 2.15% 2.13% Net interest income of HK$23,590 million was HK$2,180 million, or 10.2 per cent, higher than the first half of 2005. The contribution from balance sheet growth and improved deposit spreads throughout the region was partially offset by significantly lower balance sheet management income which was impacted by higher funding costs and flat yield curves. Net interest income in Personal Financial Services rose by HK$1,584 million, or 12.4 per cent, partly due to improved liability spreads earned in the higher interest rate environment, coupled with strong growth in the deposit base outside of Hong Kong. Lending growth also contributed to the increase in interest income, particularly personal loans in India, Korea and Indonesia, credit cards in the Philippines, Indonesia and India, and mortgages in Taiwan and Singapore. Net interest income in Commercial Banking was HK$1,396 million, or 27.6 per cent, ahead of the prior period due to balance sheet growth, notably in Hong Kong, India and Singapore, and improved deposit spreads. In Corporate, Investment Banking and Markets, net interest income from Global Transaction Banking increased significantly, due to higher deposit balances and spreads, notably in Hong Kong and India. Average interest earning assets rose by HK$171.0 billion, or 8.5 per cent, to HK$2,179.2 billion. Average advances to customers grew by HK$77.1 billion, or 8.1 per cent, with strong increases in corporate loans in Hong Kong, mainland China, India and Singapore, and rises in mortgage lending in Korea, Singapore, Taiwan and India. Average credit card balances rose in all areas, notably Hong Kong and Indonesia, and personal instalment loans grew, most significantly in Korea. Average placements with banks were HK$28.1 billion higher, and holdings of available-for-sale securities rose by HK$18.9 billion, reflecting the deployment of the commercial surplus. Lending to fellow HSBC subsidiaries increased by HK$35.3 billion. The group's net interest margin of 2.18 per cent for the first half of 2006 was three basis points higher than the comparable period in 2005. Net interest spread declined by 19 basis points, while the contribution from net free funds increased by 22 basis points. The reduction in balance sheet management income negatively affected net interest margin by 26 basis points when compared to the first half of 2005. For the bank in Hong Kong, net interest margin decreased by 16 basis points to 2.08 per cent for the first half of 2006. Spread fell by 29 basis points, primarily due to the negative impact of lower balance sheet management income as fixed rate asset positions faced an increase in funding costs. Spreads on mortgages and credit cards were also impacted by a higher cost of funds, and competitive pressures on pricing affected corporate lending margins. The average yield on the residential mortgage portfolio, excluding Government Home Ownership Scheme ('GHOS') and staff loans, dropped slightly to 234 basis points below Best Lending Rate ('BLR') in the first half of 2006, compared with 233 basis points below BLR in the same period last year. The contribution from net free funds increased by 13 basis points due to the increase in market interest rates. At Hang Seng Bank, net interest margin improved by 24 basis points as the increase in contribution from net free funds outweighed the fall in spread. Net interest spread declined by 17 basis points as returns on treasury products were affected by rising funding costs and flat yield curves, and spreads narrowed on non-BLR corporate and personal loans due to competitive pressures on pricing. The average yield on the residential mortgage portfolio, excluding GHOS and staff loans, was 228 basis points below BLR for the first half of 2006, compared with 223 basis points for the same period last year. The contribution from net free funds increased by 41 basis points, benefiting from the rise in market interest rates and from higher balances of structured deposits which are classified as trading liabilities, the related interest expense being included within 'net trading income'. In the rest of Asia-Pacific, net interest margin at 2.15 per cent was 15 basis points higher than the first half of 2005. Spread decreased by 10 basis points to 1.76 per cent. All major sites faced an increase in funding costs due to higher interest rates across the region. This was coupled with competitive pressures on mortgage lending rates in Korea, Taiwan and Australia, and lower yields on credit card advances in Taiwan and Indonesia. Margins did rise, however, in several other countries, notably in India due to an increase in higher-yielding personal loans and credit cards, favourable pricing on commercial banking loans, and a rise in low cost current account balances from custody and clearing customers. In addition, margins were higher in mainland China from higher spreads on corporate lending as deposit rate rises lagged lending rate increases, and in Singapore due to rises in mortgage lending rates. The contribution from net free funds rose by 25 basis points, benefiting from higher market interest rates. 2. Net fee income Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Account services 709 642 672 Credit facilities 640 584 575 Import/export 1,400 1,345 1,432 Remittances 684 591 657 Securities/stockbroking 2,572 1,595 1,807 Cards 2,348 2,027 2,204 Insurance 154 161 119 Unit trusts 1,227 959 668 Funds under management 1,658 1,017 1,216 Other 1,793 1,658 1,742 Fee income 13,185 10,579 11,092 Fee expense (2,271) (1,705) (1,869) 10,914 8,874 9,223 Net fee income was HK$2,040 million, or 23.0 per cent, higher than the first half of 2005. Securities broking and custody fees rose by 61.3 per cent, reflecting higher stock market turnover in Hong Kong and the region. The buoyant stock markets which prevailed throughout most of the period also stimulated customer demand for unit trusts. Funds under management increased, in part due to institutional business transferred from another HSBC Group entity in the second quarter of 2005. Related fee income also includes significant fund advisory and performance fees, reflecting the success of certain emerging markets funds. Credit card fees rose by 15.8 per cent due to the increase in the number of cards in circulation and higher cardholder spending. Trade finance income, although higher, was affected by tougher market competition, whilst remittance and other account fees grew, reflecting the group's strong transactional capabilities. 3. Net trading income Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Dealing profits 4,947 4,721 3,839 Gain/(loss) from hedging activities 8 (11) 10 Net interest expense (605) (568) (916) Dividend income 112 54 51 4,462 4,196 2,984 Trading income rose by 6.3 per cent to HK$4,462 million. Foreign exchange profits benefited from exchange rate volatility, coupled with higher customer volumes as foreign investors sought to participate in local stock markets. Revenues grew strongly in the equities and equity derivatives business due to an expanded product range and more active stock markets in the first few months of the year. Strong gains were also made on the revaluation of private equity investments. Interest rate derivatives and government securities trading achieved good results, profiting from correct positioning for interest rate rises. The rising rate environment, however, negatively impacted corporate bond trading, and the increase in structured deposit products resulted in higher interest expense. 4. Gains less losses from financial investments Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Profit on disposal of available-for-sale securities 1,236 348 414 Impairment losses on available-for-sale securities (86) (1) (5) 1,150 347 409 The profit on the disposal of available-for-sale securities largely comprises the gain on the sale of part of the group's stake in UTI Bank, reducing the group's interest to 4.99 per cent. Profits were also made on the sale of Philippine government securities. An impairment charge was taken against an available-for-sale equity investment in Taiwan. 5. Other operating income Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Rental income from investment properties 109 104 111 Movement in present value of in-force insurance business 632 490 695 Profit on disposal of property, plant and equipment 448 19 85 Profit/(loss) on disposal of subsidiaries and associates - 58 (5) Surplus arising on property revaluation 337 1,038 499 Other 924 1,011 792 2,450 2,720 2,177 Profit on the disposal of property, plant and equipment principally comprises the gain made on the disposal of a commercial property in Hong Kong. The surplus arising on property revaluation was lower due to a slowdown in property price rises in Hong Kong. 6. Insurance income Included in the consolidated income statement are the following revenues earned by the group's insurance business: Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Net interest income 1,074 771 944 Net fee income 299 222 262 Net income from financial instruments designated at fair value (255) (57) 73 Gains less losses from financial investments 29 29 24 Dividend income - 1 1 Net earned insurance premiums 10,912 6,975 12,365 Movement in present value of in-force business 632 490 695 Other operating income 41 80 10 12,732 8,511 14,374 Net insurance claims incurred and movement in policyholder liabilities (9,744) (6,139) (11,152) Net operating income 2,988 2,372 3,222 Premium income rose by HK$3,937 million, or 56.4 per cent, over the first half of 2005, primarily attributable to growth in the life assurance business in Hong Kong. The product range was expanded with the launch of new retirement and other investment-linked products. Investment income was higher, reflecting the growing portfolio size and higher interest yields. The movement in the present value of in-force business increased due to the rise in the number of life policies in force. Claims and movement in policyholder liabilities comprise returns owed to investment policyholders as well as general insurance claims. The increase is largely in line with the rise in premium income. 7. Loan impairment charges and other credit risk provisions Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Net charge for impairment of customer advances - Individually assessed impairment allowances: New allowances 815 1,222 905 Releases (553) (1,249) (506) Recoveries (133) (161) (106) 129 (188) 293 - Net charge for collectively assessed impairment allowances 2,434 706 1,255 - Country risk allowances (3) (8) 10 2,560 510 1,558 Net charge/(release) of other credit risk provisions 23 6 (10) Net charge for loan impairment and other credit risk provisions 2,583 516 1,548 The net charge for loan impairment and other credit risk provisions was HK$2,067 million higher than in the first half of 2005. The environment for corporate credit remained stable in contrast to more difficult credit conditions for personal lending in some parts of the region. The charge for new individually assessed allowances was lower, attributable to a decrease in charges against corporate lending, as the prior period included a significant one-time charge. Releases and recoveries were also lower, largely relating to corporates in Hong Kong, mainland China and India, and against mortgage lending in Hong Kong. The net charge for collectively assessed allowances rose significantly, due to higher provisions against credit card lending, most notably in Taiwan and Indonesia. Delinquency rates and write-offs rose in Taiwan as a result of government measures to curb excessive consumer credit growth. These included increasing the minimum monthly repayment amount while at the same time introducing a debt renegotiation scheme which offers extended repayment periods at substantially reduced rates. Indonesia was also affected by higher minimum repayment rules, coupled with rises in inflation largely as a result of the reduction of government fuel price subsidies. 8. Employee compensation and benefits Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Wages and salaries 6,852 5,949 6,362 Performance-related pay 2,655 1,933 2,184 Social security costs 143 109 129 Retirement benefit costs 459 434 636 10,109 8,425 9,311 Staff numbers by region^ At 30JUN06 At 30JUN05 At 31DEC05 Hong Kong 25,655 24,240 24,842 Rest of Asia-Pacific 29,052 22,942 25,956 Americas/Europe 17 16 18 Total 54,724 47,198 50,816 ^ Full-time equivalent Staff costs increased by HK$1,684 million, or 20.0 per cent, compared with the first half of 2005. Salaries rose by 15.2 per cent in line with increases in headcount throughout the region. Staff numbers rose in all customer groups, notably in Personal Financial Services in Hong Kong, India, Indonesia and Korea, in Commercial Banking in Hong Kong, mainland China, Indonesia and Korea, and in Corporate, Investment Banking and Markets in Hong Kong, India, mainland China and Korea due to expansion of the payments and cash management and securities businesses. Headcount in the Group Service Centre in Guangdong rose by more than 1,300 in order to support the expansion in processing work. Performance-related remuneration increased in line with improved operating revenues. 9. General and administrative expenses Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Premises and equipment - Rental expenses 756 627 672 - Other premises and equipment 1,124 855 1,234 1,880 1,482 1,906 Marketing and advertising expenses 1,395 1,039 1,801 Other administrative expenses 3,039 2,677 2,877 Litigation and other provisions 3 204 109 6,317 5,402 6,693 The increase in general and administrative expenses of HK$915 million, or 16.9 per cent, reflected additional costs incurred in business expansion throughout the region. Premises and equipment costs rose, in part due to new branch openings in several countries. Technology costs also increased, reflecting ongoing investment in new systems and channel development. Marketing and advertising expenditure was higher in Hong Kong, India, Korea and mainland China, and comprised specific product campaigns and other drives to increase brand awareness. 10. Share of profit in associates Share of profit in associates in the first half of 2006 included the group's share of post-tax profits from Bank of Communications and Industrial Bank, and amortisation of intangible assets arising on acquisition, for the six months to 31 March 2006. 11. Taxation The charge for taxation in the consolidated income statement comprises: Half-year ended Half-year ended Half-year ended Figures in HK$m 30JUN06 30JUN05 31DEC05 Current income tax - Hong Kong profits tax 2,797 2,663 2,311 - Overseas taxation 1,709 1,300 1,298 Deferred taxation 63 285 194 4,569 4,248 3,803 The effective rate of tax for the first half of 2006 was 17.9 per cent, compared with 17.6 per cent for the first half of 2005. The increase was attributable to a higher proportion of the group's taxable profits being generated in higher tax rate jurisdictions and a rise in interest payable on preference shares for which no tax relief is available. It was partially offset by certain tax-free gains on the disposal of financial investments. 12. Dividends Half-year ended Half-year ended Half-year ended 30JUN06 30JUN005 31DEC05 HK$ HK$m HK$ HK$m HK$ HK$m per per per share share share Dividends on ordinary share capital - Paid 0.42 3,757 0.51 4,600 0.58 5,200 - Proposed 0.61 5,500 0.67 6,000 0.50 4,500 1.03 9,257 1.18 10,600 1.08 9,700 13. Trading assets Figures in HK$m At 30JUN06 At 30JUN05 At 31DEC05 Debt securities 109,842 117,682 108,687 Equity shares 16,133 5,860 22,677 Treasury bills 78,291 34,979 69,880 Other 12,167 926 14,437 216,433 159,447 215,681 14. Financial assets designated at fair value Figures in HK$m At 30JUN06 At 30JUN05 At 31DEC05 Debt securities 15,289 15,884 15,070 Equity shares 21,304 15,524 18,320 Treasury bills - 34 94 Other 1,786 4,205 3,589 38,379 35,647 37,073 Financial assets designated at fair value largely comprise investments held by the group's insurance companies. 15. Advances to customers Figures in HK$m At 30JUN06 At 30JUN05 At 31DEC05 Gross advances to customers 1,051,435 980,912 1,005,902 Impairment allowances: - Individually assessed (2,578) (4,114) (2,963) - Collectively assessed (4,483) (3,158) (3,600) - Country risk (10) (3) (13) (7,071) (7,275) (6,576) 1,044,364 973,637 999,326 Allowances as a percentage of gross advances to customers: Individually assessed 0.25% 0.42% 0.29% Collectively assessed 0.43% 0.32% 0.36% Country risk - - - Total allowances 0.68% 0.74% 0.65% 16. Impairment allowances against advances to customers Individually Collectively Country assessed assessed risk Figures in HK$m allowances allowances allowances Total At 1 January 2006 2,963 3,600 13 6,576 Amounts written off (618) (1,808) - (2,426) Recoveries of advances written off in previous years 133 219 - 352 Net charge/(release) to income (Note 7) 129 2,434 (3) 2,560 Unwinding of discount of loan impairment (41) (11) - (52) Exchange and other adjustments 12 49 - 61 At 30JUN06 2,578 4,483 10 7,071 17. Impaired advances to customers and allowances The geographical information shown below, and in notes 18, 19, 21 and 23, has been classified by location of the principal operations of the subsidiary company or, in the case of the bank, by location of the branch responsible for advancing the funds. Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total Half-year ended 30JUN06 Impairment charge 514 2,046 - 2,560 At 30JUN06 Advances to customers which are considered to be impaired are as follows: Gross impaired advances 3,918 4,306 - 8,224 Individually assessed allowances (1,275) (1,303) - (2,578) 2,643 3,003 - 5,646 Individually assessed allowances as a percentage of gross impaired advances 32.5% 30.3% - 31.3% Gross impaired advances as a percentage of gross advances to customers 0.6% 1.1% - 0.8% Impaired advances to customers are those advances where objective evidence exists that full repayment of principal or interest is considered unlikely. Individually assessed allowances are made after taking into account the value of collateral held in respect of such advances. Half-year ended 30JUN05 Impairment charge/(release) 455 67 (12) 510 At 30JUN05 Advances to customers which are considered to be impaired are as follows: Gross impaired advances 5,436 3,438 - 8,874 Individually assessed allowances (2,230) (1,884) - (4,114) 3,206 1,554 - 4,760 Individually assessed allowances as a percentage of gross impaired advances 41.0% 54.8% - 46.4% Gross impaired advances as a percentage of gross advances to customers 0.9% 0.9% - 0.9% Half-year ended 31DEC05 Impairment charge 701 857 - 1,558 At 31DEC05 Advances to customers which are considered to be impaired are as follows: Gross impaired advances 3,920 3,079 - 6,999 Individually assessed allowances (1,335) (1,628) - (2,963) 2,585 1,451 - 4,036 Individually assessed allowances as a percentage of gross impaired advances 34.1% 52.9% - 42.3% Gross impaired advances as a percentage of gross advances to customers 0.6% 0.8% - 0.7% 18. Overdue advances to customers Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 30JUN06 Gross advances to customers which have been overdue with respect to either principal or interest for periods of: - three to six months 1,158 1,299 - 2,457 - six months to one year 750 403 - 1,153 - over one year 1,008 1,020 - 2,028 2,916 2,722 - 5,638 Overdue advances to customers as a percentage of gross advances to customers: - three to six months 0.2% 0.3% - 0.2% - six months to one year 0.1% 0.1% - 0.1% - over one year 0.2% 0.3% - 0.2% 0.5% 0.7% - 0.5% At 30JUN05 Gross advances to customers which have been overdue with respect to either principal or interest for periods of: - three to six months 814 886 - 1,700 - six months to one year 307 379 - 686 - over one year 1,546 1,272 - 2,818 2,667 2,537 - 5,204 Overdue advances to customers as a percentage of gross advances to customers: - three to six months 0.1% 0.2% - 0.2% - six months to one year 0.1% 0.1% - 0.1% - over one year 0.2% 0.4% - 0.2% 0.4% 0.7% - 0.5% At 31DEC05 Gross advances to customers which have been overdue with respect to either principal or interest for periods of: - three to six months 1,073 891 - 1,964 - six months to one year 272 430 - 702 - over one year 1,053 1,071 - 2,124 2,398 2,392 - 4,790 Overdue advances to customers as a percentage of gross advances to customers: - three to six months 0.2% 0.2% - 0.2% - six months to one year - 0.1% - 0.1% - over one year 0.2% 0.3% - 0.2% 0.4% 0.6% - 0.5% 19. Rescheduled advances to customers Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 30JUN06 Rescheduled advances to customers 2,016 1,862 - 3,878 Rescheduled advances to customers as a percentage of gross advances to customers 0.3% 0.5% - 0.4% At 30JUN05 Rescheduled advances to customers 2,327 552 - 2,879 Rescheduled advances to customers as a percentage of gross advances to customers 0.4% 0.1% - 0.3% At 31DEC05 Rescheduled advances to customers 1,941 623 - 2,564 Rescheduled advances to customers as a percentage of gross advances to customers 0.3% 0.2% - 0.3% 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 which have subsequently become overdue for over three months and which are included in overdue advances to customers (Note 18). 20. Repossessed assets Figures in HK$m At 30JUN06 At 30JUN05 At 31DEC05 Repossessed assets 480 403 478 Repossessed assets are non-financial assets acquired in exchange for loans in order to achieve an orderly realisation, and are included in 'Other assets' at the lower of fair value (less costs to sell) and the carrying amount of the loan (net of any impairment allowance). This information is provided by RNS The company news service from the London Stock Exchange SSMSESW

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