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3 August 2009
Hang Seng Bank Limited 2009 Interim Results
- Highlights
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Operating profit down 26.0 per cent to HK$6,740 million
(HK$9,112 million for the first half of 2008; up 46.1 per cent compared
with HK$4,613 million for the second half of 2008)
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Operating profit excluding loan impairment charges and other credit risk
provisions down 20.8 per cent to HK$7,361 million
(HK$9,300 million for the first half of 2008; up 2.2 per cent when compared
with HK$7,201 million for the second half of 2008)
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Profit before tax down 27.7 per cent to HK$7,618 million
(HK$10,530 million for the first half of 2008; up 42.4 per cent compared with
HK$5,348 million for the second half of 2008)
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Attributable profit down 28.8 per cent to HK$6,451 million
(HK$9,064 million for the first half of 2008; up 28.1 per cent compared with
HK$5,035 million for the second half of 2008)
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Return on average shareholders' funds of 25.1 per cent
(32.8 per cent for the first half of 2008; 18.7 per cent for the second half of 2008)
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Assets up 3.7 per cent to HK$790.1 billion
(HK$762.2 billion at 31 December 2008)
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Earnings per share down 28.9 per cent to HK$3.37 per share
(HK$4.74 per share for the first half of 2008)
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Second interim dividend of HK$1.10 per share; total
dividends of HK$2.20
per share for the first half of 2009
(HK$2.20 per share for the first half of 2008)
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Capital adequacy ratio* of 16.6 per cent (12.5 per cent
at 31 December 2008);
core capital ratio of 13.1 per cent (9.5 per cent at
31 December 2008)
- Cost efficiency ratio of 30.4 per cent
(26.3 per cent for the first half of 2008)
*The capital adequacy and core capital ratios at 30 June 2009 were calculated in accordance with Basel II - advanced internal ratings-based approach which became effective on 1 January 2009, while those at 31 December 2008 were calculated in accordance with Basel II - foundation internal ratings-based approach.
Comment by Raymond Ch’ien, Chairman
Against the backdrop of the global economic crisis, Hang Seng’s key financial indicators for the first half of 2009 are generally down compared with the same period last year, but have improved substantially against the second half of 2008. This highlights the success of our actions to maintain broad-based business momentum in these challenging economic times.
We have been well-served by our continued emphasis on the long-held values behind Hang Seng’s trusted brand – including financial prudence, long-term partnerships and professionalism. These operating principles have helped us deepen existing customer relationships and establish new ones. Customers continue to rely on Hang Seng to help them manage their financial needs, rewarding us with their loyalty and trust.
With strong roots in our local communities, we are working hard with customers to tackle today’s economic challenges, to capitalise on opportunities for sustainable growth and to support economic recovery.
We are an active player in the Hong Kong government’s efforts to aid the business sector and promote economic activity. In the tight credit environment, we are assisting customers by extending loans under government-backed schemes aimed at small and medium-sized enterprises.
We continue to work to join up our Commercial Banking teams in Hong Kong and mainland China as well as to introduce new initiatives such as our cross-border renminbi settlement services. In doing so, we are contributing to the infrastructure that facilitates trade activity and enhances Hong Kong’s status as a leading international centre for finance and commerce.
We remain focused on increasing value for shareholders through careful risk management and cost control while investing in our business for future growth.
Financial Performance
Operating profit excluding loan impairment charges and other credit risk provisions was HK$7,361 million, down 20.8 per cent on the first half of 2008 but up 2.2 per cent on the second half. At HK$6,740 million, operating profit fell by 26.0 per cent compared with a year earlier, but increased by 46.1 per cent compared with the second half of last year, reflecting the improvement in loan impairment charges and other credit risk provisions.
Profit before tax recorded a decline of 27.7 per cent compared with a year earlier to HK$7,618 million, but was up 42.4 per cent on the second half of last year.
Profit attributable to shareholders was HK$6,451 million – a 28.8 per cent decline on the first half of 2008 but a 28.1 per cent increase on the second half. At HK$3.37, earnings per share were down HK$1.37, or 28.9 per cent, on the same time last year.
Net operating income before loan impairment charges and other credit risk provisions fell by 16.2 per cent to HK$10,576 million. Further emphasis on cost control saw us achieve a 3.2 per cent reduction in operating expenses to HK$3,215 million. Our cost efficiency ratio was 30.4 per cent.
Return on average shareholders’ funds was 25.1 per cent, compared with 32.8 per cent and 18.7 per cent for the first and second halves of 2008 respectively. Return on average total assets was 1.7 per cent – down 0.7 percentage points compared with the first half of last year but up 0.4 percentage points on the second half.
On 30 June 2009, our capital adequacy ratio and core capital ratio were 16.6 per cent and 13.1 per cent respectively, as calculated using the ‘advanced internal ratings-based approach’ under Basel II, compared with 12.5 per cent and 9.5 per cent as calculated using the ‘foundation internal ratings-based approach’ under Basel II at the end of last year. The strengthening of these ratios largely reflects profit growth after accounting for dividends in the first half of the year, the improvement in the available-for-sale debt securities reserve due to the narrowing of credit spreads and a change in calculation methodology.
The Directors have declared a second interim dividend of HK$1.10 per share, payable on 2 September 2009. This brings the total distribution for the first half of 2009 to HK$2.20 per share, the same as in the first half of last year.
Outlook
Following the implementation of large-scale fiscal and monetary stimulus programmes in many major economies, there are some early signs that the pace of global economic contraction has begun to moderate. However, operating conditions will remain challenging on the road to worldwide recovery.
The Mainland economy has shown itself to be more resilient than most. Demand for exports has declined sharply, but comprehensive government efforts to promote economic activity have helped support continued domestic consumption.
As a highly open economy, Hong Kong has seen contraction in both export and domestic sectors. Action by the government is offering important assistance to businesses, but given the city’s significant dependence on external demand, economic recovery among its major trading partners will be a crucial factor in regaining growth momentum.
Hang Seng’s solid financial fundamentals and strong brand will remain important stabilising forces in uncertain market conditions.
We will continue to uphold our core principles and further enhance our relationships with customers and other stakeholders as we work to achieve long-term growth.
Review by Margaret Leung, Vice-Chairman and Chief Executive
Hang Seng’s well-respected brand, premium service, and prudent approach to business helped differentiate us from our peers in the challenging operating conditions experienced during the first half of 2009. Supported by our diverse portfolio of products, we adapted to the changing needs of customers – maintaining a strong position and achieving increased market share in both loans and deposits compared with the end of last year.
While working to protect our business against the effects of the global economic turbulence, we remained committed to developing wealth management, Commercial Banking and mainland China business as key drivers of long-term growth.
In the uncertain investment environment, we provided customers with yield enhancement opportunities through more defensive products. Our wide range of insurance solutions helped us increase our Hong Kong market share for life insurance (in terms of new business) to 16.3 per cent during the first quarter of the year. We strengthened wealth management growth prospects by expanding product offerings for commercial customers and on the Mainland.
Our cross-border Commercial Banking services and offering of government-guaranteed SME loans provided valuable support to new and existing customers in the difficult economic conditions.
In the changing credit conditions, Corporate Banking improved loan pricing, underpinning solid growth in net interest income.
Treasury moved forward with its strategy for enhancing the quality and performance of the balance sheet management portfolio and capitalised on increased customer interest in foreign exchange-linked investments.
Assisted by close collaboration between colleagues in Hong Kong and on the Mainland, Hang Seng Bank (China) Limited further enhanced service delivery and widened its product range. This helped drive a 45 per cent increase in the customer base compared with a year earlier.
Customer Groups
Personal Financial Services recorded a 34.4 per cent decline in profit before tax to HK$3,467 million, due mainly to the substantial fall in wealth management income compared with the same period last year in the adverse investment environment. Operating profit excluding loan impairment charges was down 30.4 per cent at HK$3,579 million. However, profit before tax and operating profit excluding loan impairment charges were up by 10.9 per cent and 7.6 per cent respectively compared with the second half of 2008.
Wealth management income was HK$2,176 million – down 31.7 per cent on the first half of last year, but up 35.8 per cent compared with the second half.
Our new Securities Select Customer Trading Centre capitalised on rising investor interest in securities during the second quarter and we achieved growth in the securities account base and market share. Income from securities broking and related services fell by 15 per cent but grew by 25.4 per cent compared with the first and second halves of 2008 respectively. We achieved record turnover in sales of foreign exchange-linked investment deposits.
Overall, investment-related income was up 3.3 per cent on the second half of last year, but down 52.7 per cent on the first half, due mainly to the significantly lower level of investor transactions. Private Banking was also affected by poor investment sentiment, with income down by 70.5 per cent.
Supported by our comprehensive range of life insurance products, we achieved a 12.7 per cent rise in policies in force and a 19.1 per cent increase in total annualised premiums to HK$13.0 billion. Life insurance income grew by 20.4 per cent compared with the first half of 2008 and 110.6 per cent compared with the second half.
Despite narrowing spreads on deposits and mortgage loans, net interest income declined only slightly by 6.5 per cent to HK$4,015 million, due to our successful strategy to improve investment returns on the life insurance portfolio.
A series of customer acquisition and card utilisation campaigns helped us expand our credit card business and we gained market share in terms of the card base, spending and receivables. In competitive conditions, we leveraged our online services to maintain a strong position in mortgage lending, ranking first for equitable mortgages and second for residential mortgages in Hong Kong during the first quarter of the year.
Commercial Banking’s operating profit excluding loan impairment charges was HK$951 million – down 22 per cent and 16.2 per cent on the first and second halves of last year respectively.
Total operating income was down 12.9 per cent, due largely to an 18.5 per cent drop in net interest income. Average customer deposits grew by 3.1 per cent, but margin compression in the near-zero interest rate environment led to a 48.7 per cent decline in related net interest income. Reduced international trade flows resulted in a 4.9 per cent drop in average customer advances and a 23.4 per cent fall in trade finance. The repricing of loans to reflect prevailing credit conditions underpinned a 16.9 per cent increase in net interest income from advances.
Commercial Banking’s non-interest income fell by a modest 5.4 per cent. We focused on structured deposits to serve customers looking for lower-risk yield enhancement. A strengthened product suite and coordinated marketing efforts drove the 230.3 per cent increase in corporate life insurance income. Corporate wealth management business contributed 12.9 per cent to Commercial Banking’s total operating income, up from 10.4 per cent in 2008.
We continued to assist SMEs dealing with tough operating conditions. Since late 2008, we have approved over 3,400 government-guaranteed SME loans – totalling more than HK$10 billion.
Commercial Banking’s profit before tax was down 36.6 per cent at HK$1,080 million, due mainly to higher loan impairment charges in the difficult economic environment. With continued vigilance in risk management, asset quality overall remained within our expectations. Much improved market conditions in the first half of this year led to a 66.4 per cent reduction in loan impairment charges compared with the second half of 2008, reflected in the 40.8 per cent increase in profit before tax compared with the second half of last year.
Corporate Banking recorded an operating profit excluding loan impairment charges of HK$517 million – a 41.6 per cent increase compared with the first half of 2008 and a 14.9 per cent increase compared with the second half. At HK$449 million, profit before tax was up 23.0 per cent and 60.4 per cent compared with the first and second halves of last year respectively.
Total operating income grew by 31.4 per cent, driven largely by the 31.9 per cent increase in net interest income. Supported by a strong balance sheet and liquidity, we continued to provide customers with new and renewed facilities while adjusting pricing in line with the credit environment, achieving a 66.2 per cent rise in net interest income from advances. Net interest income from deposits was down 34.5 per cent, with the increase in low-cost current and savings account deposits only partly offsetting the fall in time deposits.
Treasury’s operating profit excluding credit risk provisions grew by 6.2 per cent to HK$1,804 million. Compared with the second half of last year, operating profit excluding credit risk provisions increased by 34.7 per cent. We continued with our prudent risk management strategy – striving for stable revenue growth through investment in selected high-quality negotiable instruments.
In challenging market conditions, we maintained the momentum of customer-driven Treasury business by focusing on the increased demand for foreign exchange-linked products.
Treasury’s profit before tax grew by 1.7 per cent to HK$2,017 million.
Mainland Business
As at 30 June 2009, Hang Seng China’s network stood at 34 outlets across 11 cities.
Significant growth in the customer base – driven by the further development of wealth management offerings and growing Commercial Banking capabilities – helped support an increase in net interest income, with total operating income rising by 19.9 per cent.
Under our strategy to create a springboard for future deposits growth, we continued to target the affluent personal customer segment, achieving a 77.0 per cent rise in Prestige Banking customers compared with a year earlier.
In the uncertain economic conditions, we took a prudent approach to lending – emphasising loan quality over business growth – resulting in a 12.9 per cent decline in customer advances. We further strengthened the management of credit risk and operational risk. Loan impairment charges were higher compared with the first half of 2008, but significantly lower compared with the second half. Deposits rose by 1.2 per cent.
Profit before tax recorded steady growth. Higher total operating income and a reduction in losses on the revaluation of US dollar capital funds against the renminbi were partly offset by the cost of network expansion, investment in human resources and the rise in loan impairment charges.
We continued to work with Industrial Bank to good effect. Our dual-branded credit card is now one of the favoured cards on the Mainland among younger generations and we are stepping up collaboration in areas such as wealth management and trade services.
Our cooperation with new strategic partner Yantai Bank Co., Ltd moved forward with the launch of its updated corporate image and tagline.
Including the share of profits from strategic partners, our Mainland business contributed 11.7 per cent to total profit before tax, compared with 9.4 per cent in the first half of 2008.
Looking Ahead
The global financial crisis that broke out in 2008 continues to pose challenges for business. Although major economies across the world have introduced stimulus measures, it is too soon to tell how successful such measures will be in driving sustainable growth momentum.
With Hong Kong’s economy heavily reliant on trade, the outlook for the rest of the year and into 2010 remains cloudy. New investment projects and solid domestic consumption are helping to revive economic growth on the Mainland, although the pace is likely to be slower than that achieved in the past decade.
We will further enhance our product and service offerings to drive the expansion of our customer base – particularly among segments such as the affluent and young people – and provide greater choice for investors.
In mid July, our attractive promotion on IPO margin financing received an excellent customer response, with Personal Financial Services achieving a new high for stagging finance and a new high in the amount of financing applied for online – which reached 74 per cent. Towards the end of the month, we became the first financial institution in Hong Kong to obtain permission from the Financial Supervisory Commission in Taiwan to make dual-listing applications with the Taiwan Stock Exchange for two of our exchange-traded funds (ETFs) – the Hang Seng Index ETF and the Hang Seng H-Share Index ETF.
Making full use of our distribution, product manufacturing and time-to-market strengths, we will continue to tailor financial services to meet customer needs in changing economic conditions.
Our strong cross-border capabilities and the expansion of our corporate wealth management proposition will help us deepen relationships with commercial customers and attract new business.
Treasury will continue to actively manage its portfolio to achieve an optimal mix of investments that strikes a good balance between risk and return.
We will further strengthen our profile on the Mainland through brand-building initiatives and strategic business collaboration with our local partners. Hang Seng China will open more outlets in high-potential cities, focusing particularly on the Pearl River Delta region to take advantage of the new opportunities for business expansion provided under CEPA VI.
Businesses across the board will continue to be tested in the second half of 2009. With its highly respected brand and dedicated staff, Hang Seng is well positioned to overcome the obstacles that lie ahead and build on its competitive strengths to capture future opportunities for growth.
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