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

Good afternoon, ladies and gentlemen. Welcome to Hang Seng's 2006 interim results announcement.

Those of you who have attended our previous results announcements will have noticed our new backdrop, which reflects design changes under our newly launched brand revitalisation programme. However, while the backdrop has changed, our friendly faces remain the same!

Before turning to our 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.

Improved economic conditions and initiatives taken according to our roadmap for growth helped Hang Seng make solid progress during the first half of 2006 in a keenly competitive banking environment.

Aided by the buoyant economy, we expanded our commercial banking and wealth management businesses, with encouraging growth in investment services and insurance income, trading profit and trade finance.

Efforts to broaden our customer base led to increases in loan balances and customer deposits. Along with the effects of rising interest rates, these increases underpinned growth in net interest income.

Total operating income increased by 18.1 per cent to reach $12,396 million.

Operating profit excluding loan impairment charges and other credit risk provisions was up 7.6 per cent at $6,387 million. An 88.7 per cent reduction in loan impairment allowances saw operating profit rise by 12.8 per cent to $6,353 million.

Pre-tax profit grew by 6.4 per cent to reach $7,513 million.

Attributable profit after taxation and minority interests was $6,190 million, up 2.4 per cent compared with the same period last year which benefited from a large property revaluation surplus.

Our Roadmap

Our interim results reflect the focus provided by our roadmap for growth - a set of key priorities and targets designed to drive our business forward.

Relationships with commercial customers were further strengthened through the opening of more Business Banking Centres and our Business Partner Direct 24-hour hotline as well as the expansion of our team of relationship managers.

These enhancements helped us win the award for Best Banking Service at the SME's Best Partner Awards 2006 organised by the Hong Kong Chamber of Small and Medium Business.

We grew our mainland China operations by hiring around 100 new staff and adding a fourth Shanghai sub-branch. We deepened cooperation with Industrial Bank, focusing on areas such as credit card business, lending and cross-referral of customers.

As reflected in our new corporate tagline 'Managing wealth for you, with you', we allocated more resources to meeting the investment and insurance needs of our customers.

Private Banking recorded significant increases in customer base and assets under management.

Steps taken to help us achieve a more customer driven and diversified treasury income base are beginning to produce encouraging results.

We will build on the good momentum we have generated during the initial stages of our roadmap strategy.

Financial Highlights

At a Bank-wide level, net interest income grew by 21.1 per cent to $6,375 million, excluding $847 million in net interest expenses on the trading and fair value portfolios.

Net interest margin increased by 24 basis points to 2.37 per cent.

Average interest-earning assets grew by 8.7 per cent to $541.3 billion. Total assets were up 8.2 per cent at $628.3 billion.

Wealth management income increased by 23.9 per cent to reach $2,211 million.

The active equities market drove an 88.4 per cent rise in securities-related income to $439 million. Together with increases in fee income from private banking and card services, this helped net fee income grow by 13 per cent to $1,782 million.

Trading profit was up 69.4 per cent at $659 million, attributable primarily to strong growth in foreign exchange income. However, after deducting trading-related net interest expenses of $879 million, a net trading loss of $220 million was reported.

Financial Strength

Salary increases and the hiring of new staff for business expansion saw operating expenses rise $182 million, or 8.4 per cent.

However, we continue to maintain high efficiency and strong financial fundamentals.

Our cost efficiency ratio for the first half of 2006 was 26.8 per cent, one of the lowest in the banking industry.

The sale in May of 77 Des Voeux Road Central for $2.26 billion as part of our property portfolio rationalisation programme will allow us to make better use of our resources.

In June, we enjoyed a good market response to our first-ever US dollar subordinated notes issue. The US$450 million offering helped to improve our capital base.

Our total and tier 1 capital ratios at 30 June 2006 were 14.2 per cent and 11 per cent respectively, up from 12.8 per cent and 10.4 per cent at the end of 2005.

We continue to enjoy the highest ratings given to banks in Hong Kong. In June, Moody's upgraded our long-term local currency deposit rating to Aa2. In July, Standard & Poor's raised our local and foreign currency long-term corporate credit ratings to AA.

Shareholders' funds, excluding proposed dividends, were up 6.9 per cent at $41,615 million, due primarily to the growth in retained profits. Return on average shareholders' funds was 29 per cent, one of the highest in the banking sector.

Helped by the benign credit conditions, loan impairment allowances fell to 0.33 per cent of gross advances to customers as at 30 June 2006, compared with 0.39 per cent at the end of 2005. Gross impaired advances as a percentage of gross total advances were down 0.1 percentage points at 0.4 per cent.

Customer Group Performance

Personal Financial Services' operating profit excluding loan impairment charges rose 7 per cent to $3,960 million. Pre-tax profit was $3,897 million, a 1.8 per cent decline compared with the same period last year, which benefited from a $260 million net release in loan impairment allowances.

Net interest income rose by 5.4 per cent, supported by a 9.1 per cent increase in average customer deposits.

Wealth management income remained a central growth driver. We continued to expand and refine our range of products to take advantage of prevailing market conditions and meet customers' investment and insurance needs at all stages of life.

The success of our new Monthly Income Retirement Plan underpinned the 28.4 per cent increase in life insurance income to $697 million. We gained market share in terms of new annualised premiums.

Private Banking's total operating income rose by 42.1 per cent.

Increased stock market activity helped securities-related income grow by 83.5 per cent.

Continuous efforts to acquire new customers saw cards in issue reach 1.32 million. Card spending was up 9.2 per cent year on year.

Commercial Banking's operating profit excluding loan impairment charges increased by an encouraging 21.8 per cent to $933 million, within which the small business banking portfolio grew by 28.2 per cent. Pre-tax profit rose 150.8 per cent to $1,096 million, reflecting a $26 million net release in loan impairment allowances compared with a large charge at the same time last year. Net interest income rose 25.3 per cent.

The development of deeper customer relationships helped trade finance and commercial loans grow by 17.8 per cent and 18.1 per cent respectively during the first half of 2006, and by 13.6 per cent and 38.2 per cent respectively year on year. The introduction of corporate wealth management advisors proved effective, contributing to the 21.2 per cent rise in net fees and commissions.

Corporate Banking's pre-tax profit benefited from a release in loan impairment allowances, compared with a charge in the same period last year, rising 58.5 per cent to $271 million. Operating profit excluding loan impairment charges fell by 8.2 per cent to $257 million.

With the intensely competitive lending market and high levels of liquidity driving down margins on corporate loans, Corporate Banking continued with its strategy of diversifying its loan portfolio, cross-selling Treasury products and growing its Mainland client base.

Treasury's trading profit grew by an encouraging $246 million following efforts to enhance proprietary trading capability, expand corporate treasury services and increase cooperation with other customer groups.

However, with interest rate rises continuing to put pressure on Treasury's balance sheet management portfolios, pre-tax profit fell by 35.5 per cent to $506 million.

Mainland Business

We extended our service capabilities and product offerings on the Mainland, helping us to capture more business. Following the opening of a new Shanghai sub-branch in May, our network now stands at 13 outlets.

Early this year, our first offsite ATMs on the Mainland were set up in Beijing and Shanghai. Our Fuzhou branch expanded the scope of its renminbi and foreign currency services. We received approval for a similar expansion at our Nanjing branch, which will begin offering its new services in the third quarter of this year. Trade-related insurance agency services are now available in Guangzhou, Shanghai and Shenzhen. We are among the first group of foreign banks on the Mainland to have received approval to offer renminbi foreign exchange swap services.

New products such as market-linked structured deposits helped total Mainland deposits grow by 11.2 per cent during the first half of 2006 and 43.8 per cent year on year. Lending increased by 21.7 per cent over the previous year-end and 42.4 per cent year on year.

Net profit from our strategic investment in Industrial Bank grew by 10 per cent to reach $209 million.

Loans And Deposits

Despite the competitive banking conditions, we achieved growth in both deposits and loan balances.

Customer deposits, including certificates of deposit and other instruments in issue, rose 5.4 per cent to $504.9 billion.

Continuing efforts to diversify our loan portfolio helped drive good growth in trade finance, commercial banking advances, mortgages and personal loans, outweighing falls in mortgages under the suspended Government Home Ownership Scheme and lending to large corporations. Advances to customers increased 2.2 per cent to $266.5 billion.

Lending to individuals (excluding GHOS mortgages) grew by 1.9 per cent. Despite intense competition in the residential mortgage sector, we achieved a 1.8 per cent increase in loan balance and gained market share.

Sustained consumer demand, underpinned by the buoyant labour market, helped personal loans grow by 16.8 per cent during the first half of 2006. Compared with a year earlier, personal loans rose by 41.4 per cent.

Credit card advances fell by 1.9 per cent compared with the end of 2005, due primarily to the repayment of tax bill payment balances. Year on year, card advances were up 15.2 per cent.

Loans to the wholesale and retail trade and the manufacturing industry rose by 7.4 per cent and 7.2 per cent respectively. Compared with 30 June 2005, lending to these sectors increased by 13.9 per cent and 9.3 per cent. Lending for property investment was up 3.6 per cent on the previous year-end and 13.4 per cent year on year. Trade finance recorded strong growth of 19.5 per cent since the end of 2005 and 12.2 per cent year on year.

Loans for use outside Hong Kong rose by $1,951 million, or 12.3 per cent, over the previous year-end, driven primarily by the 21.7 per cent increase in lending by our Mainland branches.

Investing In The Future

We are pushing forward with plans that support the sustainable growth of our business by revitalising our brand, improving service delivery and contributing to the development of the communities we serve.

To boost our competitiveness and grow our market share in key customer segments such as young people and SMEs, we are investing in brand strengthening.

This investment will help reinforce our progressive, pragmatic and thoughtful approach that places primary focus on service excellence, enhancing our leadership position as customers' bank of choice.

In late May, we kicked off our integrated branding programme, which covers both advertising and key areas affecting customer experience, such as products, services, points of contact and marketing materials.

We now have two TV commercials that build our brand equity using a testimonial approach. Our branches at China Resources Building in Wan Chai and Cheung Sha Wan Plaza in Lai Chi Kok have adopted new branch design elements. We will refurbish more branches in line with our new brand identity and to provide an enhanced banking experience.

Ongoing enhancements to our online services are enabling us to offer more convenient banking to our customers. Over 577,000 personal account holders and nearly 33,000 companies now enjoy the advantages of using e-Banking.

During the first half of 2006, 38 per cent of all personal banking transactions were completed online, up from 29 per cent in the same period last year. This included 66 per cent of securities trading, 87 per cent of investment fund switching and 80 per cent of foreign exchange margin trading.

Improvements to our website are helping encourage customers to purchase products and services via online channels. During the first half of the year, 55 per cent of our travel insurance sales were completed over the Internet.

Year on year, total online sales and transactional income was up 112 per cent.

More than 100,000 personal account holders have switched to our e-Statement service, saving an estimated 5 million sheets of A4 paper a year.

In January, we pledged to plant one tree for every shareholder who elected to receive shareholder communication materials by electronic means and for every 10 Hang Seng personal accounts that switched to e-Statement, up to a total of 10,000 trees. Over 2,000 shareholders have since opted to receive materials electronically. In April, 10,000 saplings were planted at Ma On Shan Country Park, bringing the number of trees we have planted since 1999 to 50,000.

Campaigns such as these not only improve our operating and cost efficiency, but also form part of our efforts to contribute to the well-being of the local communities that help support our business.

The Road Ahead

The good economic conditions and strong labour market are forecast to continue during the second half of the year, although the pace of growth may become more moderate if uncertainty over global interest rate trends persists.

We will take advantage of positive market sentiment to grow commercial lending and consumer finance and expand the reach of our SME services. We will build on the success of our wealth management business by continuing to introduce products that meet the demands of a wide spectrum of investors.

On the Mainland, we will extend our reach with the opening of our first sub-branch in Guangzhou next month and a branch in Dongguan later this year. We will take additional steps to expand our deposit base to support loan growth. We have applied for a licence under the new Qualified Domestic Institutional Investors scheme and will further develop our wealth management services.

Progress under our roadmap for growth has helped us return solid results in the first half of 2006 and provides a good foundation from which to further build our business. Backed by our strong brand, we remain firmly focused on our objectives to the sustaining benefit of our business and stakeholders.

Thank you.