FORM 6

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Report of Foreign Private Issuer

Pursuant to Rule 13a - 16 or 15d - 16 of

the Securities Exchange Act of 1934

 

For the month of  August

HSBC Holdings plc

42nd Floor, 8 Canada Square, London E14 5HQ, England

 

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F).

Form 20-F   X              Form 40-F ......

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934).

Yes.......          No    X

(If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ..............).

 

 

 

 

2 August 2010
 

HANG SENG BANK LIMITED
2010 INTERIM RESULTS - HIGHLIGHTS


 

·    Attributable profit up 8.4 per cent to HK$6,964 million (HK$6,426 million for the first half of 2009; up 3.8 per cent compared with HK$6,712 million for the second half of 2009).

 

·    Profit before tax up 6.6 per cent to HK$8,103 million (HK$7,599 million for the first half of 2009; up 3.9 per cent compared with HK$7,801 million for the second half of 2009).

 

·    Operating profit up 0.1 per cent to HK$6,697 million (HK$6,687 million for the first half of 2009; up 2.6 per cent compared with HK$6,527 million for the second half of 2009).

 

·    Operating profit excluding loan impairment charges and other credit risk provisions down 6.3 per cent to HK$6,850 million (HK$7,308 million for the first half of 2009; up 2.0 per cent compared
  with HK$6,718 million for the second half of 2009).

 

·    Return on average shareholders' funds of 22.8 per cent (23.5 per cent for the first half of 2009; 22.4 per cent for the second half of 2009).

 

·    Earnings per share up 8.3 per cent to HK$3.64 per share (HK$3.36 per share for the first half of 2009).

 

·    Second interim dividend of HK$1.10 per share; total dividends of HK$2.20 per share for the first half of 2010 (HK$2.20 per share for the first half of 2009).

 

·    Capital adequacy ratio of 12.9 per cent (16.3 per cent at 31 December 2009); core capital ratio of 11.1 per cent (12.6 per cent at 31 December 2009).

 

·    Cost efficiency ratio of 33.8 per cent (30.9 per cent for the first half of 2009 and 34.4 per cent for the second half of 2009).

 

   Within this document, the Hong Kong Special Administrative Region of the People's Republic of China has been referred to as 'Hong Kong'.

 

 

 

Hang Seng Bank Limited

Contents

 

__________________________________________________________________________________________

 

The financial information in this news release is based on the unaudited consolidated financial statements of Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the group') for the six months ended 30 June 2010.

 

1

Highlights of Results

2

Contents

4

Chairman's Comment

6

Chief Executive's Review

10

Results Summary

14

Customer Group Performance

21

Mainland Business

22

Consolidated Income Statement

23

Consolidated Statement of Comprehensive Income

24

Consolidated Statement of Financial Position

25

Consolidated Statement of Changes in Equity

27

Consolidated Cash Flow Statement

28

Financial Review
 

28

Net interest income
 

30

Net fee income
 

31

Trading income
 

32

Net income/(loss) from financial instruments designated at fair value
 

32

Other operating income
 

33

Analysis of income from wealth management business
 

35

Loan impairment charges and other credit risk provisions
 

36

Operating expenses
 

37

Gains less losses from financial investments and fixed assets
 

38

Tax expense
 

39

Earnings per share
 

39

Dividends per share
 

39

Segmental analysis
 

42

Cash and balances with banks and other financial institutions
 

42

Placings with and advances to banks and other financial institutions
 

43

Trading assets
 

44

Financial assets designated at fair value
 

45

Advances to customers
 

46

Loan impairment allowances against advances to customers
 

47

Impaired advances and allowances
 

48

Overdue advances
 

49

Rescheduled advances
 

49

Segmental analysis of advances to customers by geographical area
 

50

Gross advances to customers by industry sector
 

52

Financial investments
 

54

Investments in associates
 

54

Intangible assets
 

54

Other assets
 

55

Current, savings and other deposit accounts
 

55

Certificates of deposit and other debt securities in issue
 

56

Trading liabilities
 

56

Other liabilities
 

57

Subordinated liabilities
 

58

Shareholders' funds
 

59

Capital resources management
 

60

Liquidity ratio
 

61

Reconciliation of cash flow statement
 

62

Contingent liabilities, commitments and derivatives
 

66

Statutory accounts and accounting policies
 

66

Comparative figures
 

67

Property revaluation
 

67

Foreign currency positions
 

69

Ultimate holding company
 

69

Register of shareholders
 

69

Proposed timetable for the remaining 2010 quarterly dividends
 

69

Code on corporate governance practices
 

70

Board of Directors
 

70

News release

 

 

 


Comment by Raymond Ch'ien, Chairman

 

Our efforts to position Hang Seng for long-term growth yielded encouraging results in the first half of 2010. Our trusted brand and comprehensive portfolio of products and services helped us expand our customer base in both Hong Kong and mainland China and increase our income from core customer groups despite competitive operating conditions.
 
We recorded strong growth in fee income, although the persistence of low interest rates continued to constrain interest-based revenues, particularly under Treasury.
 
We enhanced our position as a leader in wealth management by using our excellent time-to-market capabilities to capture the shift in investor preference and by extending our range of corporate wealth management products.
 
As economic conditions improved, we leveraged our strong balance sheet to grow lending to both personal and business customers.
 
Our initiatives to improve service delivery and access for SMEs, together with our active participation in Hong Kong government-organised lending schemes, helped reinforce our reputation as a trusted banking partner for local industry. Close collaboration between our Commercial Banking teams in Hong Kong and on the Mainland and the expansion of our renminbi services are helping us win a greater share of cross-border business.
 
We strengthened our platform for future growth on the Mainland. We expanded our network of outlets and the deposit base and deepened local strategic alliances. We took up our full entitlement under a rights share issue by our Mainland partner, Industrial Bank Co., Ltd. ('Industrial Bank').
 

Financial Performance


Profit attributable to shareholders rose to HK$6,964 million - up 8.4 per cent and 3.8 per cent compared with the first and second halves of last year respectively. Earnings per share rose by 8.3 per cent compared with a year earlier to reach HK$3.64.
 

Profit before tax increased to HK$8,103 million - up 6.6 per cent and 3.9 per cent compared with the first and second halves of 2009 respectively.


Operating profit excluding loan impairment charges and other credit risk provisions fell by HK$458 million, or 6.3 per cent, to HK$6,850 million compared with the first half of 2009, due mainly to the 7.7 per cent drop in net interest income. Compared with the second half of 2009, operating profit excluding loan impairment charges and other credit risk provisions was up 2.0 per cent.
 
Operating profit increased by 0.1 per cent compared with the first half of last year and 2.6 per cent compared with the second half to reach HK$6,697 million, reflecting improved economic conditions and effective credit risk management.
 
Increases in performance-related pay, marketing to support growth and investment in our Mainland operations resulted in a HK$236 million, or 7.2 per cent, rise in operating expenses to HK$3,504 million. Excluding our Mainland business, operating costs were up 6.1 per cent.
 
Our cost efficiency ratio was 33.8 per cent - compared with 30.9 per cent in the first half of 2009 and 34.4 per cent in the second half.
 
Return on average shareholders' funds was 22.8 per cent, compared with 23.5 per cent and 22.4 per cent for the first and second halves of 2009. Return on average total assets was 1.7 per cent - the same as the first half of last year and up 0.1 percentage point on the second half.
 
At 30 June 2010, our capital adequacy ratio was 12.9 per cent, compared with 16.3 per cent at the end of 2009. This decline was due mainly to our participation in Industrial Bank's rights issue, the repayment of HK$2.5 billion in subordinated debt and the rise in risk-weighted assets. Our core capital ratio was 11.1 per cent, down 1.5 percentage points compared with last year-end.
 
The Directors have declared a second interim dividend of HK$1.10 per share, payable on 1 September 2010. This brings the total distribution for the first half of 2010 to HK$2.20 per share, the same as in the first half of 2009.
 

Outlook


The global economy has rebounded from the international financial crisis on the back of large-scale fiscal and monetary stimulus. However, this recovery has been uneven, with solid improvements in key emerging economies but slower progress in many advanced economies.
 
The rebound supported an upswing in exports and GDP growth in both Hong Kong and the Mainland during the first half of 2010. Looking ahead, overseas trade activity will likely grow at a more modest pacein the second half of the year as governments around the world begin to rein in their stimulus programmes. Officials in several major export markets have announced plans to cut spending and implement tax hikes in a bid to restore fiscal discipline and tackle serious challenges such as high levels of sovereign debt.
 
On the Mainland, the domestic sector will remain strong. The authorities are taking steps to curb escalating property prices, but steady income growth and government measures to support private consumption will continue to drive demand. In Hong Kong, improving labour market conditions and rising consumer confidence should help underpin domestic-led growth.
 
Against this backdrop, we will continue to leverage our competitive strengths - including our widely respected brand, strong customer relationships and excellent market knowledge - to enhance our leading position in target areas and capitalise on emerging opportunities to achieve long-term growth for shareholders.

 

 

 

Review by Margaret Leung, Vice-Chairman and Chief Executive

 

Competition intensified in the first half of 2010 as banks sought to capitalise on increased trade flows and an upswing in investment sentiment. Hang Seng's leading market position and fast response to the changing needs of customers proved to be powerful tools in capturing business. We achieved growth in our customer base and income in key segments and we further aligned our operations to support the continued expansion of core revenue drivers.

 

In the low interest rate environment, we took successful steps to further diversify our revenue base - leveraging our strong wealth management capabilities and comprehensive range of cross-border services for commercial customers to increase fee-based income. With excellent growth in investment fund sales revenue, we consolidated our position as a leading fund distributor in Hong Kong.

 

We used our balance sheet strength and good credit risk management to expand lending, gaining market share in the competitive credit card sector. Increases in net interest income from advances and returns on the life insurance investment funds portfolio partly offset the declines in contributions from Treasury's balance sheet management portfolio and deposits.

 

We expanded renminbi services for commercial customers and became the first bank in Hong Kong to establish a renminbi prime rate, underscoring our position as a market leader for cross-border commercial banking and our active support for Hong Kong's development as the centre for offshore renminbi financial services.

 

In Personal e-Banking, we passed the milestone of one million registered customers and we became one of the first banks in Hong Kong to launch an iPhone application for on-the-go investment services.

 

Customer Groups

 

Personal Financial Services achieved a 13.6 per cent increase in profit before tax to HK$3,937 million. Operating profit excluding loan impairment charges grew by 10.2 per cent to HK$3,945 million. Operating profit was up 16.3 per cent at HK$3,843 million.
 

With narrow spreads on mortgage loans and deposits, we redeployed the commercial surplus to expand secured and unsecured lending. Along with improved returns on the life insurance investment funds portfolio, this supported the 4.5 per cent increase in net interest income to HK$4,194 million.

 

Wealth management business was a core driver of growth, with income up 14.6 per cent at HK$2,495 million. Investment income increased by 20.7 per cent. We took steps to capitalise on improved investor confidence - including launching the Hang Seng China A-Share Focus Fund. We achieved a 28-month high in investment fund sales in March and investment fund subscriptions increased five-fold during the first half of 2010 compared with the same period last year. Enhancements to investment service delivery channels contributed to the increases in turnover and the number of accounts for foreign exchange and gold margin trading.

 

Life insurance income grew by 9.5 per cent, with an 8.7 per cent rise in total policies in force and a 13.7 per cent increase in total annualised life insurance premiums.

 

Our strong portfolio of mortgage services supported year-on-year growth of 92.3 per cent in residential mortgage drawdowns. We ranked first for equitable mortgages and second for new mortgage registrations in the second quarter of this year. 

 

A series of effective card utilisation campaigns drove increases in credit card spending, receivables and the card base of 17.8 per cent, 11.8 per cent and 6.1 per cent respectively. We maintained our position as Hong Kong's second-largest issuer of credit cards, with over 1.9 million cards in circulation.

 

Year-on-year, total operating income from secured and unsecured lending was up 28.1 per cent and 16.5 per cent respectively.

 

In February, we were named 'Best Local Private Bank in Hong Kong' in Euromoney's peer-nominated Private Banking Survey 2010.

 

Commercial Banking recorded a 65.1 per cent increase in profit before tax to HK$1,783 million. Operating profit excluding loan impairment charges rose by 31.1 per cent to HK$1,247 million, reflecting broad-based income growth. Operating profit was up 74 per cent at HK$1,197 million, with improvements in the economic environment and good credit risk management resulting in an 81.0 per cent decline in loan impairment charges.

 

Net interest income rose by 20 per cent to HK$1,184 million. We capitalised on the upswing in economic activity during the first half of 2010 to grow lending by 60.9 per cent, supporting an increase in net interest income from advances. Customer deposits rose by 23.9 per cent, but narrowing deposit spreads resulted in a drop in net interest income from deposits.

 

Non-interest income was up 22.0 per cent at HK$850 million. Net fee income grew by 23.9 per cent to HK$649 million, driven mainly by sales of investment and treasury products and a 19.2 per cent increase in trade finance and factoring fee revenue.

 

The strength of our cross-border proposition was an important competitive advantage in growing our Commercial Banking business. A comprehensive range of new renminbi services, closer cooperation between Commercial Banking teams in Hong Kong and on the Mainland, and an expanding network of strategic mainland partners enhanced our service capabilities and coverage.

 

At 30 June 2010, we had over 4,000 cross-border renminbi trade settlement accounts and had facilitated more than RMB4.2 billion in renminbi cross-border trade business.

 

We further developed our corporate wealth management business, offering investment products in line with risk appetite and liquidity needs as well as a broad range of business insurance coverage. Corporate wealth management revenue grew by 37.1 per cent, increasing its contribution to Commercial Banking's total operating income to 15.1 per cent - up from 13.2 per cent in 2009.

 

We improved service access and banking convenience for SME customers by remodelling our Business Banking Centres, extending transaction cut-off times and expanding our Business e-Banking platform. As at 30 June 2010, we had approved about 6,000 loan applications totalling more than HK$16.3 billion under Hong Kong government-initiated SME lending schemes.
 

Corporate Banking's profit before tax rose by 24.7 per cent to HK$560 million. Operating profit excluding loan impairment charges was up 7.5 per cent at HK$556 million, due largely to the 9.9 per cent increase in net interest income. Operating profit grew by 27.6 per cent to HK$555 million, reflecting a 98.8 per cent reduction in loan impairment charges.

 

Assisted by our cross-border services, good industry knowledge and long-term customer relationships, we provided facilities to high-quality borrowers in a competitive environment for lenders, with notable progress in loans to large Mainland enterprises with operations in Hong Kong.

 

Lending to corporate customers grew by 14.2 per cent compared with a year earlier. Customer deposits rose by 61.1 per cent.

 

Treasury recorded profit before tax of HK$1,430 million - down 29.1 per cent due mainly to the 55.0 per cent fall in net interest income. Operating profit excluding credit risk provisions declined by 48.6 per cent to HK$927 million.

 

Low interest rates and ample market liquidity limited good investment opportunities under the balance sheet management portfolio. We maintained our prudent risk management approach while taking steps to defend the interest margin. We capitalised on market opportunities to dispose of selected instruments and invest in high-quality assets. 

 

Initiatives with other customer groups to cross-sell Treasury products saw a more than tripling of income from foreign exchange options and other structured products.

 

Mainland Business

 

Hang Seng Bank (China) Limited ('Hang Seng China') opened two cross-location sub-branches under CEPA VI in the first half of 2010, bringing its total number of outlets to 38 across 13 cities.

 

We enhanced our Commercial Banking capabilities and wealth management offerings and leveraged new and existing strategic alliances. This supported good growth in both the personal and commercial customer bases - which increased by 9 per cent and 11 per cent respectively compared with a year earlier.

 

Customer deposits were up 24.6 per cent on last year-end and 67.4 per cent year on year - improving balance sheet strength. We expanded lending while continuing to emphasise credit quality over loan portfolio size. Advances to customers increased by 13.2 per cent compared with 31 December 2009 and 36.8 per cent compared with 30 June 2009.

 

Hang Seng China's profit before tax recorded encouraging year-on-year growth, with the 16.4 per cent rise in total operating income and a decline in loan impairment charges slightly offset by increased investment in future business expansion.
 

Collaboration with strategic partners, Industrial Bank and Yantai Bank Co., Ltd ('Yantai Bank'), continued to provide business synergy and extend our reach in regions with good economic growth potential.
 

Looking Ahead

 

Improvements in business and investment sentiment on the back of the economic upturn generated new opportunities for business during the first half of 2010.
 
However, the recovery remains fragile - particularly in major advanced economies that provide key export markets for Asia - making the outlook uncertain for Hong Kong's externally orientated economy for the rest of the year. A slowdown in external demand will also affect the Mainland, although robust domestic consumption should help underpin growth, albeit at a more moderate pace than in the first half of the year.
 
In an uncertain economic environment, we will continue to focus on providing excellent service to meet the changing needs of our diverse range of customers.
 

Our time-to-market strengths, comprehensive range of products and extensive distribution network - including mobile and online channels - will support the growth of our wealth management business and drive new customer acquisitions. We will continue to enhance our services in support of key personal customer segments, focusing particularly on Prestige Banking and young people.


We will further leverage our strong financial fundamentals to expand secured and unsecured lending while staying vigilant in managing credit risk.
 
Cross-border collaboration will remain central to our strategy to establishing Hang Seng as a leading provider of Greater China Commercial Banking services. We will continue to strengthen our product and service suite to provide comprehensive financial solutions for companies with operations in Hong Kong and on the Mainland. We have enhanced our corporate e-banking platforms to support renminbi account enquiries and transaction instructions and we will capitalise on the recent expansion of the renminbi cross-border trade settlement scheme.
 
Treasury will continue to work closely with other customer groups to support the growth of non-interest based business and explore new opportunities created by the enlarged scope of offshore renminbi financial services.
 
On the Mainland, we will deepen cooperation with existing strategic partners and build new alliances to enhance service delivery, expand product offerings and generate more cross-referral business. Along with brand-building initiatives, this will underpin growth in the customer and deposit bases. In May, we underlined our long-term commitment to this important market with a RMB510 million agreement to purchase a Mainland headquarters premises in Shanghai.
 
We will continue to make good use of our competitive strengths to further develop our core business drivers, reinforce our leadership in key lines, and tap new markets and customer segments in support of long-term growth and increasing value for shareholders.
 

 

Results summary

 

Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the group') reported an unaudited profit attributable to shareholders of HK$6,964 million for the first half of 2010, up 8.4 per cent compared with the first half of 2009. Earnings per share were up 8.3 per cent at HK$3.64. Compared with the second half of 2009, attributable profit rose by 3.8 per cent.

 

- Operating profit excluding loan impairment charges and other credit risk provisions fell by HK$458 million, or 6.3 per cent, to HK$6,850 million. In the low interest rate environment, net interest income was adversely affected by the continuing compression of deposit spreads and the re-pricing of assets at lower rates. Non-interest income registered encouraging growth as Asian economies strengthened and demand for wealth management products in Hong Kong and mainland China increased. While continuing to carefully manage costs, the group made further investments in its business to drive income growth momentum - resulting in a 7.2 per cent increase in operating expenses compared with the same period last year.

 

- Net interest income dropped by HK$562 million, or 7.7 per cent, despite the 7.8 per cent increase in average interest-earning assets. The group achieved good growth in its loan portfolios and lending spreads improved. However, with the persistence of low interest rates, deposit spreads remained constrained and contribution from net free funds fell. Re-pricing of assets at lower rates also had an adverse effect. Net interest margin for the first half of 2010 was 1.77 per cent - down 29 basis points compared with the same period last year. Net interest spread dropped by 27 basis points to 1.72 per cent and the contribution from net free funds declined by 2 basis points to 0.05 per cent. Compared with the second half of 2009, net interest income remained broadly at the same level, reflecting the bank's efforts to support its net interest income base through the expansion of lending.

 

- Net fees and commissions grew across most core business lines and increased by HK$443 million, or 23.0 per cent, to HK$2,369 million. Despite tightened regulatory requirements in Hong Kong, the group's quick response to improved investment sentiment saw income from sales of retail investment funds increase by 117.3 per cent. This achievement was facilitated by the launch of the Hang Seng China A-Share Focus Fund in March 2010 as part of efforts to offer a wide spectrum of funds from both Hang Seng Investment Management and third-party providers. Private banking continued to expand its product range and grew its service fee income by 37.0 per cent, reflecting increased client appetite for trading and investment in structured products. The group enhanced its comprehensive range of health and wealth insurance solutions for all life stages, underpinning a 35.0 per cent increase in insurance agency fee income. The credit card business continued to gain market share in terms of cards in issue, spending and receivables, and achieved strong fee income growth of 12.6 per cent. Benefiting from the rebound of the export market and recovering global demand, income from trade financing and remittance services recorded double-digit growth of 18.5 and 20.8 per cent respectively. There were also increases in fee income from account services and credit facilities as the bank continued to grow affluent personal banking, which increased the customer base and lending opportunities. With the bank registering lower stock market trading turnover and keen price competition, income generated from stockbroking and related services fell by 2.3 per cent.
 

- Trading income was down HK$145 million, or 14.0 per cent, at HK$890 million. Foreign exchange income declined by HK$50 million, or 5.4 per cent, due primarily to the decrease in trading net interest income from funding swaps, although this was partly offset by modest growth in foreign exchange-linked structured products income. Securities, derivatives and other trading income fell by HK$95 million, or 90.5 per cent.

 

- Income from insurance business (included under 'net interest income', 'net fee income', 'net income from financial instruments designated at fair value', 'net earned insurance premiums', and 'movement in present value of in-force insurance business' within 'other operating income', and after deducting 'net insurance claims incurred and movement in policyholders' liabilities) grew by HK$119 million, or 9.5 per cent, to HK$1,370 million. The bank continued to enhance its strong position in providing retirement savings products to customers. Net interest income and fee income from life insurance business grew by 20.1 per cent, attributable mainly to the increase in the size of the life insurance funds investment portfolio, with bond investments the major underlying assets. Investment returns on life insurance funds improved from a loss of HK$133 million in the first half of 2009 to a gain of HK$97 million in the first half of 2010. New annualised life insurance premiums grew modestly compared with same period last year. Movement in present value of in-force insurance business ('PVIF') increased, due mainly to the growth in volume and profitability of new business written in the first half of 2010 as well as increases in natural premiums paid up and maturing policies, which had little impact on PVIF movement in the first half of 2010 but contributed to higher profit release in 2009.

 

- Net operating income before loan impairment charges and other credit risk provisions decreased by HK$222 million, or 2.1 per cent, to HK$10,354 million.

 

- Operating expenses rose by HK$236 million, or 7.2 per cent, compared with the first half of 2009. The group invested in its business to better capture new opportunities arising from the economic recovery and improve its income streams, while continuing to carefully manage costs. Excluding mainland business, operating expenses rose by 6.1 per cent, attributable largely to higher performance-related pay expenses, marketing expenditure and processing recharges. Mainland-related operating expenses increased by 15.3 per cent, reflecting the expansion of the bank's wholly owned mainland banking subsidiary, Hang Seng Bank (China) Limited ('Hang Seng China') , from 36 to 38 outlets as well as an increase in headcount.

 

- Operating profit grew by HK$10 million, or 0.1 per cent, to HK$6,697 million, after accounting for the HK$468 million improvement in loan impairment charges and other credit risk provisions. Compared with the second half of 2009, operating profit was up HK$170 million, or 2.6 per cent.

 

- Profit before tax increased by 6.6 per cent to HK$8,103 million after taking the following items into account:

 

·    a 25.5 per cent (or HK$14 million) rise in gains less losses from financial investments and fixed assets;

·    a 62.8 per cent (or HK$59 million) increase in net surplus on property revaluation; and

·    a 55.2 per cent (or HK$421 million) increase in share of profits from associates, mainly Industrial Bank Co., Ltd. and a property investment company. 

 

Consolidated financial positions and key ratios

 

Total assetsincreased by HK$40.4 billion, or 4.9 per cent, to HK$871.1 billion. Customer advances rose by 14.4 per cent with encouraging growth in corporate and retail lending, mainland loans and trade finance. Benefiting from the robust property market, the bank achieved strong growth in residential mortgages in intensely competitive operating conditions - sustaining a leading position and gaining market share. Customer deposits rose by HK$8.6 billion, or 1.3 per cent, to HK$672.2 billion, with improved investor sentiment tempered by continuing caution in identifying investment opportunities. At 30 June 2010, the advances-to-deposits ratio was 58.6 per cent, compared with 51.9 per cent at the end of December 2009. Treasury continued to take a prudent approach in managing its balance sheet management investments. Surplus funds were redeployed to interbank placements and available-for-sale debt securities to attain yield enhancement in the more stable financial markets. As a result, financial investments rose by 2.4 per cent - primarily in high-quality debt securities, including government-guaranteed debt securities.

 

At 30 June 2010, shareholders' funds (excluding proposed dividends) were HK$62,117 million, an increase of HK$3,602 million, or 6.2 per cent. Retained profits rose by HK$2,722 million, due mainly to the growth in attributable profit (excluding first and second interim dividends) for the first half of 2010. The available-for-sale investments reserve recorded a surplus of HK$48 million, compared with a deficit of HK$257 million at last year-end, reflecting the narrowing of credit spreads as a result of the stabilisation in credit markets.

 

The return on average total assets was 1.7 per cent, compared with 1.7 per cent and 1.6 per cent for the first and second halves of 2009 respectively. The return on average shareholders' funds was 22.8 per cent (23.5 per cent in the first half of 2009 and 22.4 per cent in the second half of 2009).

 

At 30 June 2010, the capital adequacy ratio was 12.9 per cent, down from 16.3 per cent at the end of last year. The core capital ratio was 11.1 per cent, down from 12.6 per cent. The ratios were calculated in accordance with the advanced internal ratings-based approach under the Banking (Capital) Rules issued by the Hong Kong Monetary Authority for the implementation of Basel II. The declines in both the capital adequacy and core capital ratios largely reflect the net effect of the increase in deduction on the capital base as a result of the group's participation in Industrial Bank's rights issue in the first half of 2010, the repayment of HK$2.5 billion in subordinated debt in June 2010, the increase in risk-weighted assets and profit growth after accounting for dividends in the first half of the year. 
 

The bank maintained a strong liquidity position. The average liquidity ratio for the first half of 2010 was 42.0 per cent (calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance), compared with 47.5 per cent for the first half of 2009.

 

The cost efficiency ratio for the first half of 2010 was 33.8 per cent, compared with 30.9 per cent and 34.4 per cent for the first and second halves of 2009 respectively.

 

Dividends

 

The Directors have declared a second interim dividend of HK$1.10 per share, which will be payable on 1 September 2010 to shareholders on the register of shareholders as of 17 August 2010. Together with the first interim dividend, the total distribution for the first half of 2010 will amount to HK$2.20 per share, the same as in the first half of 2009.

 

 

Customer group performance

 

 

Personal

               

Total

  

Inter-

      

 

Financial

Commercial

Corporate

          

reportable

segment

      

 

Figures in HK$m

Services

  

Banking

  

Banking

  

Treasury

  

Other

  

segments

elimination

  

Total

  
                                 

Half-year ended

                                

30 June 2010

                                
                                 

Net interest income

4,194

  

1,184

  

641

  

609

  

85

  

6,713

  

__

  

6,713

  

Net fee income/(expense)

1,585

  

649

  

90

  

(12

)

57

  

2,369

  

__

  

2,369

  

Trading income/(loss)

249

  

145

  

4

  

506

  

(14

)

890

  

__

  

890

  

Net income/(loss) from financial

       

 

  

 

  

 

      

 

      

 instruments designated at fair

        

 

  

 

  

 

      

 

      

 value

148

  

__

  

__

  

(2

)

(14

)

132

  

__

  

132

  

Dividend income

__

  

__

  

__

  

__

  

4

  

4

  

__

  

4

  

Net earned insurance premiums

6,232

  

126

  

1

  

__

  

__

  

6,359

  

__

  

6,359

  

Other operating income/(loss)

541

  

9

  

__

  

(1

)

313

  

862

  

(226

)

636

  

Total operating income

12,949

  

2,113

  

736

  

1,100

  

431

  

17,329

  

(226

)

17,103

  

Net insurance claims

                                

  incurred and movement

                                

  in policyholders' liabilities

(6,670

)

(79

)

__

  

__

  

__

  

(6,749

)

__

  

(6,749

)

Net operating income before

                        

 

      

  loan impairment charges

                        

 

      

  and other credit risk

                                

  provisions

6,279

  

2,034

  

736

  

1,100

  

431

  

10,580

  

(226

)

10,354

  

Loan impairment charges

                        

 

      

  and other credit risk provisions

(102

)

(50

)

(1

)

__

  

__

  

(153

)

__

  

(153

)

Net operating income

6,177

  

1,984

  

735

  

1,100

  

431

  

10,427

  

(226

)

10,201

  

Total operating expensesW

(2,334

)

(787

)

(180

)

(173

)

(256

)

(3,730

)

226

  

(3,504

)

Operating profit

3,843

  

1,197

  

555

  

927

  

175

  

6,697

  

__

  

6,697

  

Gains less losses from financial

                               

  investments and fixed assets

__

  

__

  

5

  

62

  

2

  

69

  

__

  

69

  

Net surplus on property

                                

  revaluation

__

  

__

  

__

  

__

  

153

  

153

  

__

  

153

  

Share of profits from associates

94

  

586

  

__

  

441

  

63

  

1,184

  

__

  

1,184

  

Profit before tax

3,937

  

1,783

  

560

  

1,430

  

393

  

8,103

  

__

  

8,103

  

Share of profit before tax

48.6

%

22.0

%

6.9

%

17.6

%

4.9

%

100.0

%

__

  

100.0

%
                                 
                                 

Operating profit excluding loan

                                

  impairment charges

                                

  and other credit risk provisions

3,945

  

1,247

  

556

  

927

  

175

  

6,850

  

__

  

6,850

  
                                 

W Depreciation/amortisation

                                

    included in total operating

                       

 

      

    expenses

(88

)

(16

)

(3

)

(2

)

(246

)

(355

)

__

  

(355

)
                                 
                                 

At 30 June 2010

                                
                         

 

      

Total assets

244,132

  

128,459

  

115,306

  

348,071

  

35,119

  

871,087

  

__

  

871,087

  

Total liabilities

546,668

  

132,261

  

54,456

  

37,866

  

35,616

  

806,867

  

__

  

806,867

  

Investments in associates

1,049

  

5,913

  

__

  

4,466

  

2,413

  

13,841

  

__

  

13,841

  
                                     


 

 

 

Personal

               

Total

  

Inter-

      

 

Financial

Commercial

Corporate

          

reportable

segment

      

 

Figures in HK$m

Services

  

Banking

  

Banking

  

Treasury

  

Other

  

segments

elimination

  

Total

  
                                 

Half-year ended

                                

30 June 2009 (restated)

                                
                                 

Net interest income

4,015

  

987

  

583

  

1,353

  

337

  

7,275

  

__

  

7,275

  

Net fee income/(expense)

1,294

  

524

  

79

  

(19

)

48

  

1,926

  

__

  

1,926

  

Trading income/(loss)

317

  

115

  

10

  

616

  

(23

)

1,035

  

__

  

1,035

  

Net loss from financial

       

 

  

 

  

 

      

 

      

 instruments designated at fair

        

 

  

 

  

 

      

 

      

 value

(170

)

__

  

__

  

(9

)

(16

)

(195

)

__

  

(195

)

Dividend income

1

  

__

  

__

  

__

  

4

  

5

  

__

  

5

  

Net earned insurance premiums

6,549

  

108

  

1

  

__

  

__

  

6,658

  

__

  

6,658

  

Other operating income

264

  

15

  

1

  

__

  

307

  

587

  

(237

)

350

  

Total operating income

12,270

  

1,749

  

674

  

1,941

  

657

  

17,291

  

(237

)

17,054

  

Net insurance claims

                                

  incurred and movement

                                

  in policyholders' liabilities

(6,413

)

(65

)

__

  

__

  

__

  

(6,478

)

__

  

(6,478

)

Net operating income before

                        

 

      

  loan impairment charges

                        

 

      

  and other credit risk

                                

  provisions

5,857

  

1,684

  

674

  

1,941

  

657

  

10,813

  

(237

)

10,576

  

Loan impairment charges

                        

 

      

  and other credit risk provisions

(274

)

(263

)

(82

)

(2

)

__

  

(621

)

__

  

(621

)

Net operating income

5,583

  

1,421

  

592

  

1,939

  

657

  

10,192

  

(237

)

9,955

  

Total operating expenses W

(2,278

)

(733

)

(157

)

(137

)

(200

)

(3,505

)

237

  

(3,268

)

Operating profit

3,305

  

688

  

435

  

1,802

  

457

  

6,687

  

__

  

6,687

  

Gains less losses from financial

                               

  investments and fixed assets

96

  

53

  

14

  

(95

)

(13

)

55

  

__

  

55

  

Net surplus on property

                                

  revaluation

__

  

__

  

__

  

__

  

94

  

94

  

__

  

94

  

Share of profits from associates

66

  

339

  

__

  

310

  

48

  

763

  

__

  

763

  

Profit before tax

3,467

  

1,080

  

449

  

2,017

  

586

  

7,599

  

__

  

7,599

  

Share of profit before tax

45.6

%

14.2

%

5.9

%

26.6

%

7.7

%

100.0

%

__

  

100.0

%
                                 
                                 

Operating profit excluding loan

                                

  impairment charges

                                

  and other credit risk provisions

3,579

  

951

  

517

  

1,804

  

457

  

7,308

  

__

  

7,308

  
                                 

W Depreciation/amortisation

                               

    included in total operating

                       

 

      

    expenses

(82

)

(15

)

(4

)

(2

)

(223

)

(326

)

__

  

(326

)
                                 
                                 

At 30 June 2009

                                
                         

 

      

Total assets

218,251

  

84,180

  

90,115

  

366,245

  

35,604

 

794,395

  

__

  

794,395

  

Total liabilities

542,284

  

106,419

  

32,593

  

27,141

  

29,128

  

737,565

  

__

  

737,565

  

Investments in associates

683

  

3,608

  

__

  

2,666

  

2,372

  

9,329

  

__

  

9,329

  
                                     

 

 

 

 

 

Personal

               

Total

  

Inter-

      

 

Financial

Commercial

Corporate

          

reportable

segment

      

 

Figures in HK$m

Services

  

Banking

  

Banking

  

Treasury

  

Other

  

segments

elimination

  

Total

  
                                 

Half-year ended

                                

31 December 2009 (restated)

                                
                                 

Net interest income

4,180

  

1,024

  

575

  

809

  

160

  

6,748

  

__

  

6,748

  

Net fee income/(expense)

1,706

  

590

  

66

  

(16

)

49

  

2,395

  

__

  

2,395

  

Trading income/(loss)

345

  

130

  

(2

)

438

  

(23

)

888

  

__

  

888

  

Net income/(loss) from financial

       

 

  

 

  

 

      

 

      

 instruments designated at fair

        

 

  

 

  

 

      

 

      

 value

116

  

__

  

__

  

14

  

(10

)

120

  

__

  

120

  

Dividend income

1

  

6

  

__

  

__

  

4

  

11

  

__

  

11

  

Net earned insurance premiums

4,744

  

117

  

__

  

__

  

__

  

4,861

  

__

  

4,861

  

Other operating income

   634

  

14

  

__

  

__

  

325

  

973

  

(234

)

739

  

Total operating income

11,726

  

1,881

  

639

  

1,245

  

505

  

15,996

  

(234

)

15,762

  

Net insurance claims

                                

  incurred and movement

                                

  in policyholders' liabilities

(5,455

)

(69

)

(2

)

__

  

__

  

(5,526

)

__

  

(5,526

)

Net operating income before

                        

 

      

  loan impairment (charges)/

                        

 

      

  releases and

                               

  other credit risk provisions

6,271

  

1,812

  

637

  

1,245

  

505

  

10,470

  

(234

)

10,236

  

Loan impairment (charges)/

                        

 

      

  releases and

            

 

  

 

      

 

      

  other credit risk provisions

(180

)

(15

)

4

  

__

  

__

  

(191

)

__

  

(191

)

Net operating income

6,091

  

1,797

  

641

  

1,245

  

505

  

10,279

  

(234

)

10,045

  

Total operating expenses W

(2,393

)

(774

)

(175

)

(131

)

(279

)

(3,752

)

234

  

(3,518

)

Operating profit

3,698

  

1,023

  

466

  

1,114

  

226

  

6,527

  

__

  

6,527

  

Gains less losses from financial

                               

  investments and fixed assets

__

  

__

  

__

  

(57

)

188

  

131

  

__

  

131

  

Net surplus on property

                                

  revaluation

__

  

__

  

__

  

__

  

158

  

158

  

__

  

158

  

Share of profits from associates

93

  

534

  

__

  

319

  

39

  

985

  

__

  

985

  

Profit before tax

3,791

  

1,557

  

466

  

1,376

  

611

  

7,801

  

__

  

7,801

  

Share of profit before tax

48.6

%

20.0

%

6.0

%

17.6

%

7.8

%

100.0

%

__

  

100.0

%
                                 
                                 

Operating profit excluding loan

                                

  impairment charges

                                

  and other credit risk provisions

3,878

  

1,038

  

462

  

1,114

  

226

  

6,718

  

__

  

6,718

  
                                 

W Depreciation/amortisation

                               

    included in total operating

                       

 

      

    expenses

(91

)

(16

)

(3

)

(2

)

(237

)

(349

)

__

  

(349

)
                                 
                                 

At 31 December 2009

                                
                         

 

      

Total assets

234,723

  

96,490

  

88,135

  

377,561

  

33,759

  

830,668

  

__

  

830,668

  

Total liabilities

554,357

  

123,996

  

37,477

  

21,503

  

31,187

  

768,520

  

__

  

768,520

  

Investments in associates

847

  

4,284

  

__

  

2,707

  

2,388

  

10,226

  

__

  

10,226

  
                                     

 

 

 

Personal Financial Services ('PFS') reported a profit before tax of HK$3,937 million, representing growth of 13.6 per cent compared with the same period last year. Operating profit excluding loan impairment charges was up 10.2 per cent at HK$3,945 million. Investment and insurance were the key growth drivers as market sentiment improved during the first half of the year.
 
Despite narrowing spreads on deposits and mortgage loans in the low interest rate environment, net interest income grew to HK$4,194 million - up 4.5 per cent compared with the first half of last year - attributable to the successful deployment of the commercial surplus to achieve growth in secured and unsecured lending portfolios.
 
Riding on the buoyant property market, the bank's residential mortgage business achieved good growth and maintained a leading market position. Despite strong competition among lenders, income from secured lending and residential mortgage drawdowns grew by 28.1 per cent and 92.3 per cent respectively compared with the first half of last year. Hang Seng ranked first for equitable mortgages and second for new mortgage registrations in the second quarter of this year, with a market share of 21.6 per cent and 15.8 per cent respectively in June 2010.
 
Total operating income from unsecured lending was up 16.5 per cent year-on-year. Supported by effective marketing campaigns, the credit card business registered impressive growth and gained market share. The card base grew by 6.1 per cent to exceed 1.9 million, helping the bank maintain its number two position for the credit card business in Hong Kong in terms of cards in issue. Card receivables rose by 11.8 per cent to HK$14.3 billion. The bank outperformed its peers for card spending, which rose by 17.8 per cent compared with the first half of last year to HK$32.4 billion. Hang Seng made an important milestone in launching a Hong Kong dollar China UnionPay (CUP) Credit Card in June 2010, offering cardholders' convenience via the extensive CUP merchant network in Hong Kong, Mainland China and overseas countries. Personal loans were up 31.0 per cent year-on-year, with a total loan balance of HK$4.3 billion.
 
Wealth management income increased by 14.6 per cent to HK$2,495 million. Income from investment rose by 20.7 per cent to HK$1,295 million as the bank capitalised on increased investor appetite with the launch of timely investment products - including the Hang Seng China A-Share Focus Fund and tailor-made structured products - that helped boost sales and turnover. Investment fund subscription in the first half of 2010 increased five-fold year-on-year.
 
Income from insurance grew by 8.6 per cent, as we managed to diversify our product mix to offer a wide range of endowment, protection or investment-linked solutions to cater for customer needs. Total policies in force and total annualised life insurance premiums rose by 8.7 per cent and 13.7 per cent respectively.
 
Personal e-Banking achieved landmark growth with over 1.03 million registered customers - a year-on-year increase of 12.3 per cent. Hang Seng was among the first banks in Hong Kong to launch a customised iPhone application that provides a comprehensive platform for obtaining up-to-date investment information.

 

Commercial Banking ('CMB') reported a strong 65.1 per cent increase in profit before tax to reach HK$1,783 million. CMB's contribution to the bank's total profit before tax increased to 22.0 per cent, up 7.8 percentage points compared with the first half of 2009. Operating profit excluding loan impairment charges rose by 31.1 per cent to HK$1,247 million, driven mainly by growth in net interest income from advances and net fee income. On the back of improving market conditions and a continuing emphasis on good risk management, loan impairment charges fell by 81.0 per cent.
 

CMB capitalised on recovering global demand and the rebound of export markets to grow customer advances by 60.9 per cent, which supported the 37.3 per cent increase in net interest income from lending year-on-year. With an influx of liquidity into the region and continuing investor caution, customer deposits rose by 23.9 per cent year-on-year. Net interest income from deposits decreased by 17.6 per cent, reflecting the adverse effects of the low interest rate environment on deposit spreads.

 

In response to the Elucidation of Supervisory Principles and Operational Arrangements regarding RMB Business in Hong Kong released by Hong Kong Monetary Authority in February, CMB expanded the scope of renminbi banking services offered to commercial customers. In addition to renminbi trade settlement services, the bank established the first renminbi Prime Rate in Hong Kong in March 2010, substantiating Hang Seng's position as a commercial banking leader in the Greater China region and contributing to the development of Hong Kong as the key centre for offshore renminbi banking and financial services. A full suite of renminbi commercial banking products was launched in March, including renminbi commercial finance, renminbi current account, renminbi overdraft and renminbi factoring. By 30 June 2010, more than 4,000 cross-border renminbi trade settlement accounts had been opened, with total turnover from cross-border renminbi trade business routed through the bank amounting to over RMB4.2 billion.
 
To assist commercial customers with cross-border operations, CMB continued to collaborate with China Export and Credit Insurance Corporation (Sinosure), as well as Hang Seng China and our strategic mainland partner Industrial Bank. Strengthening these partnerships has augmented CMB's capacity to offer one-stop commercial banking solutions and capture an increasing share of cross-border business flows.
 

CMB worked to provide competitive corporate wealth management products for its customers, especially those in the top-end segment. Enhanced corporate insurance products were marketed to customers using different selling angles, including as wealth management, investment and funding tools. With the sovereign debt crisis in Europe serving to prolong uncertainty in financial markets, momentum was maintained in investment services business with the up-skilling of the sales force, and a greater emphasis on more defensive investment instruments and treasury hedging solutions. Income derived from corporate wealth management business recorded an encouraging growth of 37.1 per cent, increasing its contribution to CMB's total operating income by 1.9 percentage points compared with 2009 to reach 15.1 per cent.


In support of the SME community, Business Banking Centres in prime commercial locations were refurbished to enhance service delivery.

 

The bank continued to be an active player in government-backed SME loan schemes. Since the launch of the SME Loan Guarantee Scheme and Special Loan Guarantee Scheme in late 2008, the bank has approved about 6,000 applications with a total loan amount of more than HK$16.3 billion at 30 June 2010.

 

CMB customers continued to migrate to online and automated banking channels, supported by the expansion of service offerings. At 30 June 2010, over 82,900 customers had registered for the bank's Business e-Banking service - up 16.8 per cent compared with a year earlier. The number of online business banking transactions grew by 18.8 per cent.

 

Corporate Banking ('CIB') capitalised on economic recovery in Hong Kong and on the Mainland to record a 7.5 per cent rise in operating profit excluding loan impairment charges to HK$556 million. Profit before tax was up 24.7 per cent at HK$560 million, due mainly to a 98.8 per cent improvement in loan impairment charges. Improvements in the economic environment combined with low interest rates and the increasing availability of investment opportunities to support increased customer demand for funding. This created new opportunities to expand lending, but intensifying competition among banks to book loan assets drove down margins compared with 2009. With changes in the market environment on the Mainland, CIB put more emphasis on lending in Hong Kong and made good progress in expanding its business among key customer segments, including large mainland-owned companies with operations in Hong Kong. Working closely with colleagues in Hang Seng China, CIB provided customers with effective cross-border banking support. This helped strengthen relationships, enabling CIB to capture an increasing share of business from these customers in areas such as deposits.

 

CIB's loan and deposit balances grew by 16.6 per cent and 45.0 per cent respectively compared with the end of December 2009. Net interest income increased by 9.9 per cent compared with a year earlier. Loan impairment charges decreased, resulting in a 27.6 per cent rise in operating profit after impairment compared with the same period last year.
 

Treasury ('TRY') reported a 29.1 per cent drop in profit before tax to HK$1,430 million, mainly reflecting the weak performance of net interest income.
 
With the fragility of the economic recovery and sovereign risks in Europe, global interest rates continued to hover at low levels in the first half of 2010. Coupled with ample liquidity in the local market, this served to limit good investment opportunities in the balance sheet management portfolio. Re-pricing of matured investments resulted in a significant drop in the interest margin. Overall, net interest income fell by 55.0 per cent to HK$609 million.
 
In the difficult interest rate environment, Treasury closely monitored market opportunities to dispose of assets and prudently invested in selective quality securities. The mix of investments in the balance sheet management portfolio was improved. For the first six months of 2010, disposal gains of over HK$60 million were generated, contributing to the bank's bottom line.   

 

With high market volatility and tightening regulatory requirements for sales of investment products to the retail segment posing challenges for proprietary trading and product sales, Treasury worked to sustain trading business momentum by promoting sales of renminbi-linked products and hedging instruments, including foreign exchange options. Income contribution from sales of vanilla and exotic foreign exchange options grew six-fold compared with the same period last year. However, with a HK$82 million drop in funding swap income for the first half of 2010, net trading income fell by 17.9 per cent to HK$506 million. If the volatile funding swap income (described below) is excluded, net trading income decreased by HK$28 million, or 6.8 per cent.

 

 

 

 

 

(Treasury from time to time employs foreign exchange swaps for its funding activities, which in essence involves 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 HKAS 39, the exchange difference of the spot and forward contracts is required to be recognised as a foreign exchange gain/loss, while the corresponding interest differential between the original and swap funding is reflected in net interest income.)


 

 

Mainland business

 

Including two cross-city sub-branches that opened in Guangdong Province under CEPA VI during the first half of 2010, Hang Seng Bank (China) Limited now operates a network of 38 outlets in Beijing, Shanghai, Guangzhou, Dongguan, Shenzhen, Fuzhou, Nanjing, Hangzhou, Ningbo, Tianjin, Kunming, Foshan and Zhongshan. The bank has a branch in Shenzhen for foreign currency wholesale business and a representative office in Xiamen.


Strong growth was recorded in gross customer advances, which rose by 13.2 per cent to HK$32.1 billion when compared with last year-end. With the further development of wealth management business and Commercial Banking's growing service capabilities, there was  good growth in both personal and commercial customer bases, with total customers increasing by 9.1 per cent year on year. This increase in the mainland customer base helped underpin a 24.6 per cent rise in customer deposits when compared with last year-end.

 

Total operating income grew by 16.4 per cent, supported by the 10.1 per cent increase in net interest income and the 84.4 per cent rise in other operating income. The improvement in other operating income was partly offset by increased exchange losses from the revaluation of US dollar capital funds against the renminbi during the first half of 2010. Profit before tax also recorded encouraging growth of 144.0 per cent when compared with the same period last year.

 

To reinforce the group's long-term commitment to the mainland market and support the continued development of Hang Seng China's business, in May this year Hang Seng China signed a RMB510 million agreement to acquire headquarter premises in Shanghai.

 

The bank's strategic alliance with Industrial Bank continues to yield encouraging results. The Bank took up its full share entitlement under a rights issue by Industrial Bank and increased its equity interest in the mainland bank from 12.78 per cent to 12.80 per cent at 30 June 2010.

 

 

Consolidated Income Statement (unaudited)

 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
         

(restated)

    

(restated)

  
                   

Interest income

  

7,665

    

8,775

    

           7,615

 

Interest expense

  

(952

)

  

(1,500

)

  

          (867

)

Net interest income

  

6,713

    

7,275

    

             6,748

 

Fee income

  

2,835

    

2,327

    

             2,863

 

Fee expense

  

(466

)

  

(401

)

  

              (468

)

Net fee income

  

2,369

    

1,926

    

             2,395

  

Trading income

 

890

    

1,035

    

             888

 

Net income/(loss) from financial

                  

  instruments designated at fair value 

 

132

  

 

(195

)

  

             120

 

Dividend income

  

4

    

5

    

                 11

  

Net earned insurance premiums

  

6,359

    

6,658

    

             4,861

 

Other operating income

 

636

    

350

    

               739

 

Total operating income

 

17,103

    

17,054

    

           15,762

 

Net insurance claims incurred and

                  

  movement in policyholders' liabilities

  

(6,749

)

  

(6,478

)

  

            (5,526

)

Net operating income before loan

                  

  impairment charges and

              

          

 

  other credit risk provisions

  

10,354

    

10,576

    

           10,236

 

Loan impairment charges and

                  

  other credit risk provisions

  

(153

)

  

(621

)

  

              (191

)

Net operating income

 

10,201

    

9,955

    

10,045

 

Employee compensation and benefits

  

(1,773

)

  

(1,669

)

  

            (1,709

)

General and administrative expenses

 

(1,376

)

  

(1,273

)

  

            (1,460

)

Depreciation of premises, plant

             

             

 

  and equipment

 

(306

)

  

(286

)

  

(305

)

Amortisation of intangible assets

  

(49

)

  

(40

)

  

                (44

)

Total operating expenses

  

(3,504

)

  

(3,268

)

  

          (3,518

)

Operating profit

 

6,697

    

6,687

    

           6,527

 

Gains less losses from financial investments

                  

  and fixed assets

  

69

    

55

    

131             

 

Net surplus on property revaluation

  

153

    

94

    

               158

  

Share of profits from associates 

 

1,184

    

763

    

               985

 

Profit before tax

 

8,103

    

7,599

    

          7,801

 

Tax expense

  

(1,139

)

  

(1,173

)

  

            (1,089

)

Profit for the period

  

6,964

    

6,426

    

             6,712

 
                   
                   

Profit attributable to shareholders

  

6,964

    

6,426

    

             6,712

  
                   

Earnings per share (in HK$)

  

3.64

    

3.36

    

3.51

  

 

The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as 'Net trading income' and arising from financial instruments designated at fair value through profit and loss 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 interest income and interest expense of Hang Seng, as included within the HSBC Group accounts:

   

Half-year ended ended

    

Half-year ended

    

Half-year ended

  

Figures in HK$m

  

30 June 2010

    

     30 June 2009

    

         31 December2009

  
                   

Interest income

  

7,526

    

8,545

    

7,405

  

Interest expense

  

(757

)

  

(1,124

)

  

(689

)

Net interest income

  

6,769

    

7,421

    

6,716

  

Net interest income and expense reported as 'Net trading income'

  

(83

)

  

(196

)

  

(38

)

Net interest income and expense reported as 'Net income from

                  

  financial instruments designated at fair value'

  

27

    

50

    

70

  

 

 


Details of dividends payable to shareholders of the bank attributable to the profit for the half year are set out on page 39.
 

 

Consolidated Statement of Comprehensive Income (unaudited)
 

 

Half-year ended

    

Half-year ended

    

Half-year ended

  

 
 

30 June

    

30 June

    

31 December

  

 

Figures in HK$m

2010

    

2009

    

2009

  

 
       

(restated)

    

(restated)

  

 
                 

 

Profit for the period

6,964

    

6,426

    

6,712

 

 
                 

 

Other comprehensive income

                

 

Premises:

                

 

- unrealised surplus on

               

 

  revaluation of premises

690

    

535

    

940

 

 

- deferred taxes

(114

)

  

(79

)

  

(103

)

 

Available-for-sale investments reserve:

                

 

- fair value changes taken to/(from) equity:

            

             

 

 

  -- on debt securities

774

    

1,934

    

1,974

  

 

  -- on equity shares

(30)

    

28

    

52

  

 

- fair value changes transferred

                

 

  (to)/from income statement:

                

 

  -- on impairment

__

    

4

    

__

  

 

  -- on hedged items

(441

)

  

114

    

 (33

)

 

  -- on disposal

(72

)

  

(64

)

  

55

  

 

- share of changes in equity of associates

                

 

  -- fair value changes

108

    

73

    

(99

)

 

- deferred taxes

(34

)

  

(270

)

  

(202

)

 

Cash flow hedge reserve:

                

 

- fair value changes taken to equity

127

    

194

    

213

  

 

- fair value changes transferred to

                

 

  income statement

(261

)

  

(511

)

  

(353

)

 

- deferred taxes

23

    

48

    

21

 

 

Defined benefit plans:

                

 

- actuarial (losses)/gains on defined

            

           

 

 

  benefit plans

(183

)

  

1,520

    

357

  

 

- deferred taxes

30

    

(251

)

  

(58

)

 

Exchange differences on translation of:

                

 

- financial statements of overseas

            

              

 

 

  branches, subsidiaries and associates

176

    

(12

)

  

15

 

 

- others

13

    

5

    

5

    

Other comprehensive income for the

            

 

  

 

  period, net of tax

806

    

3,268

    

2,784

    

Total comprehensive income

                

 

  for the period

7,770

    

9,694

    

9,496

  

 
                 

 

Total comprehensive income

                

 

  for the period attributable to

                

 

  shareholders

7,770

    

9,694

    

9,496

  

 
                 

 

 

Consolidated Statement of Financial Position (unaudited)

 

 

 

 

 

At 30 June

  

 

At 30 June

  

 

At 31 December

  

 

 

Figures in HK$m

  

2010

    

2009

    

2009

  

 

 

          

(restated)

    

(restated)

  

 

 

                    

 

 

ASSETS

                  

 

 

Cash and balances with banks and

                  

 

 

  other financial institutions

  

30,065

    

51,065

    

22,086

  

 

 

Placings with and advances to banks and

                  

 

 

  other financial institutions

  

104,711

    

55,223

    

 104,551

  

 

 

Trading assets

  

35,559

    

84,517

    

66,597

  

 

 

Financial assets designated at fair value

 

6,160

    

6,025

  

 

5,450

  

 

 

Derivative financial instruments

  

4,645

    

4,927

    

5,050

  

 

 

Advances to customers

  

394,110

    

325,371

    

344,621

  

 

 

Financial investments

  

247,280

    

225,338

    

241,502

  

 

 

Investments in associates

  

13,841

    

9,329

    

10,226

  

 

 

Investment properties

  

3,013

    

2,716

    

2,872

  

 

 

Premises, plant and equipment

 

12,853

    

11,704

    

12,414

  

 

 

Intangible assets

  

4,706

    

3,621

    

4,214

  

 

 

Other assets

 

14,134

    

14,534

    

11,069

  

 

 

Deferred tax assets

  

10

    

25

    

16

  

 

 

Total assets

  

871,087

    

794,395

    

830,668

  

 

 

                    

 

 

LIABILITIES AND EQUITY

                  

 

 

                    

 

 

Liabilities

                  

 

 

Current, savings and other deposit accounts

  

650,859

    

591,267

    

636,369

 

 

 

Deposits from banks

  

12,962

    

4,603

    

4,870

  

 

 

Trading liabilities

 

40,789

    

53,387

    

38,391

  

 

 

Financial liabilities designated at fair value

  

446

    

1,452

  

 

1,456

  

 

 

Derivative financial instruments

  

5,516

    

8,778

    

4,251

  

 

 

Certificates of deposit and other

                 

 

 

  debt securities in issue

 

1,360

    

2,294

    

1,826

  

 

 

Other liabilities

 

23,863

    

14,328

    

15,285

  

 

 

Liabilities to customers under

                  

 

 

  insurance contracts

 

59,547

    

49,479

    

54,240

  

 

 

Current tax liabilities

 

963

    

739

    

52

  

 

 

Deferred tax liabilities

  

2,709

    

1,926

    

2,460

  

 

 

Subordinated liabilities

 

7,853

    

9,312

  

 

9,320

  

 

 

Total liabilities

  

806,867

    

737,565

    

768,520

  

 

 

                    

 

 

Equity

                  

 

 

Share capital

  

9,559

    

9,559

    

9,559

  

 

 

Retained profits

  

40,474

    

36,116

    

37,752

  

 

 

Other reserves

  

12,084

    

9,052

    

11,204

  

 

 

Proposed dividends

  

2,103

    

2,103

    

3,633

  

 

 

Shareholders' funds

  

64,220

    

56,830

    

62,148

  

 

 

Total equity and liabilities

  

871,087

    

794,395

    

830,668

  

 

 

                    

 
                       

 

Consolidated Statement of Changes in Equity (unaudited)

 

   

Half-year ended

  

Half-year ended

  

Half-year ended

  


Figures in HK$m

  

30 June
2010

  

30 June
 2009

  

31 December 2009

  
       

(restated)

  

(restated)

  
               

Share capital

              

  At beginning and end of period

  

9,559 

 

9,559 

 

9,559 

 
               

Retained profits (including
  proposed dividends)

              

  At beginning of period

  

41,385 

 

38,260 

 

38,219 

 

  Dividends to shareholders

              

  - Dividends approved in respect of the 
    previous year

  

(3,633 

)

(5,736 

)

__

  

  - Dividends declared in respect of the 
    current period

  

(2,103 

)

(2,103 

)

(4,206 

)

  Transfer

  

105 

 

98 

 

357 

 

  Total comprehensive income
    for the period

  

6,823 

 

7,700 

 

7,015 

 
   

42,577 

 

38,219 

 

41,385 

 
               

Other reserves

              

Premises revaluation reserve

              

  At beginning of period

  

7,885 

 

7,047 

 

7,405 

 

  Transfer

  

(105 

)

(98 

)

(357 

)

  Total comprehensive income
    for the period

  

576 

 

456 

 

  837 

 
   

8,356 

 

7,405 

 

7,885 

 
               

Available-for-sale investment reserve

              

  At beginning of period

  

(257 

)

(3,823 

)

(2,004 

)

  Total comprehensive income
    for the period

  

305 

 

1,819 

 

1,747 

 
   

48 

 

(2,004 

)

(257 

)
               

Cash flow hedge reserve

              

  At beginning of period

  

174 

 

562 

 

293 

 

  Total comprehensive income
    for the period

  

(111 

)

(269 

)

(119 

)
   

63 

 

293 

 

174 

 
               

Foreign exchange reserve

              

  At beginning of period

  

1,382 

 

1,379 

 

1,367 

 

  Total comprehensive income

  for the period

  

176 

 

(12 

)

15 

 
   

1,558 

 

1,367 

 

1,382 

 
               
               


 

 

 

    

Half-year ended

  

Half-year ended

  

Half-year ended

  

 

Figures in HK$m

  

30 June
2010

  

30 June
 2009

  

31 December 2009

  

 

        

(restated)

  

(restated)

  

 

                

 

Other reserve

              

 

  At beginning of period

  

2,020

  

1,984

  

1,991

  

 

Cost of share-based payment

    arrangements

  

38

  

7

  

28

  

 

  Total comprehensive income
    for the period

  

1

  

__

  

1

  

 

    

2,059

  

1,991

  

2,020

  

 

                

 

Total equity

              

 

  At beginning of period

  

62,148

  

54,968

  

56,830

  

 

  Dividends to shareholders

  

(5,736

)

(7,839

)

(4,206

)

 

  Cost of share-based payment 
    arrangements

  

38

  

7

  

28

  

 

  Total comprehensive income
    for the period

  

7,770

  

9,694

  

9,496

  

 

    

64,220

  

56,830

  

62,148

  
                   


 

Consolidated Cash Flow Statement (unaudited)

 

 

Half-year ended

  

Half-year ended

   

 

  

30 June

    

30 June

    

Figures in HK$m

  

2010

    

2009

    
               

Net cash (outflow)/inflow from operating activities

  

(33,732

)

  

102,831

    
               

Cash flows from investing activities

              
               

Dividends received from associates

  

397

    

358

    

Purchase of an interest in an associate

 

(2,626

)

  

__

    

Purchase of available-for-sale investments

  

(16,913

)

  

(35,448

)

  

Purchase of held-to-maturity debt securities

  

(479

)

  

(130

)

  

Proceeds from sale or redemption of

              

  available-for-sale investments

  

23,331

    

26,397

    

Proceeds from redemption of held-to-maturity

              

  debt securities

  

238

    

132

    

Purchase of fixed assets and intangible assets

  

(132

)

  

(157

)

  

Interest received from available-for-sale investments

  

783

    

2,142

    

Dividends received from available-for-sale investments

  

3

    

4

    

Net cash inflow/(outflow) from investing activities

  

4,602

    

(6,702

)

 
             

 

Cash flows from financing activities

            

 
             

 

Dividends paid

 

(5,736

)

  

(7,839

)

 

Interest paid for subordinated liabilities

  

(29

)

  

(86

)

 

Repayment of subordinated liabilities

  

(2,500

)

  

__

  

 

Net cash outflow from financing activities

  

(8,265

)

  

(7,925

)

 
             

 

(Decrease)/Increase in cash and cash equivalents

  

(37,395

)

  

88,204

  

 
             

 

Cash and cash equivalents at 1 January

  

136,759

    

76,116

  

 

Effect of foreign exchange rate changes

  

1,068

    

1,895

  

 

Cash and cash equivalents at 30 June

  

100,432

    

166,215

  

 
             

 

 

 

 

Financial Review

 

Net interest income

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

    

30 June

    

31 December

  

Figures in HK$m

2010

    

2009

    

2009

  
                 

Net interest income/(expense) arising from:

              

- financial assets and liabilities that are

               

  not at fair value through profit and loss

6,772

    

7,430

    

6,721

  

- trading assets and liabilities  

(83

)

  

(196

)

  

(38

)

- financial instruments designated

                

  at fair value

24

    

41

    

65

  
 

6,713

    

7,275

    

6,748

  
                 

Average interest-earning assets

766,382

    

711,253

    

762,234

  
                 

Net interest spread

1.72

%

  

1.99

%

  

1.71

%

Net interest margin

1.77

%

  

2.06

%

  

1.76

%

 

 

Net interest income declined by HK$562 million, or 7.7 per cent, to HK$6,713 million, primarily as a result of the low interest rate environment that has persisted since the second half of 2008. Although interest-earning assets increased by 7.8 per cent, net interest income was impacted by the continuous compression of deposit spreads and the re-pricing of assets at lower rates.

 

Net interest margin narrowed by 29 basis points to 1.77 per cent while net interest spread declined by 27 basis points to 1.72 per cent when compared with the same period last year. The low interest rates impacted liability spreads, resulting in little room for the reduction of interest rates paid to customers. Treasury balance sheet management income was adversely affected by the re-pricing of assets at lower rates. Personal and commercial lending, credit cards and trade finance registered impressive growth during the first half of 2010 and helped to moderate the unfavourable impact of deposit spreads. Strong volume growth was recorded in the average balance of mortgage lending which offset the tighter spreads on mortgages in an intensely competitive home loans market. Interest income from the life insurance funds investment portfolio, which has bond investments as its major underlying assets, grew by 19.1 per cent.

 

The contribution from net free funds also dropped by 2 basis points to 0.05 per cent as a result of the decline in average market interest rates.

 

Compared with the second half of 2009, net interest income dropped marginally by HK$35 million, or 0.5 per cent, due mainly to fewer days in the period, notwithstanding that average interest-earning assets remained broadly stable with growth of 0.5 per cent and the net interest margin was up by 1 basis point.

 

The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as 'Net trading income', while 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 in the HSBC Group accounts:

 

 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Net interest income

  

6,769

    

7,421

    

6,716

  

Average interest-earning assets

  

708,453

    

653,655

    

686,715

  
                   

Net interest spread

  

1.89

%

  

2.23

%

  

1.91

%

Net interest margin

 

1.93

%

  

2.29

%

  

1.94

%

 

 

Net fee income

 

Half-year ended

    

Half-year ended

    

Half-year ended

  
 

30 June

    

30 June

    

31 December

  

Figures in HK$m

  

2010

      

2009

      

2009

  
                       

- Stockbroking and related services

  

673

      

689

      

877

 

- Retail investment funds

 

491

      

226

      

378

  

- Structured investment products

  

11

      

5

      

23

  

- Insurance agency

  

139

      

103

      

87

  

- Account services

  

180

      

143

      

148

  

- Private banking service fee

  

63

      

46

      

83

  

- Remittances

  

122

      

101

      

116

  

- Cards

  

742

      

659

      

754

  

- Credit facilities

  

91

      

67

      

68

  

- Trade services

  

205

      

173

      

206

  

- Other

  

118

      

115

      

123

  

Fee income

  

2,835

      

2,327

      

2,863

 

Fee expense

  

(466

)

    

(401

)

    

(468

 )
   

2,369

      

1,926

      

2,395

  
                       

 

Net fee income increased by HK$443 million, or 23.0 per cent, compared with the first half of 2009 to reach HK$2,369 million.

 

With the improvements in the economic environment and investment sentiment, customer interest in wealth management products strengthened. The group responded in a timely manner to this increased demand and launched new products, including the Hang Seng China A Share Focus Fund. Fee income from retail investment fund sales grew by 117.3 per cent. The group offers a wide spectrum of funds from both Hang Seng Investment Management and third-party providers and has established itself as one of the major fund distributors in Hong Kong. Private banking investment service fee income rose by 37.0 per cent, reflecting the improved client appetite for trading and structured investment products. With the bank recording lower stock market trading turnover and keen price competition, income from stockbroking and related services decreased by 2.3 per cent.

 

Driven by a series of marketing campaigns, credit card business recorded impressive growth and gained market share. The bank's customer loyalty scheme and card utilisation programmes helped boost card spending. In tandem with the growth in average card balances, card services income rose by 12.6 per cent compared with the same period last year. The increase in merchant income was supported by year-on-year increases of 6.1 per cent in the number of cards in circulation and 17.8 per cent in cardholder spending.

 

Insurance agency fee income rose by 35.0 per cent as the bank enhanced its comprehensive range of health and wealth insurance solutions to cater for customer needs. Benefiting from the rebound in export markets, income from trade services and remittances registered good growth of 18.5 per cent and 20.8 per cent respectively. Fee income from account services and credit facilities also increased.

 

Compared with the second half of 2009, net fee income remained broadly at the same level. The increase in fee income from insurance agency service and retail investment funds was offset by the fall in fee revenue from stockbroking and related services which recorded solid growth in the second half of 2009 on the back of the rebound in equity markets.

 

Trading income

 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Trading income:

                  

- foreign exchange

  

880

    

930

    

862

  

- securities, derivatives and

                 

  other trading activities

  

10

    

105

    

26

  
   

890

    

1,035

    

888

  

 

Trading income fell by HK$145 million, or 14.0 per cent, to HK$890 million when compared with the first half of 2009. Foreign exchange income decreased by 5.4 per cent, due mainly to the decrease in net interest income from funding swapsW. Income from securities, derivatives and other trading fell by 90.5 per cent.   

 

 

 

WTreasury 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 HKAS 39, 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/(loss) from financial instruments designated at fair value

 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Net income/(loss) on assets

  designated at fair value which

  back insurance and

  investment contracts

  

147

    

(170

)

  

116

  

Net change in fair value of

  other financial instruments 

  designated at fair value

 

(15

)

  

(25

)

  

4

  
   

132

    

(195

)

  

120

  


Net income from financial instruments designated at fair value reported a revaluation gain of HK$132 million, compared with a revaluation loss of HK$195 million for the first half of 2009, reflecting the more stable financial markets in the first half of 2010. The gain mainly reflects the fair value changes of assets supporting the linked insurance contracts and reported in 'net income/(loss) from financial instruments designated at fair value' with offsetting movements in the value of these contracts reported in the 'net insurance claims incurred and movement in policyholders' liabilities'.
 

 

Other operating income

 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Rental income from

                 

   investment properties

  

78

    

73

    

76

  

Movement in present value

                 

  of in-force long-term 

                 

  insurance business

  

467

    

202

    

558

 

Other

  

91

    

75

    

105

 
   

636

    

350

    

739

 

 

 

Other operating income rose by HK$286 million, or 81.7 per cent, to HK$636 million when compared with the first half of 2009. Movement in present value of in-force insurance business ('PVIF') increased, due mainly to the growth in volume and profitability of new business written in the first half of 2010 as well as increases in natural premiums paid up and maturing policies, which had little impact on PVIF movement in the first half of 2010 but contributed to higher profit release in 2009.

 

Analysis of income from wealth management business

 

Half-year ended

Half-year ended

  

Half-year ended

  
 

30 June

    

30 June

    

31 December

  

Figures in HK$m

  

2010

      

2009

      

2009

  
                       

Investment income:

                      

- retail investment funds

  

491

      

226

      

378

  

- structured investment productsW

  

239

      

204

      

269

  

- private banking service feeWW

  

80

      

58

      

100

  

- stockbroking and related services

  

673

      

689

      

877

  

- margin trading and others

 

72

      

76

      

65

  
   

1,555

      

1,253

      

1,689

  

Insurance income:

                      

- life insurance

  

1,197

      

1,089

      

981

  

- general insurance and others

  

173

      

162

      

175

  
   

1,370

      

1,251

      

1,156

  

Total

 

2,925

      

2,504

      

2,845

  
                         

 

W           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.

 

WW 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 rose by 16.8 per cent to HK$2,925 million during the first half of 2010. Investment services income increased by 24.1 per cent, mainly reflecting strong growth in revenue from retail investment fund sales. Income from insurance business grew by 9.5 per cent. Compared with the second half of 2009, wealth management income rose by 2.8 per cent.
 
With the strengthening of major economies in Asia, demand for investment products increased. The bank used its time-to-market strength to launch and promote products and services designed to capture new business flows. Investment funds turnover and sales income rose by 503.2 per cent and 117.3 per cent respectively year on year. Income from structured investment products increased by 17.2 per cent. Securities broking and related services income declined by 2.3 per cent as a result of lower stock market turnover activity recorded by the bank and intense pricing competition in the market.
 
Private banking benefited from the improved investment sentiment, recording a 37.9 per cent rise in service fee income.

 

Leveraging its strong customer relationships, the group continued to enhance a leading position in the retirement savings insurance sector through the promotion of products such as the Smart Income Plan and Target Income Life Insurance Plan. Total policies in force grew by 8.7 per cent year on year. Net interest income and fee income rose by 20.1 per cent as a result of the growth in the size of the life insurance funds investment portfolio which held bond investments as its underlying major assets. Investment returns on life insurance funds improved from a loss of HK$133 million in the first half of 2009 to a gain of HK$97 million in the first half of 2010. The gains are mainly the fair value changes of assets supporting linked insurance contracts and reported under 'net income/(loss) from financial instruments designated at fair value', with offsetting movements in the value of these contracts reported under 'net insurance claims incurred and movement in policyholders' liabilities'. Movement in present value of in-force insurance business ('PVIF') increased, due mainly to the growth in volume and profitability of new business written in the first half of 2010 as well as increases in natural premiums paid up and maturing policies, which had little impact on PVIF movement in the first half of 2010 but contributed to higher profit release in 2009.

 

General insurance income increased by 6.8 per cent to HK$173 million.

 

 

Half-year ended

Half-year ended

  

Half-year ended

  
 

30 June

    

30 June

    

31 December

  

 

Figures in HK$m

  

2010

      

2009

      

2009

  

 
                       

 

Life insurance:

                      

 

- net interest income and fee income

  

1,142

      

951

      

1,061

  

 

- investment returns on life insurance

                     

 

  funds

  

97

      

(133

)

    

150

  

 

- net earned insurance premiums

  

6,189

      

6,502

      

4,691

  

 

- net insurance claims incurred and

                     

 

  movement in policyholders' liabilitiesW

  

(6,698

)

    

(6,433

)

    

(5,479

)

 

- movement in present value of in-force

                     

 

  long-term insurance business

 

467

      

202

      

558

  

 
   

1,197

      

1,089

      

981

  

 

General insurance and others

  

173

      

162

      

175

  

 

Total

 

1,370

      

1,251

      

1,156

  

 
                           

 

W Including premium and investment reserves

 

 

 

Loan impairment charges and other credit risk provisions

 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Loan impairment charges:

                  

- individually assessed

  

(77

)

  

(288

)

  

(22

)

- collectively assessed

  

(76

 )

  

(333

)

  

(169

)
   

(153

 )

  

(621

)

  

(191

)

Of which:

                  

- new and additional

 

(281

 )

  

(709

)

  

(395

)

- releases

  

98

    

61

    

169

  

- recoveries

  

30

    

27

    

35

  
   

(153

)

  

(621

)

  

(191

)
                   

Other credit risk provisions

  

__

    

__

    

__

  
                   

Loan impairment charges and other

                 

  credit risk provisions

  

(153

)

  

(621

)

  

(191

)

 

Loan impairment charges and other credit risk provisions dropped by HK$468 million year-on-year to HK$153 million.

 

Individually assessed provisions fell by HK$211 million, due mainly to lower impairment charges on commercial banking customers in the first half of 2010, supported by the improvement in the credit environment compared to the credit conditions in the same period last year and the bank's good risk management control measures.

 

Collectively assessed provisions dropped by HK$257 million, due largely to the fall in credit card delinquencies. In line with the declining bankruptcy trend, impairment provisions for personal loan portfolios were lower. Impairment allowances for loans not individually identified as impaired also decreased as a result of lower historical loss rates, driven by the improvement in the global credit markets.

 

 

Operating expenses

 

 

Half-year ended

Half-year ended

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
         

(restated)

    

(restated)

  

Employee compensation and benefits:

                  

- salaries and other costs

  

1,403

    

1,401

    

1,313

  

- performance-related pay

  

236

    

123

    

254

  

- retirement benefit costs

  

134

    

145

    

142

  
   

1,773

    

1,669

    

1,709

  

General and administrative expenses:

                  

- rental expenses

  

227

    

210

    

220

  

- other premises and equipment

 

428

    

442

    

458

  

- marketing and advertising expenses

  

234

    

174

    

208

  

- other operating expenses

  

487

    

447

    

574

  
   

1,376

    

1,273

    

1,460

  

Depreciation of business premises

                  

  and equipment

  

306

    

286

    

305

  

Amortisation of intangible assets

  

49

    

40

    

44

  
   

3,504

    

3,268

    

3,518

  
                   

Cost efficiency ratio

  

33.8

%

  

30.9

%

  

34.4

%
                   
 

At 30 June

  

At 30 June

At 31 December

  

Staff numbersW by region

  

2010

    

2009

    

2009

  
                   

Hong Kong

  

7,933

    

7,972

    

7,834

  

Mainland

 

1,497

    

1,411

    

1,449

  

Others

  

58

    

55

    

59

  

Total

 

9,488

    

9,438

    

9,342

  

W Full-time equivalent

 

Operating expenses rose by HK$236 million, or 7.2 per cent, compared with the first half of 2009, reflecting the bank's investments to support business growth while continuing to carefully manage costs in the difficult operating environment. Excluding mainland business, operating expenses rose by 6.1 per cent. Compared with the second half of 2009, operating expenses were maintained at broadly the same level.

 

Employee compensation and benefits increased by HK$104 million, or 6.2 per cent. Salaries and other costs rose by 0.1 per cent, reflecting the combined effects of the increase in annual salary increment and reduction in average headcount. Recognition of good staff performance led to a rise in performance-related pay expenses. General and administrative expenses were up 8.1 per cent, attributable to more marketing and advertising to support business growth. Rental expenses rose due to increased rents for branches in Hong Kong as well as new branches on the Mainland. Depreciation charges were up 7.0 per cent, mainly reflecting increases in depreciation on the bank's headquarters building in Hong Kong. 


The group's number of full-time equivalent staff rose by 146 compared with 2009 year-end - mainly in the Hong Kong operations. Headcount for the mainland operations also rose when compared with last year-end as a result of the expansion of Hang Seng China's mainland business. The cost efficiency ratio for the first half of 2010 was 33.8 per cent, compared with 30.9 per cent for the first half of 2009, due primarily to the combined effects of the reduction in net operating income before impairment charges and other credit risk provisions and the increase in operating expenses. Compared with the second half of 2009, the cost efficiency ratio improved by 0.6 percentage points.

 

 

 

Gains less losses from financial investments and fixed assets 

 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Net gains from disposal of 

                 

  available-for-sale equity securities

  

10

    

159

    

2

 
                 

 

Net gains/(losses) from disposal of

                

 

  available-for-sale debt securities

  

62

    

(95

)

  

(57

)
                   

Impairment of available-for-sale

                 

  equity securities

 

__

    

(4

)

  

__

  
                   

Gains less losses on disposal of

                  

  assets held for sale

  

__

    

__

    

187

  
                   

Gains less losses on disposal of

                  

  fixed assets

  

(3

)

  

(5

)

  

(1

)
   

69

    

55

    

131

  
                   

 

Gains less losses from financial investments and fixed assets amounted to HK$69 million - an increase of HK$14 million compared with the first half of 2009. Net gains from disposal of available-for-sale equity securities fell by HK$149 million, or 93.7 per cent, attributable to the profit realised from the disposal of Visa Inc. in the first half of 2009. In the difficult interest rate environment, we capitalized on market opportunities to dispose of selected instruments and invest in high-quality assets. As a result, there was a HK$62 million gain on the disposal of available-for-sale debt securities - reflecting the profit realised from the disposal of government-guaranteed debt securities - compared with a loss of HK$95 million on the disposal of certain debt securities in the first half of 2009.

 

Tax expense


Taxation in the consolidated income statement represents:
 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
 

30 June

  

30 June

  

31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
       

(restated)

  

(restated)

  
                   

Current tax - provision for

                 

  Hong Kong profits tax

                  

Tax for the period

  

933

    

977

    

867

  

Adjustment in respect of

                 

  prior periods

  

(19

)

  

(3

)

  

__

  
                   

Current tax - taxation outside

                  

  Hong Kong

                  

Tax for the period

  

39

    

3

    

47

  
                   

Deferred tax

                  

Origination and reversal of

                 

  temporary differences

  

186

    

196

    

175

  

Total tax expenses

  

1,139

    

1,173

    

1,089

  
                   


The current tax provision is based on the estimated assessable profit for the first half of 2010, and is determined for the bank and its subsidiaries operating in Hong Kong by using the Hong Kong profits tax rate of 16.5 per cent (the same as in 2009). For subsidiaries and branches operating in other jurisdictions, the appropriate tax rates prevailing in the relevant countries are used. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.

 

 

Earnings per share


The calculation of earnings per share for the first half of 2010 is based on earnings of HK$6,964 million (HK$6,426 million and HK$6,712 million for the first and second halves of 2009 respectively) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from the first and second halves of 2009).

 

 

Dividends per share

 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  

 
   

30 June

    

30 June

  

31 December

  

 
   

2010

    

2009

    

2009

  

 
 

HK$

HK$m

  

HK$

HK$m

  

HK$

HK$m

  
 

per share

    

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

  

Fourth interim

__

__

  

__

__

  

1.90

3,633

  
 

2.20

4,206

  

2.20

4,206

  

3.00

5,736

  

 

 

 

Segmental analysis

 

The group's business comprises five customer groups. To be consistent with the way in which information is reported internally for the purposes of resource allocation and performance assessment, the group identified the following five reportable segments:
 

·    Personal Financial Services provides banking (including deposits, credit cards, mortgages and other retail lending) and wealth management services (including private banking, investment and insurance) to personal customers.

·    Commercial Banking manages middle market and smaller corporate relationships and specialises in trade-related financial services.

·    Corporate Banking handles relationships with large corporate and institutional customers.

·    Treasury engages in balance sheet management and proprietary trading. Treasury also manages the funding and liquidity positions of the group and other market risk positions arising from banking activities.

·    'Other' mainly represents management of shareholders' funds and investments in premises, investment properties and equity shares.


(a) Segmental result

 

For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the customer groups by way of internal capital allocation and fund transfer-pricing mechanisms. Cost allocation is based on the direct costs incurred by the respective customer groups and apportionment of management overheads. Rental charges at market rates for usage of premises are reflected in other operating income for the 'Other' customer group and total operating expenses for the respective customer groups.

 

Profit before tax contributed by the customer groups for the periods stated is set out in the table below. More customer group analysis and discussions are set out in the 'Customer group performance' section on page 14.
 

 

Personal

               

Total

  

 

Financial

Commercial

Corporate

        

reportable

  

Figures in HK$m

Services

  

Banking

  

Banking

  

Treasury

  

Other

segments

  
                         

Half-year ended

30 June 2010

                        
                         

Profit before tax

3,937

  

1,783

  

560

  

1,430

  

393

  

8,103

  

Share of profit before tax

48.6

%

22.0

%

6.9

%

17.6

%

4.9

%

100.0

%
                         

Half-year ended

30 June 2009 (restated)

                        

 
                         

Profit before tax

3,467

  

1,080

  

449

  

2,017

  

586

  

7,599

  

Share of profit before tax

45.6

%

14.2

%

5.9

%

26.6

%

7.7

%

100.0

%
                         

 

Half-year ended

31 December 2009 (restated)

                      

 
                         

Profit before tax

3,791

  

1,557

  

466

  

1,376

  

611

  

7,801

  

Share of profit before tax

48.6

%

20.0

%

6.0

%

17.6

%

7.8

%

100.0

%
                                                                       


(b) Geographic information
 

The geographical regions in this analysis are classified by the location of the principal operations of the subsidiary companies or, in the case of the bank itself, by the location of the branches responsible for reporting the results or advancing the funds.
 
 

 

          

Mainland

      

Figures in HK$m

Hong Kong

Americas

  

and other

  

Total

  
                   

Half-year ended 30 June 2010

                  
                   

Income and expense

                  

Total operating income

  

16,095

  

440

  

568

  

17,103

  

Profit before tax

  

6,479

  

425

  

1,199

  

8,103

  

 

At 30 June 2010

                  
                   

Total assets

  

737,526

  

63,322

  

70,239

  

871,087

  

Total liabilities

  

765,674

  

1,403

  

39,790

  

806,867

  

Interest in associates

  

946

  

__

  

12,895

  

13,841

  

Non-current assetsW

  

20,266

  

__

  

306

  

20,572

  
                   

Half-year ended 30 June 2009 (restated)

                  
                   

Income and expense

                  

Total operating income

  

16,058

  

499

  

497

  

17,054

  

Profit before tax

  

6,372

  

449

  

778

  

7,599

  

 

At 30 June 2009 (restated)

                  
                   

Total assets

  

684,863

  

60,265

  

49,267

  

794,395

  

Total liabilities

  

708,439

  

1,169

  

27,957

  

737,565

  

Interest in associates

  

899

  

__

  

8,430

  

9,329

  

Non-current assetsW

  

17,724

  

__

  

317

  

18,041

  
                   

Half-year ended 31 December 2009(restated)

                
                   

Income and expense

                  

Total operating income

  

14,865

  

386

  

511

  

15,762

  

Profit before tax

  

6,453

  

350

  

998

  

7,801

  

 

At 31 December 2009 (restated)

                  
                   

Total assets

  

710,167

  

63,808

  

56,693

  

830,668

  

Total liabilities

  

734,618

  

1,109

  

32,793

  

768,520

  

Interest in associates

  

916

  

__

  

9,310

  

10,226

  

Non-current assetsW

  

19,183

  

__

  

317

  

19,500

  

W Non-current assets consist of properties, plant and equipment, goodwill and other intangible assets.


 
Cash and balances with banks and other financial institutions
 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Cash in hand

  

3,992

    

3,621

    

4,299

  

Balances with central banks

  

9,404

    

31,637

    

3,397

  

Balances with banks and

                 

   other financial institutions

  

16,669

    

15,807

    

14,390

  
   

30,065

    

51,065

    

22,086

  
                   

 

 

Placings with and advances to banks and other financial institutions
 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Placings with and advances to banks

                 

  and other financial institutions

                 

  maturing within one month

  

57,557

    

28,456

    

76,579

  

Placings with and advances to banks

                 

  and other financial institutions

                 

  maturing after one month

  

47,154

    

26,767

    

27,972

  
   

104,711

    

55,223

    

 104,551

  

 


Trading assets
 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Treasury bills

  

30,156

    

79,426

    

62,028

  

Other debt securities

  

4,203

    

4,340

    

4,562

  

Debt securities

  

34,359

    

83,766

    

66,590

  

Equity shares

  

__

    

1

    

6

  

Total trading securities

  

34,359

    

83,767

    

66,596

  

OtherW

  

1,200

    

750

    

1

  

Total trading assets

  

35,559

    

84,517

    

66,597

  
                   

Debt securities:

                  

- listed in Hong Kong

  

3,043

    

2,872

    

2,712

  

- listed outside Hong Kong

  

109

    

153

    

157

  
   

3,152

    

3,025

    

2,869

  

- unlisted

  

31,207

    

80,741

    

63,721

  
   

34,359

    

83,766

    

66,590

  

Equity shares:

                  

- listed in Hong Kong

  

__

    

1

    

6

  
                   

Total trading securities

  

34,359

    

83,767

    

66,596

  
                   

Debt securities:

                  

Issued by public bodies:

                  

- central governments and central banks

  

34,043

    

83,168

    

65,817

  

- other public sector entities

  

85

    

373

    

369

  
   

34,128

    

83,541

    

66,186

  

Issued by other bodies:

                  

- banks and other financial institutions

  

118

    

80

    

292

  

- corporate entities

  

113

    

145

    

112

  
   

231

    

225

    

404

  
   

34,359

    

83,766

    

66,590

  

Equity shares:

                  

Issued by corporate entities

  

__

    

1

    

6

  

Total trading securities

  

34,359

    

83,767

    

66,596

  
                   

W This represents amount receivable from counterparties on trading transactions not yet settled.

 

With the global economy staging a gradual recovery and the improved credit environment in the first half of 2010, the bank continued to redeploy surplus funds arising from the maturity of trading assets into interbank placements and available-for-sale debt securities to achieve yield enhancement while prudently managing risk. As a result, trading securities declined by 48.4 per cent to HK$34,359 million when compared with last year-end. These trading securities are mostly in the form of government treasury bills with short tenors. 

 


Financial assets designated at fair value 
 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Certificates of deposit

  

10

    

139

    

129

  

Other debt securities

  

4,569

    

5,481

    

4,798

  

Debt securities

  

4,579

    

5,620

    

4,927

  

Equity shares

  

1,581

    

405

    

523

  
   

6,160

    

6,025

    

5,450

  
                   

Debt securities:

                  

- listed in Hong Kong

  

3

    

559

    

3

  

- listed outside Hong Kong

  

195

    

271

    

194

  
   

198

    

830

    

197

  

- unlisted

  

4,381

    

4,790

    

4,730

  
   

4,579

    

5,620

    

4,927

  

Equity shares:

                  

- listed in Hong Kong

  

157

    

34

    

21

  

- listed outside Hong Kong

  

57

    

54

    

69

  
   

214

    

88

    

90

  

- unlisted

  

1,367

    

317

    

433

  
   

1,581

    

405

    

523

  
   

6,160

    

6,025

    

5,450

  
                   

Debt securities:

                  

Issued by public bodies:

                  

- central governments and central banks

  

151

    

556

    

154

  

- other public sector entities

  

138

    

409

    

168

  
   

289

    

965

    

322

  

Issued by other bodies:

                  

- banks and other financial institutions

  

4,165

    

4,441

    

4,464

  

- corporate entities

  

125

    

214

    

141

  
   

4,290

    

4,655

    

4,605

  
   

4,579

    

5,620

    

4,927

  

Equity shares:

                  

Issued by corporate entities

  

1,581

    

405

    

523

  
   

6,160

    

6,025

    

5,450

  
                   

 

 

Advances to customers

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Gross advances to customers

  

395,935

    

327,731

    

346,586

  

Less:

                  

Loan impairment allowances:

                  

- individually assessed

  

(1,099

)

  

(1,492

)

  

(1,151

)

- collectively assessed

  

(726

)

  

(868

)

  

(814

)
   

394,110

    

325,371

    

344,621

  
                   
                   

Included in advances to customers are:

                  

- Trade bills

  

7,636

    

2,773

    

2,802

  

  Less: loan impairment allowances

  

(39

)

  

(39

)

  

(42

)
   

7,597

    

2,734

    

2,760

  
                   

 

 


Loan impairment allowances against advances to customers

 

                   

 
   

Individually

  

Collectively

          

 

Figures in HK$m

  

assessed

  

assessed

    

Total

  

 
                 

 

At 1 January 2010

  

1,151

    

814

    

1,965

  

 

Amounts written off

  

(129

)

  

(184

)

  

(313

)

 

Recoveries of advances

                  

 

  written off in previous years

  

9

    

21

    

30

  

New impairment allowances

                  

 

  charged to income statement

 

114

    

167

    

281

  

 

Impairment allowances released

 

 

  

 

 

    

 

  

 

  to income statement

 

(37

)

  

(91

)

  

(128

)

 

Unwinding of discount of loan

 

 

  

 

 

    

 

  

 

  impairment allowances

 

    

 

          

 

  recognised as 'interest income'

 

(9

)

 

(1

)

  

(10

)

 

At 30 June 2010

  

1,099

    

726

    

1,825

  

 
                   

 
                       


Total loan impairment allowances as a percentage of gross advances to customers are as follows:

 

 

At 30 June

  

At 30 June

  

At 31 December

  
   

2010

    

2009

    

2009

  
   

%

    

%

    

%

  
                   

Loan impairment allowances:

                  

- individually assessed

  

0.28

    

0.46

    

0.33

  

- collectively assessed

  

0.18

    

0.26

    

0.23

  

Total loan impairment allowances

  

0.46

    

0.72

    

0.56

  
                   

 

Total loan impairment allowances as a percentage of gross advances to customers was 0.46 per cent at 30 June 2010 - 0.1 percentage points lower than at the end of 2009. Individually assessed and collectively assessed allowances as a percentage of gross advances both fell by 0.05 percentage points to 0.28 per cent and 0.18 per cent respectively, reflecting the improved credit quality and the bank's good credit risk management control.
 
 

Impaired advances and allowances

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Gross impaired advances

  

2,429

    

3,742

    

2,508

  

Individually assessed allowances

 

(1,099

)

  

(1,492

)

  

(1,151

)
   

1,330

    

2,250

    

1,357

  
                   

Individually assessed allowances

                  

  as a percentage of

                  

  gross impaired advances

  

45.2

%

  

39.9

%

  

45.9

%
               

 

  

Gross impaired advances

                 

  as a percentage of gross

                 

  advances to customers

  

0.6

%

  

1.1

%

  

0.7

%
         

 

        

 

Impaired advances are those advances where objective evidence exists that full repayment of principal or interest is considered unlikely.

 

Gross impaired advances declined by HK$79 million, or 3.1 per cent, to HK$2,429 million compared with last year-end, with the downgrade of certain commercial banking accounts more than offset by the write-off of irrecoverable balances against impairment allowances and customer repayments. Gross impaired advances as a percentage of gross advances to customers stood at 0.6 per cent - an improvement of 0.1 percentage points compared with last year-end.

 

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Gross individually assessed

                  

  impaired advances

  

2,280

    

3,650

    

2,434

  

Individually assessed allowances

 

(1,099

)

  

(1,492

)

  

(1,151

)
   

1,181

    

2,158

    

1,283

  
                   

Gross individually assessed

                  

  impaired advances

                  

  as a percentage of

                  

  gross advances to customers

  

0.6

%

  

1.1

%

  

0.7

%
                   

Amount of collateral which

                  

  has been taken into account

              

 

  

  in respect of individually assessed

                  

  impaired advances to customers

  

862

    

2,105

    

1,024

  
         

 

        


 
Collateral includes any tangible security that carries a fair market value and is readily marketable. This includes (but is not limited to) cash and deposits, stocks and bonds, mortgages over properties and charges over other fixed assets such as plant and equipment. Where collateral values are greater than gross advances, only the amount of collateral up to the gross advance has been included.

 


Overdue advances
 

Advances to customers that are more than three months overdue and their expression as a percentage of gross advances to customers are as follows:

 

 

At 30 June

  

At 30 June

  

At 31 December

  
     

2010

      

2009

      

2009

  
 

HK$m

  

%

  

HK$m

  

%

  

HK$m

  

%

  
                         

Gross advances to customers

                        

  which have been overdue

                        

  with respect to either principal

                        

  or interest for periods of:

                       

- more than three months but

                        

  not more than six months

179

  

0.1

  

628

  

0.2

  

241

  

0.1

  

- more than six months but

                       

  not more than one year

164

  

__

  

830

  

0.3

  

353

  

0.1

  

- more than one year

1,055

  

0.3

  

500

  

0.1

  

864

  

0.2

  
 

1,398

  

0.4

  

1,958

  

0.6

  

1,458

  

0.4

  

 

Advances with a specific repayment date are classified as overdue when the principal or interest is overdue and remains unpaid at period-end. Advances repayable by regular instalments are treated as overdue when an instalment payment is overdue and remains unpaid at period-end. Advances repayable on demand are classified as overdue either when a demand for repayment has been served on the borrower but repayment has not been made in accordance with the demand notice or when the advances have remained continuously outside the approved limit advised to the borrower for more than the overdue period in question.

 

Overdue advances decreased by 4.1 per cent to HK$1,398 million compared with last year-end. Overdue advances as a percentage of gross advances to customers stood at 0.4 per cent.
 

Rescheduled advances

 

Rescheduled advances and their expression as a percentage of gross advances to customers are as follows:

 

 

At 30 June

  

At 30 June

  

At 31 December

  
     

2010

      

2009

      

2009

  
 

HK$m

  

%

  

HK$m

  

%

  

HK$m

  

%

  

Rescheduled advances

                       

   to customers

258

  

0.1

  

666

  

0.2

  

703

  

0.2

  
                         

 

Rescheduled advances are those advances that have been rescheduled or renegotiated for reasons related to the borrower's financial difficulties. This will normally involve the granting of concessionary terms and resetting the overdue account to non-overdue status. A rescheduled advance will continue to be disclosed as such unless the debt has been performing in accordance with the rescheduled terms for a period of six to 12 months. Rescheduled advances that have been overdue for more than three months under the rescheduled terms are reported as overdue advances (page 48).

 

Rescheduled advances decreased by HK$445 million, or 63.3 per cent, to HK$258 million at 30 June 2010, representing 0.1 per cent of gross advances to customers. The improvement was due mainly to the upgrade and repayments of customers.

 

 

Segmental analysis of advances to customers by geographical area


Advances to customers by geographical area are classified according to the location of the counterparties after taking into account the transfer of risk. In general, risk transfer applies when an advance is guaranteed by a party located in an area that is different from that of the counterparty. At 30 June 2010, about 90 per cent (over 90 per cent at 30 June 2009 and about 90 per cent at 31 December 2009) of the group's advances to customers, including related impaired advances and overdue advances, were classified under Hong Kong. There was no geographical segment other than Hong Kong to which the bank's advances to customers is not less than 10 per cent of the total loans and advances.
 

 

Gross advances to customers by industry sector

 

The analysis of gross advances to customers by industry sector based on categories and definitions used by the HKMA is as follows:

 

 

At 30 June

  

At 30 June

  

At 31 December

  

 

  

2010

    

2009

    

2009

  

Figures in HK$m

              
                   

Gross advances to customers for

                  

  use in Hong Kong

                  
                   

Industrial, commercial and

                  

  financial sectors

                  

Property development

  

28,226

    

22,865

    

23,618

  

Property investment

  

88,418

    

66,060

    

75,264

  

Financial concerns

  

3,395

    

2,130

    

2,720

  

Stockbrokers

  

2,646

    

2,736

    

480

  

Wholesale and retail trade

  

9,993

    

6,489

    

7,812

  

Manufacturing

  

14,924

    

11,350

    

12,080

  

Transport and transport equipment

  

5,565

    

8,031

    

6,503

  

Recreational activities

  

37

    

28

    

37

  

Information technology

  

1,227

    

1,265

    

1,247

  

Other

  

28,083

    

25,348

    

24,405

  
   

182,514

    

146,302

    

154,166

  

Individuals

                  

Advances for the purchase of flats under

                 

  the Government Home Ownership

                  

  Scheme, Private Sector Participation

                 

  Scheme and Tenants Purchase Scheme

  

14,179

    

15,740

    

14,647

  

Advances for the purchase of other

                  

  residential properties

  

102,566

    

91,656

    

96,651

  

Credit card advances

  

14,289

    

12,780

    

13,818

  

Other

  

13,363

    

10,992

    

11,961

  
   

144,397

    

131,168

    

137,077

  

Total gross advances for

                  

  use in Hong Kong

  

326,911

    

277,470

    

291,243

  

Trade finance

  

29,319

    

18,878

    

19,215

  

Gross advances for

                  

  use outside Hong Kong

  

39,705

    

31,383

    

36,128

  

Gross advances to customers

  

395,935

    

327,731

    

346,586

  
                   

 

 

 

Gross advances to customers grew by HK$49.3 billion, or 14.2 per cent, to HK$395.9 billion compared with the end of 2009.

 

Loans for use in Hong Kong increased by HK$35.7 billion, or 12.2 per cent, with expansion recorded in most industry sectors. The bank proactively managed its loan book and took steps to capture business opportunities arising from the improving credit environment and strong property market. Lending to the property development, property investment and financial concerns (including financial vehicles) sectors grew by 19.5 per cent, 17.5 per cent and 24.8 per cent respectively. Lending to stockbrokers rose sharply by 451.3 per cent, reflecting increased IPO-related financing. The bank was an active participant in Hong Kong government-organised schemes to support SMEs, and recorded loan growth of 27.9 per cent to the wholesale and retail trade sector and 23.5 per cent to manufacturing. The decline in lending to transport and transport equipment was due mainly to loan repayments in the first half of the year. Growth in lending to 'Other' was attributable to certain new working capital financing for large corporate customers.

 

Lending to individuals rose by 5.3 per cent against last year-end. Excluding the fall in Government Home Ownership Scheme mortgages, lending to individuals grew by 6.4 per cent. In the buoyant property market, the bank sustained a leading position for mortgage business based on a competitive pricing strategy and premium service. Residential mortgage lending to individuals increased by 6.1 per cent, despite intense competition and new government measures to regulate property sales. Credit card advances grew by 3.4 per cent, supported by a year-on-year rise of 6.1 per cent in the number of cards in circulation and a 17.8 per cent increase in cardholder spending. Other loans to individuals were up 11.7 per cent, reflecting the bank's successful efforts to prudently expand personal lending.

 

Benefiting from recovering global demand and the rebound in export markets, the bank grew trade finance lending by 52.6 per cent. Commercial Banking took steps to expand trade finance business by maintaining close relationships with strategic partners to support cross-border renminbi trade business and grow trade refinancing lending to other banks on the Mainland.

 

Loans for use outside Hong Kong rose by HK$3.6 billion, or 9.9 per cent, compared with the end of 2009, driven largely by lending on the Mainland. The mainland loan portfolio increased by 13.2 per cent to HK$32.1 billion, underpinned by the expansion of renminbi lending to corporate borrowers.


 

Financial investments

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Available-for-sale at fair value:

                  

- debt securities

  

193,786

    

180,413

    

192,486

  

- equity shares

  

301

    

295

    

347

  

Held-to-maturity debt securities

                 

   at amortised cost

  

53,193

    

44,630

    

48,669

  
   

247,280

    

225,338

    

241,502

  
                   

Fair value of held-to-maturity debt securities

  

56,328

    

44,823

    

49,805

  

 

                  

Treasury bills

  

62,962

    

35,778

    

53,973

  

Certificates of deposit

  

7,005

    

9,469

    

7,665

  

Other debt securities

  

177,012

    

179,796

    

179,517

  

Debt securities

  

246,979

    

225,043

    

241,155

  

Equity shares

  

301

    

295

    

347

  
   

247,280

    

225,338

    

241,502

  
                   

Debt securities:

                  

- listed in Hong Kong

  

9,168

    

5,526

    

7,607

  

- listed outside Hong Kong

  

73,831

    

65,791

    

66,618

  
   

82,999

    

71,317

    

74,225

  

- unlisted

  

163,980

    

153,726

    

166,930

  
   

246,979

    

225,043

    

241,155

  

Equity shares:

                  

- listed in Hong Kong

  

45

    

48

    

60

  

- listed outside Hong Kong

  

58

    

64

    

85

  
   

103

    

112

    

145

  

- unlisted

  

198

    

183

    

202

  
   

301

    

295

    

347

  
   

247,280

    

225,338

    

241,502

  
                   

Fair value of listed financial investments

  

83,561

    

71,398

    

74,493

  
                   

Debt securities:

                  

Issued by public bodies:

                  

- central governments and central banks

  

78,730

    

44,478

    

64,776

  

- other public sector entities

  

20,947

    

9,463

    

25,065

  
   

99,677

    

53,941

    

89,841

  

Issued by other bodies:

                  

- banks and other financial institutions

  

129,462

    

154,640

    

133,312

  

- corporate entities

  

17,840

    

16,462

    

18,002

  
   

147,302

    

171,102

    

151,314

  
   

246,979

    

225,043

    

241,155

  

Equity shares:

                  

Issued by corporate entities

  

301

    

295

    

347

  
   

247,280

    

225,338

    

241,502

  

 

Debt securities by rating agency designation

 

 

At 30 June

  

At 30 June

  

At 31 December

Figures in HK$m

  

2010

    

2009

    

2009

 

                

AAA

  

87,424

    

86,125

    

74,339

AA- to AA+

  

94,497

    

67,826

    

98,811

A- to A+

  

59,869

    

58,544

    

58,749

B+ to BBB+

  

2,048

    

7,978

    

5,094

B and lower

  

__

    

151

    

__

Unrated

  

3,141

    

4,419

    

4,162
   

246,979

    

225,043

    

241,155


Financial investments include treasury bills, certificates of deposit, other debt securities and equity shares intended to be held for an indefinite period of time.
 
Available-for-sale investments may be sold in response to needs for liquidity or changes in the market environment, and 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 premiums and discounts.
 

Financial investments rose by HK$5.8 billion, or 2.4 per cent, compared with last year-end. Investments were primarily in high-quality debt securities or debt securities guaranteed by governments, reflecting the bank's strategy to identify quality investment opportunities that enable it to optimise returns while prudently managing risk. At 30 June 2010, 98.7 per cent of the group's holdings of debt securities were assigned investment grade ratings by rating agencies. The unrated debt securities were issued by subsidiaries of investment-grade banks and are guaranteed by their corresponding holding companies. These notes rank pari passu with all of the respective guarantor's other senior debt obligations. The group did not hold any investments in structured investment vehicles or any sub-prime related assets such as collateralised debt obligations, mortgage-backed securities and other asset-backed securities.

 

Investments in associates

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Share of net assets

  

13,310

    

8,782

    

9,691

  

Intangibles

  

94

    

119

    

106

  

Goodwill

 

437

    

428

    

429

  
   

13,841

    

9,329

    

10,226

  

 

Investments in associates rose by HK$3,615 million, due mainly to the increase in the bank's share of net assets of Industrial Bank and its participation - at an investment cost of RMB2.3 billion - in Industrial Bank's rights issue in the first half of 2010, which increased the bank's equity interest in Industrial Bank from 12.78 per cent to 12.80 per cent at 30 June 2010.

 

 

Intangible assets

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Present value of in-force long-term  

                 

  insurance business

  

3,933

    

2,909

    

3,466

  

Internally developed software

  

408

    

357

    

385

  

Acquired software

  

36

    

26

    

34

  

Goodwill

  

329

    

329

    

329

  
   

4,706

    

3,621

    

4,214

  

 

 

Other assets

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Items in the course of collection

                  

  from other banks

  

5,393

    

7,059

    

4,343

  

Prepayments and accrued income

  

2,160

    

2,263

    

1,835

  

Assets held for sale

                  

- Repossessed assets

  

19

    

59

    

47

  

- Other assets held for sale

  

18

    

254

    

__

  

Acceptances and endorsements

  

4,662

    

3,388

    

3,584

  

Retirement benefit assets

  

77

    

64

    

86

  

Other accounts

  

1,805

    

1,447

    

1,174

  
   

14,134

    

14,534

    

11,069

  
                   

 

 

Current, savings and other deposit accounts

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Current, savings and

                 

  other deposit accounts:

                  

- as stated in consolidated statement of

                 

  financial position

  

650,859

    

591,267

    

636,369

  

- structured deposits reported as

                  

  trading liabilities

  

17,499

    

28,306

    

22,212

  
   

668,358

    

619,573

    

658,581

  

By type:

                  

- demand and current accounts

  

54,432

    

43,594

    

53,450

  

- savings accounts

  

426,942

    

380,090

    

437,440

  

- time and other deposits

  

186,984

    

195,889

    

167,691

  
   

668,358

    

619,573

    

658,581

  

 

 

Certificates of deposit and other debt securities in issue

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Certificates of deposit and 

                 

  other debt securities in issue:

                  

- as stated in consolidated statement of

                 

  financial position

  

1,360

    

2,294

    

1,826

  

- structured certificates of deposit

                 

  and other debt securities in issue

                  

  reported as trading liabilities

  

2,508

    

7,329

    

3,247

  
   

3,868

    

9,623

    

5,073

  
                   

By type:

                 

- certificates of deposit in issue

  

1,574

    

3,206

    

2,304

  

- other debt securities in issue

  

2,294

    

6,417

    

2,769

  
   

3,868

    

9,623

    

5,073

  
                   

Customer deposits and certificates of deposit and other debt securities in issue stood at HK$672.2 billion at 30 June 2010 - a rise of 1.3 per cent over the end of 2009 and 6.8 per cent year on year. Higher growth was recorded in time deposits and current account balances, but this was partly offset by the fall in savings balances. Structured deposits and other structured certificates of deposit and other debt securities in issue fell, due primarily to reduced demand for these investment-related products in the uncertain market conditions. Deposits with Hang Seng China rose by 24.6 per cent, driven mainly by renminbi deposits. 

 

Trading liabilities

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Structured certificates of deposit and

                  

  other debt securities in issue

  

2,508

    

7,329

    

3,247

  

Structured deposits

  

17,499

    

28,306

    

22,212

  

Short positions in securities and other

  

20,782

    

17,752

    

12,932

  
   

40,789

    

53,387

    

38,391

  
                   

 

 

 

Other liabilities

 

 

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

  

2010

    

2009

    

2009

  
                   

Items in the course of transmission

                  

  to other banks

  

12,540

    

5,644

    

6,304

  

Accruals

  

1,930

    

2,106

    

2,039

  

Acceptances and endorsements

  

4,662

    

3,388

    

3,584

  

Retirement benefit liabilities

  

1,903

    

2,071

    

1,712

  

Other

  

2,828

    

1,119

    

1,646

  
   

23,863

    

14,328

    

15,285

  
                   

 

 

Subordinated liabilities

 

   

At 30 June

  

At 30 June

  

At 31 December

  

Figures in HK$m

    

2010

    

2009

    

2009

  
                     

Nominal value

Description

                  
                     

Amount owed to third parties

                  
                     

HK$1,500 million

Callable floating rate

                  
 

  subordinated notes

                  
 

  due June 2015 (Note)

  

__

    

1,499

    

1,499

  
                     

HK$1,000 million

4.125 per cent callable

                  
 

  fixed rate subordinated

                  
 

  notes due June 2015 (Note)

 

__

    

1,017

    

1,003

  
                     

US$450 million

Callable floating rate

                 
 

  subordinated notes

                  
 

  due July 2016

 

3,498

    

3,479

    

3,483

  
                     

US$300 million

Callable floating rate

                 
 

  subordinated notes

                  
 

  due July 2017

 

2,331

    

2,319

    

2,321

  
                     

Amount owed to HSBC Group undertakings

                  
                     

US$260 million

Callable floating rate

                  
 

  subordinated loan debt

                  
 

  due December 2015

  

2,024

    

2,015

    

  2,017

  
     

7,853

    

10,329

    

10,323

  

Representing:

                    

- measured at amortised cost

  

7,853

    

9,312

    

9,320

  

- designated at fair value

  

__

    

1,017

    

1,003

  
     

7,853

    

10,329

    

10,323

  
                     

 

(Note: The bank has exercised its option to redeem these subordinated notes at par of HK$2,500 million in aggregate in June 2010.)

 

 

No subordinated debt was issued during the first half of 2010. The outstanding subordinated notes, which qualify as supplementary capital, serve to help the bank maintain a more balanced capital structure and support business growth.
 

 

Shareholders' funds

 

 

At 30 June

  

At 30 June

At 31 December

    

Figures in HK$m

  

2010

    

2009

    

2009

    
         

(restated)

    

(restated)

    
                     

Share capital

  

9,559

    

9,559

    

9,559

    

Retained profits

  

40,474

    

36,116

    

37,752

    

Premises revaluation reserve

  

8,356

    

7,405

    

7,885

    

Cash flow hedge reserve

  

63

    

293

    

174

    

Available-for-sale investment reserve

                    

- on debt securities

  

(156

)

  

(2,191

)

  

(496

)

  

- on equity securities

  

204

    

187

    

239

    

Capital redemption reserve

  

99

    

99

    

99

    

Other reserves

  

3,518

    

3,259

    

3,303

    

Total reserves

  

52,558

    

45,168

    

48,956

    
   

62,117

    

54,727

    

58,515

    

Proposed dividends

  

2,103

    

2,103

    

3,633

    

Shareholders' funds

  

64,220

    

56,830

    

62,148

    
                     

Return on average shareholders' funds

  

22.8

%

23.5

%

22.4

%
                     

 

Shareholders' funds (excluding proposed dividends) grew by HK$3,602 million, or 6.2 per cent, to HK$62,117 million at 30 June 2010. Retained profits rose by HK$2,722 million, mainly reflecting the growth in attributable profit (excluding first and second interim dividends) during the period. The premises revaluation reserve increased by HK$471 million on the back of the continued robust growth in the property market during the first half of 2010. The premises revaluation reserves for the three half-yearly periods also included the leasehold land held under long leases for the bank's headquarters building after adopting the amendment to HKAS 17 'Leases' in the first half of 2010.

 

The available-for-sale investment reserve for debt securities showed a deficit of HK$156 million compared with a deficit of HK$496 million at last year-end, reflecting the improvement and stabilisation in global credit markets and the disposal of high-risk assets under the bank's prudent risk management strategy. The group assessed that there were no impaired debt securities during the period and, accordingly, no impairment loss has been recognised.

 

The return on average shareholders' funds was 22.8 per cent, compared with 23.5 per cent and 22.4 per cent for the first and second halves of 2009 respectively.

 

Save for the redemption of all the (1) Series A - HK$1,000 million 4.125 per cent subordinated notes due 2015 and (2) Series B - HK$1,500 million floating rate subordinated notes due 2015, both at par on 24 June 2010, there was no purchase, sale or redemption by the bank, or any of its subsidiaries, of the bank's securities during the first half of 2010.

 

Capital resources management

 

Analysis of capital base and risk-weighted assets
 

 

At 30 June

  

At 30 June

  

At 31 December

    

Figures in HK$m

  

2010

    

2009

  

2009

  
         

(restated)

    

(restated)

    

Capital base

                    

Core capital:

                    

- Share capital

  

9,559

    

9,559

    

9,559

    

- Retained profits

  

34,431

    

28,833

    

31,741

    

- Classified as regulatory reserve

  

(1,254

)

  

(770

)

  

(920

)

  

- Less: deductible of core capital

  

(972

)

  

(547

)

  

(561

)

  

- Less: 50 per cent of total

                   

  unconsolidated investments and

                   

  other deductions

  

(9,086

)

  

(6,709

)

  

(7,330

)

  

- Total core capital

  

32,678

    

30,366

    

32,489

    
                     

Supplementary capital:

                    

- Fair value gains on the revaluation 

                   

  of property

  

5,894

    

5,513

    

5,829

    

- Fair value gains on the revaluation

                   

  of available-for-sale investment

                    

  and equity

 

478

    

612

    

498

    

- Collective impairment allowances

  

75

    

85

    

81

    

- Regulatory reserve

  

138

    

85

    

101

    

- Surplus provision

  

__

    

__

    

__

    

- Term subordinated debt

 

7,893

    

10,367

    

10,354

    

- Less: 50 per cent of total

                   

  unconsolidated investments and

                    

  other deductions

  

(9,086

)

  

(6,709

)

  

(7,330

)

  

- Total supplementary capital

  

5,392

    

9,953

    

9,533

  
                   

Total capital base after deductions

  

38,070

    

40,319

    

42,022

  
                   

Risk-weighted assets

                  

- Credit risk

  

255,927

    

195,582

    

217,134

  

- Market risk

  

1,405

    

1,476

    

1,278

  

- Operational risk

  

37,576

    

38,863

    

39,017

  
   

294,908

    

235,921

    

257,429

  
                   

Capital adequacy ratio

  

12.9

%

17.1

%

16.3

%

Core capital ratio

  

11.1

%

12.9

%

12.6

%
                   
                   

 

 

Capital ratios at 30 June 2010 were compiled in accordance with the Banking (Capital) Rules ('the Capital Rules') issued by the Hong Kong Monetary Authority ('HKMA') under section 98A of the Hong Kong Banking Ordinance for the implementation of Basel II, which came into effect on 1 January 2007. The bank used the advanced internal ratings-based approach to calculate its credit risk exposure which was approved by the HKMA effective 1 January 2009. The standardised (operational risk) approach and internal models approach were used to calculate its operational risk and market risk respectively.

 

At 30 June 2010, the capital adequacy ratio and core capital ratio were 12.9 per cent and 11.1 per cent, compared with 16.3 per cent and 12.6 per cent at last year-end. These latter ratios have been restated following the adoption of the amendment to HKAS 17 'Leases' in 2010.

 

The decline in both the capital adequacy and core capital ratios largely reflects the combined effect of the increase in deduction from the capital base as a result of participation in Industrial Bank's rights issue in first half of the year, the repayment of HK$2.5 billion in subordinated debt in June 2010 and the increase in risk-weighted assets. This was partly offset by profit growth after accounting for dividends in the first half of the year.

 

The basis of consolidation for the 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 cost of these unconsolidated regulated financial entities is deducted from the capital base.

 

To satisfy the provisions of the Hong Kong Banking Ordinance and regulatory requirements for prudential supervision purposes, the group has earmarked a regulatory reserve of HK$1,254 million (HK$770 million and HK$920 million at 30 June 2009 and 31 December 2009 respectively) from retained profits.

 

 

Liquidity ratio


The average liquidity ratio for the periods indicated, calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance, is as follows:
 

 

Half-year ended

  

Half-year ended

  

Half-year ended

  
   

30 June

    

30 June

  

31 December

  
   

2010

    

2009

    

2009

  
                   

The Bank and its subsidiaries

                 

  designated by the HKMA

 

42.0

%

  

47.5

%

  

48.7

%
                   

 

Reconciliation of cash flow statement

 

(a) Reconciliation of operating profit to net cash flow from operating activities

 

 

Half-year ended

  

Half-year ended

  

 

  

30 June

    

30 June

  

Figures in HK$m

  

2010

    

2009

  
             

Operating profit

  

6,697

    

6,687

  

Net interest income

  

(6,713

)

  

(7,275

)

Dividend income

  

(4

)

  

(5

)

Loan impairment charges and other

            

  credit risk provisions

  

153

    

621

  

Impairment of available-for-sale equity securities

  

__

    

4

  

Depreciation

  

306

    

286

  

Amortisation of intangible assets

  

49

    

40

  

Amortisation of available-for-sale investments

  

68

    

19

  

Amortisation of held-to-maturity debt securities

  

2

    

1

  

Advances written off net of recoveries

  

(283

)

  

(285

)

Interest received

  

7,090

    

6,132

  

Interest paid

  

(943

)

  

(769

)

Operating profit before changes in working capital

  

6,422

    

5,456

  

Change in treasury bills and certificates of deposit

            

  with original maturity more than three months

  

(9,028

)

  

(10,310

)

Change in placings with and advances to banks

            

  maturing after one month

  

(19,182

)

  

(4,213

)

Change in trading assets

  

6,367

    

92,246

  

Change in financial assets designated at fair value

  

189

    

37

  

Change in derivative financial instruments

  

1,670

    

(3,990

)

Change in advances to customers

  

(49,359

)

  

3,415

  

Change in other assets

  

(12,352

)

  

(7,063

)

Change in financial liabilities designated at fair value

  

(2

)

  

22

  

Change in current, savings and other deposit accounts

  

14,490

    

29,084

  

Change in deposits from banks

  

8,091

    

(6,833

)

Change in trading liabilities

  

2,398

    

5,105

  

Change in certificates of deposit and

            

  other debt securities in issue

  

(466

)

  

(478

)

Change in other liabilities

  

17,672

    

3,161

  

Elimination of exchange differences

            

  and other non-cash items

  

(605

)

  

(2,497

)

Cash (used in)/ generated from operating activities

  

(33,695

)

  

103,142

  

Taxation paid

  

(37

)

  

(311

)

Net cash (outflow)/inflow from operating activities

  

(33,732

)

  

102,831

  

 

 

(b) Analysis of the balances of cash and cash equivalents

 

 

At 30 June

  

At 30 June

  

Figures in HK$m

  

2010

    

2009

  
             

Cash and balances with banks and

            

  other financial institutions

  

30,065

    

51,065

  

Placings with and advances to banks and other

           

  financial institutions maturing within one month

  

55,784

    

27,539

  

Treasury bills

  

13,851

    

87,611

  

Certificates of deposit

  

732

    

__

  
   

100,432

    

166,215

  

 

 

Contingent liabilities, commitments and derivatives

 

       

Credit

 

Risk-

  
 

Contract

equivalent

weighted

  

Figures in HK$m

  

amounts

  

amounts

  

amounts

  
               

At 30 June 2010

              
               

Direct credit substitutes

  

3,377

  

3,246

  

2,182

  

Transaction-related contingencies

  

889

  

540

  

389

  

Trade-related contingencies

  

10,897

  

3,061

  

1,736

  

Forward asset purchases

  

44

  

44

  

44

  

Undrawn formal standby facilities, credit lines

              

  and other commitments to lend:

              

- not unconditionally cancellable W

  

31,767

  

16,115

  

7,736

  

- unconditionally cancellable

  

168,893

  

57,439

  

16,463

  
   

215,867

  

80,445

  

28,550

  
               

Exchange rate contracts:

              

Spot and forward foreign exchange

  

431,420

  

5,701

  

950

  

Other exchange rate contracts

  

74,168

  

2,500

  

1,436

  
   

505,588

  

8,201

  

2,386

  
               

Interest rate contracts:

              

Interest rate swaps

  

272,830

  

2,638

  

558

  

Other interest rate contracts

  

143

  

__

  

__

  
   

272,973

  

2,638

  

558

  
               

Other derivative contracts

  

6,982

 

473

  

100

  
               
                   

 

W The contract amount for undrawn formal standby facilities, credit lines and other commitments to lend with original maturity of 'not more than one year' and 'more than one year' were HK$15,903 million and HK$15,864 million respectively.

 

 

       

Credit

 

Risk-

  
 

Contract

equivalent

weighted

  

Figures in HK$m

  

amounts

  

amounts

  

amounts

  
               

At 30 June 2009

              
               

Direct credit substitutes

  

3,063

  

3,063

  

1,659

  

Transaction-related contingencies

  

570

  

347

  

161

  

Trade-related contingencies

  

8,905

  

2,195

  

1,415

  

Forward asset purchases

  

27

  

27

  

27

  

Undrawn formal standby facilities, credit lines

              

  and other commitments to lend:

              

- not unconditionally cancellable

 

30,624

  

16,776

  

7,399

  

- unconditionally cancellable

  

149,008

  

51,948

  

12,208

  
   

192,197

  

74,356

  

22,869

  
               

Exchange rate contracts:

              

Spot and forward foreign exchange

  

408,031

  

5,633

  

597

  

Other exchange rate contracts

  

36,469

  

1,390

  

371

  
   

444,500

  

7,023

  

968

  
               

Interest rate contracts:

              

Interest rate swaps

  

219,022

  

3,121

  

402

  

Other interest rate contracts

  

142

  

1

  

__

  
   

219,164

  

3,122

  

402

  
               

Other derivative contracts

  

13,090

 

852

  

86

  
               
                     

 

 

 

       

Credit

 

Risk-

  
 

Contract

equivalent

weighted

  

Figures in HK$m

  

amounts

  

amounts

  

amounts

  
               

At 31 December 2009

              
               

Direct credit substitutes

  

3,121

  

2,987

  

1,785

  

Transaction-related contingencies

  

550

  

289

  

155

  

Trade-related contingencies

  

9,451

  

2,465

  

1,466

  

Forward asset purchases

  

36

  

36

  

36

  

Undrawn formal standby facilities, credit lines

              

  and other commitments to lend:

              

- not unconditionally cancellable

 

29,069

  

16,447

  

7,720

  

- unconditionally cancellable

  

158,817

  

53,514

  

15,036

  
   

201,044

  

75,738

  

26,198

  
               

Exchange rate contracts:

              

Spot and forward foreign exchange

  

334,133

  

5,573

  

689

  

Other exchange rate contracts

  

51,624

  

1,644

  

489

  
   

385,757

  

7,217

  

1,178

  
               

Interest rate contracts:

              

Interest rate swaps

  

230,376

  

2,640

  

413

  

Other interest rate contracts

  

143

  

__

  

__

  
   

230,519

  

2,640

  

413

  
               

Other derivative contracts

  

7,002

 

474

  

92

  
               
                     


The tables above give the nominal contract, credit equivalent and risk-weighted amounts of off-balance-sheet transactions. The credit equivalent amounts are calculated for the purpose of deriving the risk-weighted amounts. The nominal contract amounts, credit equivalent amounts, risk-weighted amounts and the consolidation basis for the periods indicated were calculated in accordance with the Banking (Capital) Rules issued by the HKMA, which came into effect on 1 January 2007.


For the above analysis, contingent liabilities and commitments are credit-related instruments that include acceptances and endorsements, letters of credit, guarantees and commitments to extend credit. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers. These transactions are, therefore, subject to the same credit origination, portfolio management and collateral requirements as apply to customers applying for loans. As the facilities may expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements.

Derivative financial instruments are held for trading or designated as either fair value hedges or cash flow hedges. The following table shows the nominal contract amounts and marked-to-market value of assets and liabilities by class of derivatives.
 

 

At 30 June 2010

  

At 30 June 2009

  

At 31 December 2009

Figures in HK$m

Trading

  

Designated at fair value

  

Hedging

  

Trading

  

Designated at fair value

  

Hedging

  

Trading

  

Designated at fair value

  

Hedging
                                   

Contract amounts:

                                  

Interest rate contracts

178,553

  

140

  

94,461

  

161,346

  

 

 

1,683

  

60,966

  

163,354

  

 

 

1,160

  

66,554

Exchange rate contracts

641,169

  

134

  

-

  

544,640

  

70

  

-

  

473,989

  

89

  

-

Other derivative contracts

15,394

  

-

  

-

  

16,728

  

-

  

-

  

11,385

  

-

  

-
 

835,116

  

274

  

94,461

  

722,714

  

 

1,753

  

60,966

  

648,728

  

 

1,249

  

66,554
                                   

Derivative assets:

                                  

Interest rate contracts

1,650

  

-

  

302

  

1,780

  

 

 

29

  

724

  

1,552

  

 

 

17

  

391

Exchange rate contracts

2,260

  

 

 

 

-

  

 

 

 

-

  

2,132

  

 

 

 

-

  

 

 

 

-

  

2,636

  

 

 

 

1

  

 

 

 

-

Other derivative contracts

433

  

-

  

-

  

262

  

-

  

-

  

453

  

-

  

-
 

4,343

  

-

  

302

  

 4,174

  

 

 29

  

724 

  

4,641

  

 

18

  

391
                                   

Derivative liabilities:

                                  

Interest rate contracts

1,687

  

11

  

1,147

  

1,841

  

23

  

606

  

1,623

  

 

 

13

  

670

Exchange rate contracts

2,405

  

 

 

 

2

  

 

 

 

-

  

1,940

  

 

 

 

-

  

 

 

 

-

  

938

  

 

 

 

-

  

 

 

 

-

Other derivative contracts

264

  

-

  

-

  

4,368

  

-

  

-

  

1,007

  

-

  

-
 

4,356

  

13

  

1,147

  

 8,149

  

23

  

606 

  

3,568

  

 

13

  

670
                                   


 
The above derivative assets and liabilities, being the positive or negative marked-to-market value of the respective derivative contracts, represent gross replacement costs, as none of these contracts are subject to any bilateral netting arrangements.
 

Additional information

 

1. Statutory accounts and accounting policies


The information in this news release is not audited and does not constitute statutory accounts.
 
Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2009 ('2009 accounts'), which have been delivered to the Registrar of Companies and the HKMA. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 1 March 2010.
 
Disclosures required by the Banking (Disclosure) Rules issued by the HKMA are contained in the bank's Interim Report which will be published on the websites of Hong Kong Exchanges and Clearing Limited and the bank on the date of the issue of this news release.
 
The news release has been prepared on a basis consistent with the accounting policies adopted in the 2009 accounts except for the following:

  

Following the adoption of the amendments to HKAS 17 'Leases', the group has reclassified interests in leasehold land held under long leases from operating leases to finance leases. Before the amendment, these leases were recorded at historical cost and amortised over the term of the lease.  With these leases reclassified as finance leases, they are carried at valuation and included under 'Premises, plant and equipment', with the difference between the amortised cost and valuation recognised in the premises revaluation reserve. The corresponding prior-year comparatives have been adjusted accordingly.

 

The major lines of the financial statements that have been affected are as follows:

                 

Figures in HK$m

As reported

    

Adjustment

    

Restated

  
                 

  Half-year ended 30 June 2009

              

  Profit for the period

6,451

    

(25

)

  

6,426

  

  Total comprehensive income

9,467

    

227

    

9,694

  
                 

  As at 31 December 2009

                

  Premises, plant and equipment

7,178

    

5,236

    

12,414

  

  Premises revaluation reserve

3,994

    

3,891

    

7,885

  

  Retained profits

37,719

    

33

    

37,752

  

 

Certain key ratios for comparative periods have also been restated to conform with the current period presentation.

 


2. Comparative figures

 

As a result of the adoption of the amendments to HKAS 17 'Leases', certain comparative figures have been adjusted to conform with the current period's presentation and to provide comparative amounts in respect of items disclosed for the first time in 2010.
 

 

3. Property revaluation

 

The group's premises and investment properties were revalued at 30 June 2010 by DTZ Debenham Tie Leung Limited. The valuation was carried out by qualified persons who are members of the Hong Kong Institute of Surveyors. The basis of the valuation of premises was open market value for existing use and the basis of valuation for investment properties was open market value. The net revaluation surplus for group premises amounted to HK$691 million, of which HK$690 million was credited to premises revaluation reserve and HK$1 million was credited to the income statement. Revaluation gains of HK$152 million on investment properties were recognised through the income statement. The related deferred tax provisions for group premises and investment properties were HK$114 million and HK$25 million respectively.

 

The revaluation exercise also covered business premises/investment properties reclassified as properties held for sale. In accordance with HKFRS 5, there was no revaluation gain/loss recognised through the income statement.

 


4. Foreign currency positions

 

Foreign currency exposures include those arising from trading, non-trading and structural positions. The net option position is calculated on the basis of delta-weighted positions of all foreign exchange options contracts. At 30 June 2010, the US dollar (US$), Chinese renminbi (RMB), Euro (EUR), Pound Sterling (GBP), Swiss Franc (CHF), Australian dollar (AUD) and Gold (GOL) were the currencies in which the group had non-structural foreign currency positions that were not less than 10 per cent of the total net position in all foreign currencies. The group also had a RMB structural foreign currency position, which was not less than 10 percent of the total net structural position in all foreign currencies.

 

Figures in HK$m

US$

  

RMB

  

EUR

  

GBP

  

CHF

  

AUD

  

GOL

  
                             

At 30 June 2010

                            
                             

Non-structural position

                            

Spot assets

230,684

  

52,221

  

8,852

  

8,183

  

248

  

20,071

  

525

  

Spot liabilities

(152,310

)

(52,694

)

(9,647

)

(10,167

)

(684

)

(31,777

)

(2,495

)

Forward purchases

236,686

  

42,463

  

6,483

  

6,367

  

681

  

16,747

  

2,854

  

Forward sales

(315,026

)

(42,216

)

(5,826

)

(4,447

)

(208

)

(5,096

)

(851

)

Net option position

(68

)

__

  

70

  

4

  

__

  

92

  

__

  

Net long/(short)

                            

  non-structural position

(34

)

(226

)

(68

)

(60

)

37

  

37

  

33

  
                             

Structural positions

286

  

18,144

  

__

  

__

  

__

  

__

  

__

  
         

 

  

 

              

 

 

Figures in HK$m

US$

  

RMB

  

EUR

  

GBP

  

CHF

  

AUD

  

GOL

  
         

 

  

 

              

At 30 June 2009

        

 

  

 

              
         

 

  

 

              

Non-structural position

        

 

  

 

              

Spot assets

220,606

  

36,442

  

12,096

  

9,191

  

75

  

18,410

  

490

  

Spot liabilities

(189,501

)

(36,031

)

(8,907

)

(8,120

)

(409

)

(23,092

)

(2,125

)

Forward purchases

227,596

  

27,145

  

8,362

  

4,081

  

513

  

9,354

  

2,210

  

Forward sales

(251,599

)

(27,633

)

(11,504

)

(5,210

)

(162

)

(4,692

)

(567

)

Net option position

2

  

__

  

(40

)

31

  

__

  

(4

)

__

  

Net long/(short)

                            

  non-structural position

7,104

  

(77

)

7

  

(27

)

17

  

(24

)

8

  
         

 

  

 

              

Structural positions

285

  

13,589

  

__

  

__

  

__

  

__

  

__

  
         

 

  

 

  

 

  

 

  

 

  

At 31 December 2009

                

 

  

 

  

 

  
                 

 

  

 

  

 

  

Non-structural position

                

 

  

 

  

 

  

Spot assets

214,379

  

41,638

  

12,558

  

9,980

  

85

  

20,619

  

816

  

Spot liabilities

(164,511

)

(41,564

)

(9,427

)

(9,163

)

(552

)

(28,370

)

(2,387

)

Forward purchases

169,349

  

29,483

  

6,885

  

2,215

  

832

  

14,293

  

2,430

  

Forward sales

(219,453

)

(29,603

)

(10,103

)

(2,995

)

(371

)

(6,532

)

(851

)

Net option position

(4

)

__

  

(1

)

__

  

2

  

7

  

__

  

Net long/(short)

                            

  non-structural position

(240

)

(46

)

(88

)

37

  

(4

)

17

  

8

  
                             

Structural positions

285

  

14,550

  

__

  

__

  

__

  

__

  

__

  
         

 

  

 

  

 

  

 

  

 

  

 

 

5. Ultimate holding company


Hang Seng Bank is an indirectly held, 62.14 per cent-owned, subsidiary of HSBC Holdings plc.

 


6. Register of shareholders


The register of shareholders of the bank will be closed on Tuesday, 17 August 2010, during which no transfer of shares can be registered. In order to qualify for the second interim dividend, all transfers, accompanied by the relevant share certificates, must be lodged with the bank's registrars, Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration no later than 4:30 pm on Monday, 16 August 2010. The second interim dividend will be payable on Wednesday, 1 September 2010 to shareholders whose names appear on the register of shareholders of the bank on Tuesday 17 August 2010. Shares of the bank will be traded ex-dividend as from Friday, 13 August 2010.

 

 

7. Proposed timetable for the remaining 2010 quarterly dividends

 

 

Third

Fourth
 

interim dividend

interim dividend
     

Announcement

1 November 2010

28 February 2011

Book close and record date

16 November 2010

15 March 2011

Payment date

1 December 2010

30 March 2011

 

 

8. Code on Corporate Governance Practices

 

The bank is committed to high standards of corporate governance. The bank has followed the module on 'Corporate Governance of Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority and has fully complied with all the code provisions and most of the recommended best practices set out in the Code on Corporate Governance Practices contained in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited throughout the six months ended 30 June 2010.

 

The Audit Committee of the bank has reviewed the results for the six months ended 30 June 2010.
 

9. Board of Directors

 

At 2 August 2010, the Board of Directors of the bank comprises Dr Raymond K F Ch'ien* (Chairman), Mrs Margaret Leung (Vice-Chairman and Chief Executive), Dr John C C Chan*, Dr Marvin K T Cheung*, Mr Alexander A Flockhart#, Mr Jenkin Hui*,  Mr William W Leung, Dr Eric K C Li*, Dr Vincent H S Lo#, Mr Iain J Mackay#, Mrs Dorothy K Y P Sit#, Mr Richard Y S Tang* and Mr Peter T S Wong#.

 

*   Independent non-executive Directors

#   Non-executive Directors

 

 

10. News release

 

This news release is available from the bank's website www.hangseng.com.


The Interim Report 2010, which contains all disclosures required by the Banking (Disclosure) Rules issued by the HKMA, will be published on the websites of Hong Kong Exchanges and Clearing Limited and the bank on the date of the issue of this news release. Printed copies of the Interim Report 2010 will be sent to shareholders in late August 2010.
 

Media enquiries to:

Walter Cheung

Telephone: (852) 2198 4020

Queenie Yip

Telephone: (852) 2198 4227


 
 


 


 


 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HSBC Holdings plc

By:       

Name: P A Stafford

Title: Assistant Group Secretary

Date: 02 August 2010