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

Good afternoon, ladies and gentlemen. Welcome to Hang Seng Bank's 2006 results announcement. Please note the cautionary words on forward-looking statements on the screen. Unless otherwise stated, all figures are in Hong Kong dollars.

During last year's results announcement, we set out our roadmap for growth - our strategic plan for achieving long-term success. Supported by good economic conditions, our hard work to put this strategy into action has yielded pleasing results. We are well placed to take advantage of new business opportunities.

In a buoyant investment market, we significantly increased wealth management income by further enhancing product and service offerings to meet the investment and insurance needs of our customers.

We built on Private Banking's good growth momentum to achieve an encouraging increase in pre-tax profit. Given our progress, we are confident of achieving our goal of doubling Private Banking's pre-tax profit by 2008, two years ahead of schedule.

We capitalised on strong consumer demand to expand higher-yield personal lending. Deeper relationships with commercial customers drove growth in trade finance and corporate wealth management business.

The expansion of our customer base in mainland China underpinned good increases in Mainland deposits and lending. We stepped up mutually beneficial cooperation with our strategic partner Industrial Bank.

We embarked on an integrated brand revitalisation programme designed to enhance our brand equity and establish us as the financial institution of choice for both personal and commercial banking. Emphasizing our progressive, pragmatic and thoughtful approach to service, this branding programme is helping us build closer partnerships with existing customers and establish relationships with new ones.

Results Highlights

Before turning to our results, I wish to draw your attention to the fact that we have made a change in accounting presentation. Interest income and expenses of the trading and fair value portfolios were previously reported as 'trading income' and 'net income from financial instruments designated at fair value' respectively. To better reflect the interest income and funding costs of the Bank as a whole, we are now reporting interest income and expenses from all financial assets and liabilities as 'net interest income'. This presentation will facilitate the comparison of our net interest income and net interest margin with our peer banks in Hong Kong.

Good growth in our core businesses and improved credit conditions saw operating profit grow by 13.6 per cent to $12,576 million. Operating profit excluding loan impairment charges was up 9.9 per cent at $12,840 million.

Pre-tax profit rose 7.8 per cent to $14,395 million, affected by a significant drop in property revaluation gains. Attributable profit reached a new high of $12,038 million, a 6.1 per cent increase over 2005. Earnings per share were $6.30.

Net interest income increased by 8.3 per cent to $11,694 million. Good growth in customer advances, widening of the best lending rate/HIBOR gap and increased interest earned from net free funds - all these helped offset the effects of narrowing spreads on Hong Kong dollar savings accounts and the Treasury portfolio.

The ratio of non-interest income to net operating income excluding loan impairment charges rose to 35.3 per cent, up from 33.5 per cent a year earlier.

Net fee income increased by 18.3 per cent to $3,497 million. Securities-related income grew 63.3 per cent, reflecting rises in turnover, customer base and market share. Growth in cardholder spending and the number of cards in issue, which reached 1.4 million, helped support a 22 per cent rise in card services income. We gained market share in card base, spending and receivables.

Trading income increased by $445 million to $1,330 million, attributable mainly to a 50.1 per cent growth in foreign exchange income on the back of increased customer activity and improved trading results

Wealth management income rose by 22.7 per cent to $4,281 million, reflecting an active stock market, record investment product sales and a 17.5 per cent increase in life insurance income.

Total funds under management, including discretionary and advisory, grew by 10.3 per cent to $106.4 billion.

Investments to better position our Hong Kong and Mainland businesses for long-term growth saw operating expenses increase by $695 million, or 15.3 per cent. However, at 29 per cent our cost efficiency ratio continues to be one of the lowest in the banking industry.

Underpinned by a $2,992 million rise in retained profits and growth in the investment reserves, shareholders’ funds, excluding proposed dividends, reached $43.3 billion.

Return on average shareholders’ funds was 27.4 per cent. Return on average total assets was 1.9 per cent.

Our average liquidity ratio increased to 51.9 per cent, compared with 45.1 per cent in 2005.

As at 31 December 2006, our total capital ratio was 13.6 per cent, up 0.8 percentage points compared with a year earlier. Our tier 1 ratio rose 0.3 percentage points to 10.7 per cent.

Our balance sheet grew by 15.2 per cent to $669.1 billion, with good growth in both lending and deposits.

Total loan impairment allowances as a percentage of gross advances to customers were 0.33 per cent at year-end, down from 0.39 per cent a year earlier. Gross impaired advances as a percentage of gross advances to customers remained unchanged at 0.5 per cent.

In the benign credit environment, loan impairment charges and other credit risk provisions dropped by $354 million to $264 million. Individually assessed impairment charges decreased 65.4 per cent to $107 million, due mainly to a significant reduction in new and additional charges for Commercial Banking customers. Collectively assessed impairment charges fell by 53.1 per cent.

Customer Group Performance

Personal Financial Services recorded pre-tax profit of $7,730 million, representing 52.9 per cent of total pre-tax profit. Operating profit excluding loan impairment charges grew by 5.4 per cent.

Net interest income rose 4.7 per cent, benefiting from the improvement of spreads on best lending rate-based loans and good growth in customer advances.

We capitalised on positive investor sentiment by introducing new investment products to meet market demand and grow fee income. Increased marketing of our securities services and competitive pricing strategies helped us acquire new customers and boost turnover. This drove a 29.6 per cent increase in investment services income.

Hang Seng investment funds enjoyed good success. We received number one rankings from Morningstar Asia, S&P's Fund Services and Lipper for the 2006 performance of five Hang Seng funds, with one-year returns in Hong Kong dollars ranging from 52 to 161 per cent.

The recruitment of more relationship managers and a continued emphasis on personalised advice saw Private Banking achieve a 51.1 per cent rise in total operating income. Pre-tax profit rose 46.3 per cent to $556 million.

We launched new insurance products targeting the growing retiree and pre-retiree segments, which led to a satisfactory increase in life insurance income.

Commercial Banking's operating profit excluding loan impairment charges recorded strong growth of 21.5 per cent to $2,001 million. Net interest income increased by 28.3 per cent.

Customer advances rose by 22.2 per cent with trade finance achieving significant growth and gaining market share. Lending to middle market customers increased as a result of refined segmentation and closer relationships. New SME accounts acquired in the second half of 2006 outpaced the first half by 34.7 per cent.

Increases in corporate wealth management and card acquiring business helped net trading income and net fees and commissions grow by 11.9 per cent and 13.5 per cent respectively.

Including a significant reduction in loan impairment charges, Commercial Banking's pre-tax profit increased 109.8 per cent to $2,262 million, contributing 16.4 per cent to total pre-tax profit and moving us closer to our target of 20 per cent by 2010.

With market liquidity and keen competition lowering corporate lending margins, Corporate Banking looked primarily to asset yield. We further diversified our customer base and achieved good growth in deposits. The development of corporate treasury services led to rises in fees and commissions and trading income. Net operating income before loan impairment charges increased by 2.3 per cent.

Operating profit excluding loan impairment charges was $543 million, down 2 per cent. Benefiting from a net release in loan impairment allowances, pre-tax profit grew by 9.9 per cent to $557 million, representing 3.8 per cent of total pre-tax profit.

Treasury's operating profit declined 25 per cent to $887 million. Efforts to expand customer-driven business and proprietary trading helped trading income grow by 66.1 per cent to $628 million. However, net interest income fell by $514 million, or 51.7 per cent, as the balance sheet management portfolio continued to be challenged by rising funding costs and flattened yield curves. Pre-tax profit was down 2 per cent at $1,051 million, or 7.6 per cent of total pre-tax profit.

Mainland Operations

We expanded our Mainland operations on several fronts in 2006. We increased our number of staff by 75 per cent to 661. We became the first foreign bank to have a branch in Dongguan and opened three new sub-branches. Including a Guangzhou sub-branch opened early this year, we now have 16 Mainland outlets.

This expansion in service capabilities helped us achieve strong growth in Mainland deposits and advances, which rose by 51.1 per cent and 50.9 per cent respectively.

In the second half of 2006, we obtained a licence and foreign exchange conversion quota under the Qualified Domestic Institutional Investors scheme. We finished the year on a high note by receiving approval to establish a Mainland subsidiary bank.

Pre-tax profit at our Mainland branches rose by 94.2 per cent to $134 million. Including our share of profits from Industrial Bank, our Mainland business contributed $897 million, or 6.1 per cent, of total pre-tax profit. This was up from 4.5 per cent in 2005, bringing us closer to our target of 10 per cent by 2010.

Loans And Deposits

Gross advances to customers rose by 7.1 per cent to reach $280.3 billion.

Stronger partnerships with Commercial Banking customers enabled us to grow lending to the manufacturing industry by 18.4 per cent and gain market share. Advances to the wholesale and retail sector rose by 14.3 per cent compared with the market average of 4.9 per cent. Loans to property development companies rose by 9.8 per cent. We also achieved a 24 per cent increase in trade finance, giving us a bigger slice of the market.

Excluding the fall in GHOS mortgages, lending to individuals rose by 5.4 per cent.

The introduction of new credit cards and closer collaboration with merchants contributed to an 11.7 per cent increase in card spending and a 22.1 per cent increase in receivables. Personal lending enjoyed strong growth of 46.4 per cent.

In a highly competitive environment, product and online service enhancements helped us grow residential mortgage lending by 5.9 per cent and gain market share.

Loans for use outside Hong Kong rose by 39.8 per cent to $22.2 billion, due largely to increased lending by our Mainland branches. Corporate lending on the Mainland enjoyed good growth, driven by higher-margin renminbi loans. Closer collaboration between our Mainland and Hong Kong teams saw Mainland trade finance increase significantly.

Customer deposits grew 12.8 per cent, with structured deposits rising by 31.2 per cent.

At year-end, our advances-to-deposits ratio was 51.7 per cent, compared with 54.4 per cent a year earlier.

Focused On The Future

Efforts to reach our roadmap objectives are helping us refine our business focus to take better advantage of growth opportunities.

The economic outlook for the year ahead remains positive. Developments in the US housing sector may slow the pace of external trade, but increasing confidence in the local economy, the buoyant labour market and sustained growth on the Mainland should underpin domestic demand.

Supported by our revitalised brand, we are deepening relationships with existing customers and increasing our appeal among key customer groups.

Personal Financial Services will step up cross-selling efforts and expand its customer base by leveraging its well-developed, all-weather portfolio of investment products. Private Banking’s growing service capabilities and open architecture will enable us to further tap the affluent customer segment by offering personalised financial solutions.

We have had notable success with our annuity and healthcare insurance plans and will continue to develop new products to complement our existing range.

We will capitalise on positive consumer sentiment to further grow personal lending.

On the Mainland, our two-pronged approach of organic growth and close collaboration with Industrial Bank will work well for us.

Our Mainland subsidiary bank will be headquartered in Shanghai. Its establishment is planned for the second quarter of this year and will mark a new phase of business expansion. We will capitalise on the opening up of the retail renminbi market and take steps to increase renminbi deposits to support lending growth.

We will expand our customer base on the Mainland through setting up new outlets in high-growth areas, increased marketing, and more promotion of our strong brand, including leveraging our role as the compiler of the Hang Seng Index series.

We will soon open our sixth Shanghai sub-branch and have a further two planned for later in the year, giving us one of the largest networks among foreign banks in this strategic city. Other outlet openings in the pipeline for 2007 include a branch in Hangzhou and a total of six sub-branches in Beijing, Guangzhou and Shenzhen.

We aim to grow our Mainland business to more than 2,000 staff and over 50 outlets by 2010.

We will capitalise on our expanding capabilities in southern China by offering a greater range of services to Commercial Banking customers with operations in Hong Kong and on the Mainland. We will continue to deepen partnerships with SME customers and further grow our trade finance and corporate wealth management business.

Treasury will explore gapping opportunities while maintaining a prudent attitude towards growth in risk-weighted assets. We will continue to diversify our Treasury income base by strengthening our customer-driven business and expanding the scope of our proprietary trading. We will work to increase the penetration rates of our existing products and develop new commodity-linked, credit derivatives and hybrid instruments.

In a highly competitive market for corporate lending, Corporate Banking will continue to target asset yield in the year ahead. We will work to identify more cross-selling opportunities and expand corporate treasury services. We will step up efforts to acquire new customers to grow our Corporate Banking deposit base.

We will further strengthen cooperation and communication between all customer groups.

I am delighted to be working with a progressive and highly-motivated team that is firmly focused on service excellence and exceeding expectations. Building on the good progress made in 2006, we will continue to enhance our position as a leading financial institution in Greater China to the long-term benefit of our customers and shareholders.

Thank you.