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

Good afternoon, ladies and gentlemen. Welcome to Hang Seng's 2007 results announcement. I am particularly pleased to be making this announcement on the day of our 75th anniversary.

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

Hang Seng's strong results for 2007 reflect good progress with the roadmap for growth we set out in March 2006. In addition to achieving encouraging expansion in our core businesses, we also aligned ourselves to take better advantage of new opportunities and further enhance operating efficiency.

Attributable profit grew by $6,204 million, or 51.5 per cent, to $18,242 million. Earnings per share rose by 51.4 per cent to $9.54. Operating profit per full-time employee rose to $1.94 million, compared with $1.49 million in 2006.

Strong growth in both net interest income and non-interest income underpinned the 43 per cent increase in operating profit excluding loan impairment charges to $18,365 million. Operating profit was up $5,213 million, or 41.5 per cent, at $17,789 million.

Profit before tax increased by 49.2 per cent to $21,471 million, in part reflecting the unrealised gain of $1,465 million on the dilution of our investment in our strategic mainland China partner, Industrial Bank, following its listing in February 2007. Excluding the gain on dilution, profit before tax was up 39 per cent.

After careful consideration of capital requirements for investment in future business growth, particularly on the Mainland, the Directors have declared a fourth interim dividend of $3.00 per share. This brings the total distribution for 2007 to $6.30 per share, up $1.10 compared with 2006.

From Strength to Strength

We doubled wealth management income in 2007. Capitalising on positive investor sentiment, we further enhanced our product and service offerings to achieve significant success with our investment, insurance and Private Banking businesses, both in terms of revenue and customer base. We exceeded our five-year goal of doubling Private Banking's 2005 profit before tax – recording a tripling of profit in just two years.

Robust consumer demand underpinned good increases in personal loans and card receivables. Despite intense competition in the residential mortgage sector, our comprehensive e-mortgage services helped keep us among the market leaders.

Additional efforts to strengthen customer relationships supported notable rises in Commercial Banking's average customer advances and average customer deposits as well as solid growth in corporate wealth management business.

Effective steps to further diversify Corporate Banking revenue saw encouraging increases in deposits, trade services and net fee income.

Treasury made a strong return to profit growth by enhancing service delivery, strengthening cross-group collaboration and capitalising on the improved operating environment.

In September we acquired the remaining 50 per cent of Hang Seng Life from the HSBC Group for $2.4 billion. We are now better positioned to take full advantage of new life insurance business opportunities.

In November, we completed a major move to improve operational efficiency with the official opening of our new office in Kowloon Bay, which is now our largest office outside Central.

The reach and capabilities of our Mainland business improved with the opening of our subsidiary bank and new outlets as well as the expansion of renminbi services.

On 31 January this year, we signed an agreement to subscribe for 20 per cent of the enlarged share capital of Yantai City Commercial Bank, one of the largest city commercial banks in Shandong province, for a total consideration of RMB800 million - a deal that, when completed, will make us the bank's largest shareholder.

Following this proposed acquisition, our total Mainland investment will increase to about RMB7.3 billion.

Financial Highlights

Net interest income rose by 25.9 per cent to $14,719 million, supported by the 10.4 per cent growth in both average customer advances and average customer deposits. Net interest margin rose by 21 basis points to 2.23 per cent, reflecting wider deposit spreads, better yields on Treasury balance sheet management portfolios and increased contribution from net free funds.

Net fee income grew by $3,389 million, or 96.9 per cent, to $6,886 million, due largely to the strong performance of our wealth management business. Securities-related income rose by 146.6 per cent to $1,985 million, benefiting from growth in both transaction volume and customer base. Fee income from investment funds, Private Banking and structured products also registered significant increases, rising by 110.6 per cent, 202.1 per cent and 603.2 per cent respectively. Card services income was up 21.9 per cent on the back of good growth in the number of cards in issue and cardholder spending.

Trading income rose by 26.2 per cent to $1,679 million. Strong growth of 438.2 per cent in income from securities, derivatives and other trading was partly offset by the cost of funding swap activities and a loss on the revaluation of US dollar funds held by our Mainland subsidiary against the renminbi.

Operating expenses increased by $1,409 million, or 26.9 per cent, due mainly to a large rise in performance-related pay and the cost of network expansion on the Mainland. Excluding these costs, operating expenses were up $416 million, or 9 per cent.

However, the 38.3 per cent increase in net operating income before loan impairment charges and other credit risk provisions significantly outpaced the rise in expenses, contributing to an improved cost efficiency ratio of 26.6 per cent, compared with 29 per cent in 2006.

We enjoy strong credit ratings. Moody's Investors Service upgraded Hang Seng's long-term local and foreign currency ratings in 2007. Standard & Poor's has assigned Hang Seng China the highest ratings available to Mainland incorporated subsidiaries of foreign banks.

Our total and core capital adequacy ratios at 31 December 2007 were 11.2 per cent and 8.4 per cent respectively, as calculated in accordance with the 'standardised approach' under Basel II.

At 31 December 2007, shareholders' funds (excluding proposed dividends) were $50,720 million, a year-on-year increase of 17 per cent, in part reflecting the rise in attributable profit and the unrealised gain on the dilution of our investment in Industrial Bank.

We achieved record returns on equity and assets. Excluding the gain on dilution, return on average shareholders'sfunds was 32.6 per cent, up from 27.4 per cent in 2006. Return on average total assets was 2.6 per cent, compared with 1.9 per cent a year earlier.

Loans And Deposits

Customer deposits, including certificates of deposit and other debt securities in issue, rose by 9.3 per cent to $590.6 billion. On the Mainland, the launch of full renminbi deposit services for local residents and new investment-linked deposit products contributed to good growth of 188.6 per cent in deposits.

Gross advances to customers rose by 10.4 per cent to $309.4 billion.

Positive economic sentiment helped drive increases in loans to the property investment and property development sectors as well as to financial concerns. Advances to manufacturers grew by 8.4 per cent and trade finance increased by 16.8 per cent.

The strong labour market and falling interest rates sustained consumer demand. Excluding GHOS mortgages, lending to individuals grew by 8.4 per cent. We launched a series of successful consumer finance and card marketing campaigns, which contributed to the 43 per cent increase in personal loans and 20.2 per cent rise in card advances.

In a highly competitive market, we grew residential mortgage lending to individuals by 2.8 per cent.

Loans for use outside Hong Kong rose by 46.2 per cent to $32,442 million, due largely to the 63.8 per cent increase in Mainland lending.

At the end of 2007, total loan impairment allowances as a percentage of gross advances to customers were 0.34 per cent, 0.01 percentage point higher than a year earlier. Gross impaired advances as a percentage of gross advances to customers improved by 0.1 percentage point to 0.4 per cent.

Customer Groups

Personal Financial Services achieved a 54.8 per cent increase in operating profit excluding loan impairment charges to $12,139 million. Profit before tax was up 54.2 per cent at $11,918 million.

Wealth management business recorded impressive growth, with income rising by $4,330 million, or 100.4 per cent, to $8,643 million. Income from investment services grew by 147.7 per cent. We capitalised on positive investor sentiment, using effective marketing and convenient new trading channels to achieve a 146.6 per cent increase in securities-related income and a 19.7 per cent growth in customer base.

We launched new Hang Seng-branded investment products, including the Hang Seng Islamic China Index Fund -Hong Kong's first SFC-authorised Islamic fund. We are currently arranging to offer it for sale in the Middle East, where investors have shown considerable interest in the fund.

Our fund management performance was recognised through several awards and number one rankings. Investment fund income grew by 110.6 per cent to a record $1,676 million.

We increased our range of structured product offerings, enjoying a particularly strong 172 per cent increase in sales of equity-linked instruments.

We built on Private Banking's good growth momentum to achieve an impressive 196.8 per cent rise in income to $1,009 million. Additions to the relationship management team and range of services supported a 39.8 per cent increase in assets under management and a 19.8 per cent rise in customer base. Profit before tax increased by 122.7 per cent to $1,239 million – double that in 2006 and triple that in 2005.

Total funds under management grew by 35.5 per cent to $144.2 billion.

Our commitment to providing insurance solutions for all life stages helped our life insurance business rank first in Hong Kong in terms of annualised new premiums for regular-pay (non-linked) insurance in the first three quarters of the year. Premium income recorded year-on-year growth of 24.7 per cent. The acquisition of the remaining 50 per cent of Hang Seng Life has created greater flexibility as regards implementing our strategy for continued insurance business growth.

Strong consumer demand facilitated increases in personal lending and card business. Card advances grew by 20.2 per cent, supported by a 21.1 per cent rise in cardholder spending and an 8.9 per cent increase in card base.

Commercial Banking's operating profit excluding loan impairment charges grew by 10.4 per cent to $2,210 million. Profit before tax, including the share of profits from associates, increased by 19.4 per cent to $2,701 million.

Net interest income rose by 16.1 per cent. Growth in trade finance, commercial loans and factoring saw a 22.1 per cent increase in average customer advances, while further relationship management and customer segmentation initiatives helped support a 20.9 per cent rise in average customer deposits.

Net fee income increased by 24.2 per cent on the back of good progress with corporate wealth management and card merchant-acquiring business.

Octopus card merchant services proved a valuable tool in attracting new business. Our number of new commercial customers in 2007 outpaced 2006 by 22 per cent.

Hong Kong and Mainland Commercial Banking teams stepped up cooperative efforts, benefiting lending and deposits business on the Mainland.

Corporate Banking's operating profit excluding loan impairment charges grew by 10.1 per cent to $598 million. Increases in average customer deposits and average customer advances saw net interest income rise by 15.4 per cent to $719 million.

With strong liquidity continuing to put downward pressure on loan margins, Corporate Banking took effective steps to diversify its income, resulting in growth in trade services and credit facilities fees. Profit before tax fell by 14.7 per cent to $475 million, affected by a single loan impairment charge.

Greater cross-group cooperation, product and service enhancements, success with initiatives to expand non-interest income and improved interest rate conditions helped drive a 72.9 per cent rise in Treasury's operating profit excluding loan impairment charges to $1,534 million. Profit before tax, including the share of profits from associates, increased by 74 per cent.

Mainland Business

We passed several important milestones in the development of our Mainland business. Our subsidiary bank, Hang Seng Bank (China) Limited, commenced operations in May, providing significant new opportunities for growth.

Since the beginning of 2007, we have opened two branches and seven sub-branches, taking our Mainland network to 25 outlets across 10 cities. In late August, we obtained approval to offer full renminbi deposit services to local residents. To support our expansion and strengthen our sales and marketing capabilities, we increased our number of full-time staff by 66 per cent to 1,097.

These moves underpinned good growth in loans and deposits, with total operating income rising by 69.4 per cent.

Including our share of profit from Industrial Bank, Mainland business contributed 6.5 per cent to total profit before tax, compared with 6.1 per cent in 2006.

Electronic Service Delivery

We expanded our online offerings and rolled out new service delivery platforms to increase customer convenience and improve cost efficiency.

At the end of 2007, our number of Personal e-Banking customers had grown by 21.3 per cent year on year to more than 763,000. In December 2007, online foreign exchange trading and securities trading accounted for 85 per cent and 76 per cent of total transactions respectively, up from 82.5 per cent and 69.2 per cent a year earlier. More than 40 per cent of new time deposit instructions were received online.

We also used our Internet-based services to step up personalised cross-selling of individual insurance and investment products.

Together, these moves helped drive a 143.7 per cent increase in income from online sales and transactions completed via Personal e-Banking to $1,958 million.

We enhanced security features and broadened our range of online services for business customers in 2007. By year-end, over 51,000 companies had signed up for Business e-Banking, an increase of 33.5 per cent. In December, Business e-Banking recorded a year-on-year increase of 44.5 per cent in the number of transactions completed online.

In December 2007, total online transactions accounted for 47.9 per cent of all transactions, up from 45.7 per cent a year earlier.

In August 2007, we launched Hong Kong's first television-based securities trading platform. In November we introduced mobile phone-based securities trading.

Branding

Following the successful launch of our brand rejuvenation programme and new corporate look in 2006, we continued to invest in brand building, focusing particularly on key customer groups such as young people and the affluent segment.

We developed testimonial-based television commercials promoting our convenient e-Banking and credit card services to younger customers. We also sponsored a 60-episode television drama.

To enhance our image as a professional wealth management partner, we launched a Prestige Banking campaign. This not only helped build brand equity but also accelerated our acquisition of affluent customers.

Our market research confirms these investments in brand building have strengthened our image and brand preference among target customer segments.

Building On Our Achievements

Supported by favourable economic conditions, we made significant progress with our roadmap in 2007. Our accomplishments reflect the dedicated efforts of staff and management to achieve execution excellence, premium service and shareholder value, with the objective of exceeding expectations.

Looking forward, economic growth in our markets of operation will be influenced by the wider impact of the economic slowdown in the US as well as increasing inflationary pressures.

However, domestic demand is now a major driver of growth in Hong Kong and on the Mainland. Moreover, exports should remain solid on the back of stable demand from Europe and Asia. Against this backdrop, we remain cautiously optimistic for the year ahead.

We will further leverage our leading market position and brand strength to attract new customers and deepen relationships with existing ones.

Supported by our robust wealth management platform, we will enhance our competitiveness through the timely launch of innovative products and services and by offering tailor-made financial planning solutions.

With an expanding Mainland network and enhanced renminbi service offerings, we will focus on better joining up our corporate and commercial banking teams in Hong Kong and on the Mainland to deliver 'one-stop' banking services for our customers.

We will grow our Treasury business by streamlining service delivery, strengthening cross-group cooperation to broaden and deepen product penetration, and exploring emerging opportunities on the Mainland. We will take further steps to expand non-interest income.

We will continue with our two-pronged Mainland strategy. Through Hang Seng China we will pursue new avenues of business to grow our customer base. We will open new outlets in cities with high growth potential, expand renminbi service offerings and increase brand-building initiatives. We will capitalise on the synergies created by our strategic partnerships to good effect.

Despite the challenging external environment, we remain focused on expanding our core businesses to generate sustainable growth in profitability for our shareholders. We are confident that Hang Seng's position as a leading financial institution in the Greater China region will continue to be strengthened.

Thank you.