Speech by Mr Raymond C F Or
Vice-Chairman and Chief Executive

Good afternoon, ladies and gentlemen. Welcome to Hang Seng’s 2008 results announcement.

Before turning to the results, I ask that you note the cautionary words on forward-looking statements on the screen. All figures are in Hong Kong dollars unless otherwise stated.

The sharp downturn in the global economy created a highly challenging operating environment in 2008, particularly in the second half of the year.

Our prudent approach to business, trusted brand and wide range of products and services helped cushion the impact of the financial tsunami. 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 affected by increased loan impairment charges and other credit risk provisions.

Attributable profit for 2008 fell by 22.7 per cent to $14,099 million, due mainly to the drop in wealth management income and increase in loan impairment charges and other credit risk provisions in the second half. Excluding the dilution gain recorded in 2007 on our investment in Industrial Bank, attributable profit fell by 16 per cent. Earnings per share were down 22.7 per cent at $7.37.

Net operating income before loan impairment charges and other credit risk provisions grew by 15.1 per cent during the first half, but dipped by 6.9 per cent to $23,296 million for the year as market conditions continued to deteriorate.

Operating profit excluding loan impairment charges and other credit risk provisions was down 10.1 per cent at $16,501 million, with solid growth in net interest income outweighed by reduced non-interest revenue. The 381.9 per cent increase in loan impairment charges and other credit risk provisions to $2,776 million saw operating profit fall by 22.8 per cent to $13,725 million.

Profit before tax was $15,878 million – down 26 per cent, or 20.6 per cent excluding the 2007 dilution gain.

We remain a well capitalised, highly liquid bank. Our capital adequacy and core capital ratios were 12.5 per cent and 9.5 per cent respectively as at 31 December 2008.

The Directors have declared a fourth interim dividend of $3 per share, payable on 31 March 2009. This brings the total distribution for 2008 to $6.30 per share, the same as in 2007.

Our wealth management business held up well against the backdrop of weakening markets, but income growth slowed in the second half, adversely affecting Personal Financial Services revenue for the year.

Commercial Banking achieved more diversified revenue streams and registered year-on-year growth in every major income category. However, the unfavourable economic conditions led to higher loan impairment charges.

In the changing credit environment, Corporate Banking expanded quality lending and improved loan pricing.

Favourable interest rates and good growth in trading revenue helped Treasury record a strong rise in income. This was partly offset by credit risk provisions against certain investments under the balance sheet management portfolio.

Hang Seng China extended its network and launched new products, supporting significant increases in the customer account and deposit bases. Our investment in Industrial Bank continued to yield good returns. In the last quarter of 2008, we completed an RMB800 million acquisition to become the largest shareholder in Yantai City Commercial Bank in Shandong province.

Following the success of our brand rejuvenation programme in 2006-07, we made more investments in brand building in 2008 to strengthen our image as a professional wealth management partner, increasing our appeal among key customer segments.

Financial Highlights

Net interest income increased by 10.3 per cent to $16,232 million, underpinned by the 11.6 per cent rise in average customer advances, growth of lending at improved pricing, and higher margins on Treasury’s balance sheet management portfolio. The 6.8 per cent rise in average customer deposits was outweighed by narrower deposit spreads. Net interest margin was up 13 basis points at 2.36 per cent. Net interest spread rose by 31 basis points to 2.15 per cent, benefitting from asset repricing, better Treasury portfolio yields and growth in low-cost customer deposits.

Net fee income fell by 27.8 per cent to $4,969 million. The success of our credit card merchant-acquiring business helped support growth of 24.4 per cent in card services revenue and we achieved solid increases in income from remittances and credit facilities. The downturn in investor activity had an adverse impact on revenue from stockbroking and related services, retail investment funds and structured investment products, which fell by 31.5 per cent, 35.3 per cent and 48.4 per cent respectively.

The unfavourable investment environment also affected trading income from securities, derivatives and other trading activity. With reduced customer interest in equities investments, our timely promotion of foreign-exchange linked products drove encouraging growth in related revenue. Overall, trading income declined by 13.3 per cent to $1,455 million.

Operating expenses increased by $145 million, or 2.2 per cent, reflecting investment in future growth on the Mainland. Excluding our Mainland business, operating costs fell by 2.7 per cent, with traditional cost discipline and lower performance-related pay expenses outweighing rising salary and rental costs. Our cost efficiency ratio was 29.2 per cent.

We continue to command high credit ratings in Hong Kong and for our Mainland subsidiary bank.

At year-end, shareholders’ funds, excluding proposed dividends, were down 9.5 per cent at $45,890 million, due largely to the fair-value changes in available-for-sale investments. Total assets grew by 2.2 per cent to $762.2 billion.

Return on average shareholders’ funds was 26 per cent, compared with 35.4 per cent a year earlier. Return on average total assets was 1.9 per cent, down 0.7 percentage points.

Loans and Deposits

Gross advances to customers grew by 7 per cent to reach $331.2 billion.

With export activity and commodity prices declining, trade finance fell by 17.2 per cent. Factoring advances increased by 2.8 per cent. We maintained our consistently prudent lending policies in support of corporate and commercial customers.

Lending to individuals, excluding GHOS mortgages, rose by 3.6 per cent. Credit card advances were up 13.1 per cent on the back of good increases of 13.4 per cent in the card base and 15.9 per cent in card spending. Residential mortgage lending remained competitive, but our e-Mortgage services helped us record growth of 4.4 per cent. We increased our personal loan market share to 8.2 per cent.

Loans for use outside Hong Kong rose by 10.2 per cent to $35.8 billion. Mainland lending increased by 3.7 per cent to $26.9 billion.

With operating conditions for businesses increasingly difficult, loan impairment charges rose. As at 31 December 2008, total loan impairment allowances as a percentage of gross advances to customers was 0.61 per cent, compared with 0.34 per cent a year earlier. Gross impaired advances as a percentage of gross advances to customers was up 0.6 percentage points at 1 per cent.

Customer deposits grew by 2.3 per cent to $604.5 billion. Time deposits, certificates of deposit and other debt securities in issue fell, but this was outweighed by increased savings account deposits and the 91.8 per cent growth in deposits from Hang Seng China on the back of new accounts and enhanced renminbi services.

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 $8,410 million for the year. Operating profit excluding loan impairment charges fell by 30.2 per cent to $8,467 million.

Wealth management income was up 2.2 per cent at $3,518 million for the first half of 2008, but down 37.6 per cent at $5,389 million for the year.

As economic conditions became more uncertain, we leveraged our diverse wealth management portfolio and time-to-market strength to shift our sales focus to more defensive products. We expanded our multi-channel trading platform, helping us capitalise on increased customer interest in foreign exchange and gold margin trading to record a rise in related revenue.

Our trusted brand and careful approach in offering wealth management products proved important competitive advantages, with the number of customer investment accounts increasing by 5 per cent.

However, these positive developments were outweighed by the overall drop in investor activity, with investment income down 40.8 per cent at $3,692 million. Private banking recorded a 75.4 per cent fall in income.

Enhancements to our health and wealth insurance offerings led to good growth of $2,629 million, or 28 per cent, in net earned insurance premiums. We were Hong Kong’s number one life insurance provider in terms of new annualised regular life insurance premiums for the first three quarters of 2008 and increased our market share. We took early steps to defend the life insurance funds portfolio against the market downturn. In the second quarter, we replaced a substantial proportion of equities investments with debt securities investments, resulting in a 47.5 per cent year-on-year rise in net interest income and a significantly reduced loss of $35 million on investment returns during the second half compared with $1,030 million in the first half. Insurance income was down 29.4 per cent at $1,697 million, due mainly to the $1,065 million loss on investment returns.

Net interest earnings from our successful credit card portfolio and the careful expansion of our personal loans portfolio offset narrowing margins on deposits and mortgage lending. We increased our market share for credit card business in terms of spending, receivables and card base, which reached 18.2 per cent, 16.5 per cent and 12.5 per cent respectively.

Commercial Banking achieved a 6.5 per cent increase in operating profit excluding loan impairment charges to $2,354 million, but higher loan impairment provisions saw profit before tax fall by 8.6 per cent to $2,470 million.

Leveraging our large base of customers, we selectively grew average customer advances by 14.5 per cent. The fall in interest rates dragged down deposit spreads, offsetting in part the 14.7 per cent increase in net interest income from advances, to give an overall net interest income growth of 2 per cent.

Commercial Banking’s other operating income rose by 11.8 per cent. We increased revenue from corporate wealth management services by 4.5 per cent, contributing 10.4 per cent to total operating income. We improved corporate life insurance product offerings and sales training, leading to a 96.6 per cent rise in revenue.

Our comprehensive financial solutions for retailers helped drive the 27.2 per cent growth in fee income from card merchant acquisitions and a higher market share. The successful launch of express China remittance services – through which customers can make same-day remittances to about 100 key Mainland cities – underpinned an encouraging improvement in our outward remittance market share.

We achieved a 5.5 per cent year-on-year increase in our number of new commercial customers.

Corporate Banking’s operating profit excluding loan impairment charges grew by 36.3 per cent to $815 million. Profit before tax rose by 35.8 per cent to $645 million. We attained a 37.4 per cent rise 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.

Treasury recorded a 98 per cent rise in operating profit excluding credit risk provisions to $3,037 million. Operating profit increased by 8.3 per cent to $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 $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 the 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 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 $2,279 million.

Mainland Business

Our Mainland subsidiary bank, Hang Seng China, extended its network to 33 outlets across 11 cities. Enhanced relationship management helped drive the development of our wealth management business.

Hang Seng China’s total operating income rose by 63.7 per cent, but further investment in new outlets and staff, exchange losses on US dollar capital funds upon revaluation against the renminbi, and an increase in loan impairment charges led to a drop 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.

Towards the end of 2008, we completed an RMB800 million acquisition of 20 per cent of the enlarged share capital of Yantai City Commercial Bank, one of the largest city commercial banks in Shandong. This investment has strengthened our foothold in the Mainland’s rapidly developing Bohai Economic Rim region and complements our existing operations which are concentrated in the Pearl River Delta and Yangtze River Delta regions.

Including this acquisition, our total investment on the Mainland is now over RMB7.4 billion.

Branding

In the increasingly difficult operating environment, our well-respected brand helped differentiate us from our peers.

In 2006, we launched an integrated brand rejuvenation programme to further strengthen customer loyalty and increase Hang Seng brand preference among key market segments.

Testimonial-based TV commercials featuring true stories of well-known Hang Seng customers focused on the areas of SME services, investment, insurance, e-Banking, credit cards, Commercial Banking and Prestige Banking. These commercials received favourable external feedback, especially with regard to our professional and trustworthy image.

The launch of innovative products such as the Hang Seng Islamic China Index Fund and convenient new services including Mobile Trading, e-Priority Booking and Green Banking have enhanced our wealth management image and reinforced our progressive approach to business.

We developed a new branch design with a vibrant green as our new corporate colour. The bulkheads at all branches now reflect the new look, and recently opened and refurbished branches have adopted the design throughout their premises. Along with pop concert and television drama sponsorship, the dynamic image conveyed by the new design has helped us rejuvenate our image and build stronger connections with young people.

Our research shows that these efforts over the past few years have successfully improved our brand preference and recommendation scores, especially among young and affluent customer segments. We are now one of the top two bank brands in Hong Kong, with one-third of retail banking customers naming Hang Seng as their most preferred bank and year-on-year growth of 13 per cent in the number of our retail banking customers willing to recommend us to others. We are also among the top two banks for brand recommendation in the SME segment. Over 40 per cent of our SME customers would recommend us to others, and, beginning in 2006, we have won the SME’s Best Partner Award from the Hong Kong Chamber of Small and Medium Business for three consecutive years.

Rising To The Challenge

The global financial crisis posed new challenges in 2008 and the year ahead is likely to be equally demanding. The deepening global recession will see further deterioration in our operating environment. Hong Kong’s economy is expected to continue to contract in 2009.

Against this backdrop, our sound financial fundamentals, strong franchise and culture of service excellence are important competitive advantages.

Our trusted brand has also proved a valuable tool in deepening existing customer relationships and establishing new ones. We will continue to leverage our strong reputation and track record to increase our market share in core business areas and key customer groups, including through the launch of more Hang Seng-branded products.

Aided by our diverse portfolio of investment and insurance offerings and time-to-market capability, we will remain proactive in providing tailor-made wealth management solutions in changing economic conditions. Our Commercial Banking teams in Hong Kong, the Mainland and Macau will work together to offer business customers the advantage of efficient one-stop financial services. We will further grow our corporate wealth management capabilities.

In the tighter credit environment, we will continue with efforts to support our SME customers. We have approved over 1,000 applications totalling close to $3 billion under the revised SME Loan Guarantee Scheme and Special Loan Guarantee Scheme launched by the Hong Kong government.

Treasury will actively manage its well-diversified portfolio and grow non-interest income by offering customer-driven products and efficient service delivery.

Additional outlet openings and strengthened relationship management will help Hang Seng China further expand its customer and deposit bases to provide a springboard for future growth. We will build on the synergies created by our strategic partnerships.

We will continue to capitalise on the good progress made under our brand rejuvenation programme.

As announced by the Board earlier, I will retire from my position as Vice-Chairman and Chief Executive of Hang Seng following the Bank’s AGM on 6 May 2009. It has been both an honour and a pleasure to serve Hang Seng since 2005. I wish to thank my fellow Directors for their support and wise counsel, and my colleagues for their hard work and dedication, which have helped enhance Hang Seng’s brand strength and competitiveness. I must also convey my heartfelt appreciation to our customers, shareholders and all of you for strongly supporting us.

I would like to take this opportunity to wish my successor, Mrs Margaret Leung – currently Group General Manager and Global Co-Head Commercial Banking for the HSBC Group – every success in her new role.

Our customers have come to bank on our sound business judgement and passion for providing premium service. Hang Seng, in turn, benefits from their loyalty and trust.

Supported by its highly respected brand and dedicated staff, Hang Seng is well positioned to tackle the challenges that lie ahead, enhance its competitive strengths, and capitalise on future business opportunities.

Thank you.