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

Good afternoon, ladies and gentlemen. Welcome to Hang Seng’s 2007 interim 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.

Hang Seng’s record results for the first half of 2007 reflect excellent progress with our long-term growth strategy, supported by buoyant economic conditions.

Attributable profit rose by 43.2 per cent to $8,867 million. Earnings per share were $4.64, an increase of 43.2 per cent.

Underpinned by strong growth in our wealth management and Commercial Banking businesses, operating profit excluding loan impairment charges and other credit risk provisions rose by 26.1 per cent to $8,053 million. Operating profit was up $1,420 million, or 22.4 per cent, at $7,773 million – the highest rate of growth for 11 years.

Pre-tax profit grew by 36 per cent to $10,218 million, in part reflecting an 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 this year.

The Directors have declared a second interim dividend of $1.10 per share, bringing the total distribution for the first half of 2007 to $2.20.

In Action

Our wealth management business went from strength to strength, with securities turnover and sales of investment funds and structured products breaking all previous highs. Private banking remained on a strong growth trend.

We continued to enhance services for Commercial Banking customers, strengthening our position as the preferred bank for SMEs. We capitalised on positive business sentiment to increase customer advances. We made pleasing progress with the development of our corporate wealth management business.

Treasury’s balance sheet management portfolios reversed their downward trend. To further grow customer-driven business, we stepped up cross-customer group cooperation and put additional resources into structured product development. Such actions have placed Treasury in a better position to deliver profit growth.

Moves to further diversify Corporate Banking’s income proved successful, with significant increases in customer deposits, trade services and credit facility fees.

In late May, our wholly owned Mainland subsidiary bank – Hang Seng Bank (China) Limited – commenced operation, marking the start of a new era of business growth. We have also opened a third Guangzhou outlet and two new sub-branches in Shanghai since the beginning of the year, further strengthening our service capabilities in regions with good growth potential.

Financial Highlights

Net interest income grew by 20.8 per cent to $6,696 million, supported by a 10 per cent rise in average customer deposits and a 9.7 per cent increase in average customer advances. Net interest margin rose by 10 basis points to 2.11 per cent, underpinned by improvements in deposit spreads, Treasury balance sheet management portfolio yields and contribution from net free funds.

Average interest-earning assets grew by 15.1 per cent. Total assets were up 10.8 per cent at $741.3 billion.

The active investment market helped drive an 85.4 per cent increase in revenue from stockbroking and related services to $738 million. Income from retail investment fund and third-party structured product sales grew by $244 million and $217 million respectively. Along with strong growth of 108.1 per cent and 19.9 per cent in private banking business and card services income respectively, this supported the 60.6 per cent increase in net fee income to $2,862 million.

Revenue from securities, derivatives and other trading rose by $141 million. This only partly offset a $216 million decline in foreign exchange income caused by exchange losses on forward contracts relating to Treasury’s funding swap activities and on the revaluation of Hang Seng China’s US dollar capital funds against the renminbi. Overall, trading income was down $75 million, or 11.4 per cent, at $584 million.

Operating expenses rose by 24.6 per cent to $2,914 million, due largely to investments in our Mainland business as well as increases in performance-related pay and marketing costs. Excluding Mainland-related costs and performance-based bonuses and incentives, operating expenses were up 8.9 per cent.

However, the rise in costs was outpaced by the 25.7 per cent growth in total operating income. With this positive jaw of 1.1 percentage points, our cost efficiency ratio was 0.2 percentage points lower at 26.6 per cent.

We also enhanced our staff productivity – operating profit per employee during the first half was over $900,000, a 14.1 per cent increase compared with a year earlier.

In June we launched a US$300 million subordinated notes offering, which has helped expand the breadth and depth of our investor base. The proceeds will be used for general funding purposes, which may include our proposed acquisition of the outstanding 50 per cent of Hang Seng Life.

At 30 June 2007, our total and tier 1 capital ratios were 12.3 per cent and 8.9 per cent respectively, as calculated under new rules issued for the implementation of the Basel II capital accord.

We continue to enjoy excellent credit ratings. Moody’s Investors Service upgraded our long-term local and foreign currency deposit ratings to Aa1 and Aa2 respectively. Hang Seng China enjoys the highest ratings assigned to Mainland incorporated subsidiaries of foreign banks.

Shareholders’ funds (excluding proposed dividends) increased by $5,580 million, or 12.9 per cent, to $48,928 million, due largely to an increase in retained profits and the gain on the dilution of our investment in Industrial Bank.

Return on average shareholders’ funds was 36.6 per cent, compared with 29 per cent in the first half of 2006. Excluding the aforesaid gain on dilution, return on average shareholders’ funds was 30.5 per cent.

Loans and Deposits

Customer deposits, including certificates of deposit and other debt securities in issue, reached $558 billion – a rise of 3.4 per cent over the end of 2006. Particularly strong growth was achieved with Corporate Banking and non-borrowing SMEs.

Gross advances to customers at 30 June 2007 were $312 billion, up $31.7 billion, or 11.3 per cent. This amount included $26.9 billion in IPO-related financing.

New financing for large Corporate Banking customers was active, reflected in increased lending to the property investment sector and securities companies. However, large repayments of existing loans in other sectors curtailed the growth of the overall Corporate Banking loan portfolio.

Sustained consumer demand and a series of promotional campaigns helped us grow personal loans by 18.6 per cent during the first half and 48.8 per cent year on year. Card advances rose by 3.8 per cent and 29.3 per cent over 31 December 2006 and 30 June 2006 respectively.

Loans for use outside Hong Kong grew by 14.1 per cent to $25.3 billion. This was due largely to a 21.3 per cent rise in lending by our Mainland branches, which achieved significant increases in trade finance and renminbi-denominated corporate loans.

Total loan impairment allowances as a percentage of gross advances to customers improved to 0.31 per cent, compared with 0.33 per cent at the previous year-end. Gross impaired advances as a percentage of gross advances to customers remained unchanged at 0.5 per cent.

Customer Group Highlights

Personal Financial Services attained a 35.9 per cent increase in operating profit excluding loan impairment charges to reach $5,380 million. Pre-tax profit was up 35.4 per cent at $5,278 million.

Wealth management income grew sharply by 58.2 per cent to a record $3,429 million. Stock trading turnover reached a new high, with timely marketing and special promotions helping us increase our customer base.

Sales of investment funds and equity-linked structured products also enjoyed strong growth, rising by 88.6 per cent and 234.4 per cent respectively.

Our fund management achievements were recognised through a number of awards and number one rankings received during the first half of 2007.

Strategic initiatives taken to meet our private banking growth objectives – including hiring more relationship managers and extending our range of products – generated excellent results with total operating income increasing by 60.7 per cent. Pre-tax profit was up 62.4 per cent at $459 million. Given this progress, private banking should achieve its five-year target of doubling 2005’s pre-tax profit by the end of this year – three years ahead of schedule.

Funds under management rose 13.7 per cent to $121 billion compared with the previous year-end.

The further enhancement of our retirement planning services drove a 37.1 per cent growth in life insurance income in the first half of 2007 and helped make us Hong Kong’s number one provider in terms of annualised new premiums for regular-pay (non-linked) insurance in the first quarter of the year.

We capitalised on positive consumer sentiment to grow cards in issue to 1.44 million. Card spending increased by 22.3 per cent.

Residential mortgages fell slightly by 0.8 per cent. Amid intense market competition, we demonstrated our commitment to our mortgage business through continuous investment in our e-mortgage website, making it both a resource centre and sales channel. This helped us hold our position as one of the market leaders, striking a balance between market share and profit contribution.

Commercial Banking’s operating profit excluding loan impairment charges rose by 15.3 per cent to $1,076 million, driven by a 22.7 per cent increase in average customer advances as well as the expansion of corporate wealth management business and improvements in deposit spreads. Pre-tax profit rose 17.2 per cent to $1,285 million.

The contribution of corporate wealth management income to Commercial Banking’s total operating income grew from 7.9 per cent to 9 per cent. In particular, strengthened collaboration between commercial relationship managers and treasury and investment service teams saw treasury and investment income grow by 73.2 per cent.

We effectively promoted our comprehensive banking solution for retailers, growing our market share in this key sector. We also enjoyed success with expanding our card merchant-acquiring business, resulting in a 40.9 per cent increase in related income.

Commercial Banking’s average customer deposits rose 19.5 per cent, driven largely by non-borrowing SME customers.

The improved interest rate environment in the first half of 2007 saw Treasury’s operating profit increase by 2.7 per cent to $456 million. Net operating income rose 5.1 per cent, with the improvement in yields on balance sheet management portfolios. Including the increase in our share of profits from associates, pre-tax profit rose by 12.8 per cent to $571 million.

Corporate Banking’s 16 per cent rise in operating profit excluding loan impairment charges to $298 million was underpinned by growth of 15.7 per cent in net interest income and 35 per cent in net fee income.

Net interest income growth was largely driven by the 28.9 per cent growth in average customer deposits. Average customer advances were up 2.3 per cent, due mainly to lending to property investment, securities and information technology companies.

Pre-tax profit was down by $79 million at $192 million, reflecting an increase in loan impairment charges.

The opening of Hang Seng China in late May puts us in a stronger position to enlarge our service scope and build on the good growth momentum generated during the first half of the year. Including Hang Seng Bank’s Shenzhen branch and Xiamen representative office, we now have 19 outlets on the Mainland.

We continued to focus on the affluent customer segment and commercial business in high-growth regions. Our number of Mainland Prestige Banking accounts increased by 35 per cent during the first half of the year.

Total operating income of our Mainland operations grew by 86 per cent to $225 million, supported by a 21.3 per cent increase in lending and a 42.7 per cent rise in deposits. Pre-tax profit was down $40 million, affected by the costs of establishing our Mainland subsidiary, an exchange loss on US dollar capital funds upon revaluation against the renminbi and an increase in loan impairment charges.

Closer collaboration with Industrial Bank means that Hang Seng China’s Prestige Banking customers can now make deposits via 26 Industrial Bank outlets in Shanghai.

Including our share of profit from our strategic partner, the pre-tax profit of our Mainland business contributed 5.9 per cent of total pre-tax profit, compared with 4.3 per cent a year earlier.

We continued to make effective use of technology to improve our cost efficiency and offer customers more convenient banking services. Online transactions in June 2007 accounted for 51.3 per cent of all banking transactions, up from 45.7 per cent in December 2006.

Enhancements to our Personal e-Banking website helped us grow our number of Personal e-Banking customers to over 690,000, up 10 per cent compared with the end of last year. Personal e-Banking transactions increased by 12.7 per cent compared with December 2006. Internet transactions accounted for 71.6 per cent of securities trading and 81 per cent of foreign exchange trading.

Our improved e-mortgage channel was a valuable tool in maintaining our position in the highly competitive home loans market. The number of online mortgage submissions made during the first half of 2007 grew by 249 per cent compared with the first half of last year.

Year-on-year, revenue from Personal e-Banking sales and transactions grew by 93 per cent to $734 million in the first half of 2007.

We also made good progress with the expansion of Business e-Banking, growing our number of accounts by 34.5 per cent year on year to more than 44,000. Business e-Banking transaction volume grew by 46.2 per cent, reflecting the increasing popularity of our e-channels.

Economic growth in Hong Kong will maintain momentum during the second half of the year. The economy will continue to benefit from the improving labour market, a favourable interest rate environment and strong growth on the Mainland.

Potential challenges include rising inflation risks created by the weakening US dollar and appreciating renminbi, which may put upward pressure on costs. The prospects of further macro-economic policy tightening on the Mainland may also add volatility to the performance of its economy and financial markets.

Against this backdrop, we will further develop wealth management, Commercial Banking and Mainland business as key growth drivers. We will leverage our brand, leading market position and wide product range to attract new customers and deepen relationships with existing ones. We will capitalise on the positive sentiment of consumers and the business community to expand personal finance and commercial lending.

Supported by economic growth on the Mainland, we will take full advantage of new business opportunities following the establishment of our subsidiary bank.

We will grow our customer base by continuing to focus on high-growth areas such as the Pearl River Delta, Yangtze River Delta and Bohai Economic Rim regions. We are well advanced with preparations to open a Hangzhou branch and a sub-branch in Beijing within the next few months and have more openings planned for later in the year. We will take further steps to increase renminbi deposits to support lending growth. By 2010, we aim to have more than 2,000 staff and over 50 outlets on the Mainland.

The significant progress made in the first half of 2007 provides encouraging support for our strategy for long-term business growth. We will continue working to further enhance our position as a leading financial institution in Greater China and achieve new heights of excellence for customers and shareholders.

Thank you.

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