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2 March 2009
Hang Seng Bank Limited 2008 Annual Results
- Highlights
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Operating profit down 22.8 per cent to HK$13,725
million
(HK$17,789 million in 2007)
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Operating profit excluding loan impairment charges and other
credit risk provisions down 10.1 per cent to HK$16,501 million
(HK$18,365 million in 2007)
-
Profit before tax down 26.0 per cent to HK$15,878 million
(HK$21,471 million in 2007). Excluding the gain on dilution of strategic
investment in 2007, profit before tax down 20.6 per cent
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Attributable profit down 22.7 per cent to HK$14,099 million
(HK$18,242 million in 2007). Excluding the gain on dilution of strategic
investment in 2007, attribuatable profit down 16.0 per cent
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Return on average shareholders' funds of 26.0 per cent
(35.4 per cent in 2007). Excluding the gain on dilution of strategic investment
in 2007, return on average shareholders' funds down 6.6 percentage points
-
Assets up 2.2 per cent to HK$762.2 billion
(HK$746.0 billion at 31 December 2007)
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Earnings per share down 22.7 per cent to HK$7.37 per share
(HK$9.54 per share in 2007)
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Fourth interim dividend of HK$3.00 per share; total
dividends of HK$6.30 per
share for 2008
(HK$6.3 per share in 2007)
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Capital adequacy ratio* of 12.5 per cent (11.2 per cent
at 31 December 2007);
core capital ratio* of 9.5 per cent (8.4 per cent at
31 December 2007)
- Cost efficiency ratio of 29.2 per cent
(26.6 per cent in 2007)
*The capital adequacy and core capital ratios at 31 December 2008 were calculated in accordance with Basel II - foundation internal ratings-based approach which became effective on 1 January 2008, while those at 31 December 2007 were calculated in accordance with Basel II - standardised approach.
Comment by Raymond Ch’ien, Chairman
Hang Seng recorded good results in the first half of 2008, but the deepening of the global financial crisis posed significant challenges during the second half, leading to a 16.0 per cent drop in attributable profit for the full year after excluding the dilution gain recorded in 2007 on our strategic investment in Industrial Bank Co., Ltd.
Net interest income rose by 10.3 per cent on the back of higher margins on Treasury’s balance sheet management portfolio, steady growth in average customer advances and improved pricing on lending. However, this was outweighed by the decline in non-interest income, particularly net fee income which fell by 27.8 per cent with reduced customer appetite for investments.
Wealth management income grew during the first six months of the year, but declined sharply in the volatile market conditions of the second half. Encouraging broad-based growth in Commercial Banking income and a strong rise in Treasury earnings were offset by significantly higher loan impairment charges and other credit risk provisions.
The expanding network and service capabilities of our mainland China operations underpinned a rise in total operating income, although investment in business development, currency revaluation losses and increased loan impairment charges resulted in a drop in profit before tax. Our Mainland associate, Industrial Bank Co., Ltd, increased its contribution to pre-tax profits.
Operating profit excluding loan impairment charges and other credit risk provisions fell by 10.1 per cent to HK$16,501 million. The deteriorating economic conditions led to a 381.9 per cent increase in loan and certain debt securities impairment allowances to HK$2,776 million. Operating profit was down 22.8 per cent at HK$13,725 million.
Attributable profit for 2008 was HK$14,099 million, a drop of 22.7 per cent. Earnings per share were down 22.7 per cent at HK$7.37.
Net operating income before loan impairment charges and other credit risk provisions fell by HK$1,719 million, or 6.9 per cent. Operating expenses rose by 2.2 per cent, due to investment in our Mainland business. Excluding Mainland operations, tighter cost control and lower performance-related payments saw operating expenses fall by 2.7 per cent. Our cost efficiency ratio was 29.2 per cent.
Profit before tax fell by 26.0 per cent to HK$15,878 million. Excluding the 2007 dilution gain, profit before tax was down 20.6 per cent.
Return on average shareholders’ funds was 26.0 per cent, compared with 35.4 per cent (32.6 per cent excluding the dilution gain) a year earlier. Return on average total assets was 1.9 per cent, down 0.7 percentage points.
On 31 December 2008, our capital adequacy ratio and core capital ratio were 12.5 per cent and 9.5 per cent respectively, as calculated in accordance with the ‘foundation internal ratings-based approach’ under Basel II.
The Directors have declared a fourth interim dividend of HK$3.00 per share, payable on 31 March 2009. This brings the total distribution for 2008 to HK$6.30 per share, the same as in 2007.
In the worsening global financial crisis, many major economies are experiencing sharp downturns.
Declining exports and a slowdown in consumer spending has led to quarter-on-quarter economic contraction in Hong Kong since the second quarter of 2008 and unemployment is on an upward trend.
Export demand will continue to fall over the short to medium term. Domestic demand is also likely to further weaken, although this should be moderated by government-led fiscal stimulus initiatives such as investment in infrastructure and other supportive measures.
Hang Seng is a well-capitalised bank with solid fundamentals and a prudent approach to business that provides a strong anchor in the current financial storm.
Looking ahead, we will focus on leveraging our competitive advantages, including our trusted brand, strong customer relationships and comprehensive portfolio of products and services. We will take steps to enhance our leading market position and strengthen our operating capabilities to support the long-term growth of our business.
Review by Raymond Or, Vice-Chairman and Chief Executive
Hang Seng’s results for 2008 reflect the increasingly difficult operating environment, particularly in the second half of the year.
Our well-considered strategy, strong brand and prudent approach to business have helped cushion the impact of the global financial storm. We strengthened our balance sheet through early action to manage credit risk in customer lending and Treasury’s balance sheet management portfolio, and significantly reduced equity risk through disposal of our equity portfolios. We maintained good cost control while investing in the long-term development of our business. We achieved income growth across three of our four core customer groups but profitability was adversely affected by increased loan impairment charges and other credit risk provisions.
Our wealth management business performed well against the backdrop of declining markets, but income growth slowed in the second half. This had an adverse impact on Personal Financial Services revenue.
Strong customer relationships and successful initiatives to strengthen and promote our seamless financial services helped Commercial Banking achieve more diversified revenue streams, with year-on-year increases in every major income category. However, the unfavourable economic environment led to higher loan impairment charges.
Corporate Banking grew average customer advances and deposits, and took good advantage of opportunities to improve loan pricing.
Favourable interest rates and an encouraging increase in trading income helped Treasury record strong income growth. This was partly offset by credit risk provisions against certain investments under the balance sheet management portfolio.
We extended our mainland China network under Hang Seng Bank (China) Limited and introduced new products, helping support significant increases in the customer and deposit bases. Our investment in Industrial Bank continued to yield good returns.
Customer Groups
Personal Financial Services maintained good earnings for the first half of 2008, but recorded a 29.4 per cent decline in profit before tax to HK$8,410 million for the full year, due to a drop in wealth management income during the second half. Operating profit excluding loan impairment charges was down 30.2 per cent at HK$8,467 million.
Wealth management income was up 2.2 per cent at HK$3,518 million for the first half of 2008, but down 37.6 per cent at HK$5,389 million for the year.
As markets grew more uncertain, our diverse wealth management portfolio and time-to-market strength helped us rapidly shift our sales focus to more defensive products. The expansion of our multi-channel trading platform helped us capitalise on increased interest in foreign exchange and gold margin trading to record an increase in related revenue. Supported by our well-respected brand, we increased the number of customer investment accounts by 5.0 per cent. However, these positive developments were outweighed by the overall drop in investor activity, with investment income declining by 40.8 per cent. Private banking income fell by 75.4 per cent.
We were Hong Kong’s number one life insurance provider in terms of new annualised regular premiums for first three quarters of 2008 and increased our market share, achieving good growth of HK$2,629 million, or 28.0 per cent, in net earned insurance premiums. Steps taken
in the second quarter to defend the life insurance funds portfolio against the market downturn resulted in significantly reduced losses on investment returns during the second half as compared with the first. Overall, insurance income fell by 29.4 per cent.
Net interest income remained stable. A series of card acquisition and utilisation campaigns drove increases in the card base, spending and receivables. We progressed with the judicious expansion of our personal loans portfolio, which registered year-on-year growth of 18.9 per cent to HK$3.3 billion. These developments helped offset narrowing margins on deposits and mortgage lending.
Commercial Banking achieved growth in both net interest income and non-interest income. Operating profit excluding loan impairment charges rose by 6.5 per cent to HK$2,354 million. Profit before tax was down 8.6 per cent at HK$2,470 million, due to an increase in loan impairment charges.
Leveraging our large base of business customers, we selectively grew average customer advances by 14.5 per cent. Falling commodity prices and the slowdown in international trade led to a year-on-year decline in trade finance, while factoring advances grew by 2.8 per cent. Falling interest rates dragged down deposit spreads, offsetting in part the 14.7 per cent growth in net interest income from advances. Overall, net interest income rose by 2.0 per cent.
Other operating income grew by 11.8 per cent year on year. Revenue from corporate wealth management increased by 4.5 per cent and contributed 10.4 per cent of total operating income. We improved corporate life insurance product offerings and sales training, leading to a 96.6 per cent rise in revenue.
The successful launch of express China remittance services underpinned an encouraging improvement in our outward remittance market share. Our total financial solutions for retailers helped support a 27.2 per cent rise in fee income from card merchant-acquiring business. Our card merchant services were a continuing source of new customer acquisitions.
We achieved a 5.5 per cent year-on-year increase in the number of new commercial customers.
Corporate Banking’s operating profit excluding loan impairment charges rose by 36.3 per cent. We attained a 37.4 per cent increase in net interest income, with increases in average customer advances and deposits of 7.9 per cent and 5.4 per cent respectively. Having exercised restraint in asset growth leading up to 2008, we were able to support Corporate Banking customers with new or renewed facilities at good risk-adjusted returns. Net interest income from advances was up 45.3 per cent. Profit before tax grew by 35.8 per cent to HK$645 million.
Treasury recorded a 98.0 per cent rise in operating profit excluding credit risk provisions to reach HK$3,037 million. Operating profit increased by 8.3 per cent to HK$1,662 million.
The balance sheet management portfolio benefited from favourable interest rate movements, with net interest income increasing by 104.4 per cent to HK$2,682 million. Beginning in late 2007 as signs of the global financial crisis began to emerge, we took steps to reduce the credit risk of our balance sheet management portfolio. Throughout 2008, we enhanced the credit quality of the debt securities portfolio through the active disposal of some negotiable instruments. During the last quarter of 2008, we made selective investments in high-quality debt securities, most of which were triple-A rated papers. However, the growing credit crunch and deteriorating economic conditions in the second half had a negative impact on some of Treasury’s balance sheet management portfolio investments. With reduced investor appetite
for equities, we expanded trading income by successfully promoting foreign exchange-linked products and capital-protected investments.
Profit before tax, including share of profits from associates, increased by 24.6 per cent to HK$2,279 million.
Mainland Business
Hang Seng China opened two branches and eight sub-branches in 2008, bringing its Mainland network to 33 outlets across 11 cities. Full-time equivalent staff increased by 32.2 per cent to 1,450. Improved relationship management helped drive the development of our wealth management business.
These developments underpinned encouraging growth of 73.6 per cent in the customer base and 91.8 per cent in deposits. Customer advances increased by 3.7 per cent as we tailored our lending to the prevailing economic conditions.
Total operating income rose by 63.7 per cent, but further investment in Hang Seng China’s network, exchange losses on US dollar capital funds upon revaluation against the Chinese renminbi and an increase in loan impairment charges led to a fall in profit before tax.
Including our share of profit from Industrial Bank, Mainland business contributed 11.9 per cent of total profit before tax, compared with 6.5 per cent a year earlier.
In the last quarter of 2008, we completed a RMB800 million deal to acquire 20 per cent of the enlarged share capital of Yantai City Commercial Bank – one of the largest city commercial banks in Shandong province. This investment will strengthen our foothold in the Mainland’s rapidly developing Bohai Economic Rim region.
Rising to the Challenge
The international financial crisis created new challenges in 2008 and the year ahead is likely to be equally demanding. The global downturn may lead to further deterioration in our operating environment. Hong Kong’s economy is expected to continue to contract in 2009.
Our solid financial fundamentals, strong franchise and culture of service excellence provide a good platform from which to overcome obstacles and continue to grow our business.
Our trusted brand has proved a valuable tool in deepening existing customer relationships and establishing new ones. We will continue to leverage our strong reputation to increase our market share in core business areas and in key customer segments.
Aided by our diverse portfolio of products and services and time-to-market competitive advantage, we will remain proactive in providing customised wealth management solutions in changing economic conditions.
Our Commercial Banking teams in Hong Kong, the Mainland and Macau will work together to offer our business customers the advantage of efficient one-stop financial services. We will continue to grow our corporate wealth management capabilities.
Treasury will actively manage its well-diversified portfolio and prudently expand non-interest income by offering customer-driven products and efficient service delivery.
Additional outlet openings and enhanced relationship management will help Hang Seng China attract new customers and expand its deposit bases to provide a springboard for future growth. We will build on the synergies created by our strategic partnerships.
Supported by our strong brand and dedicated staff, Hang Seng is well positioned to tackle the challenges that lie ahead, enhance our competitive strengths, and capitalise on future business opportunities.
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