Speech by Mrs Margaret Leung
Vice-Chairman and Chief Executive

Good afternoon ladies and gentlemen. Thank you for attending Hang Seng’s 2009 interim results announcement, which is also my first results announcement since becoming Vice-Chairman and Chief Executive of the Bank in May this year.

Before we proceed, 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.

Against the backdrop of challenging operating conditions in the first half of 2009, Hang Seng’s key financial indicators are generally down on the same period in 2008, but have improved significantly when compared with the second half of last year, reflecting our effective actions to maintain business momentum amid market uncertainty and the global economic slowdown.

Operating profit excluding loan impairment charges and other credit risk provisions was $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 $6,740 million, operating profit fell by 26 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 was $7,618 million – down 27.7 per cent but up 42.4 per cent on the first and second halves of 2008 respectively.

Profit attributable to shareholders was $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 $3.37, earnings per share were down $1.37, or 28.9 per cent, on the same time last year.

Our well-respected brand, premium service, and prudent approach to business helped differentiate us from our peers. 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. Leveraging our comprehensive insurance solutions, we increased our market share for new life insurance business in Hong Kong 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 China 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.

Financial Highlights

Total assets increased by $28 billion, or 3.7 per cent, to $790.1 billion.

Despite a 4.2 per cent increase in average interest-earning assets, net interest income fell by 11.8 per cent to $7,275 million. Increased contributions from Treasury and fixed-income investments under the life insurance funds investment portfolio, as well as improved margins on corporate lending, were more than offset by narrowing deposit spreads and a reduced contribution from net free funds. Net interest margin was down 0.37 percentage points at 2.06 per cent.

Net fee income dropped by 36.4 per cent to $1,926 million. With continued investor caution, income from structured products, investment funds, and stockbroking and related services fell by 98.3 per cent, 70.8 per cent and 14.7 per cent respectively. Poor investment sentiment saw Private Banking investment services income decline by 74 per cent. Insurance-related fee income increased by 90.7 per cent. Card services income increased by 5.8 per cent, supported by increases in the card base, spending and receivables.

Trading income rose by 36.4 per cent to $1,035 million. Foreign exchange income was up 73.8 per cent, due mainly to growth in net interest income from funding swaps and reduced losses on the revaluation of Hang Seng China’s US dollar capital funds against the renminbi.

Increased emphasis on cost containment and lower performance-related pay expenses saw operating expenses drop by $105 million, or 3.2 per cent. Excluding our Mainland business, operating costs fell by 4.7 per cent.

With net operating income before loan impairment charges and other credit risk provisions down 16.2 per cent at $10,576 million, our cost efficiency ratio rose to 30.4 per cent. Loan impairment charges were $621 million – down significantly from $1,213 million for the second half of last year. Annualised impairment charges as a percentage of average advances to customers were 0.38 per cent, compared with 0.43 per cent for 2008.

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 by 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. The strengthening of these ratios compared with last year-end largely reflects profit growth after accounting for first-half dividends, the improvement in the available-for-sale debt securities reserve and a change in ratio calculation methodology.

The Directors have declared a second interim dividend of $1.10 per share, payable on 2 September 2009. This brings the total distribution for the first half of 2009 to $2.20 per share – the same as in the first half of 2008.

Loans and Deposits

Gross advances to customers fell by $3.4 billion, or 1 per cent, to $327.7 billion.

Loans for use in Hong Kong increased by 0.4 per cent to $277.5 billion. Credit conditions remained challenging, but we reached out to support commercial customers through the government-initiated SME Loan Guarantee Scheme and Special Loan Guarantee Scheme.

Lending to individuals – excluding GHOS mortgages – was stable. We achieved a 2.2 per cent increase in lending in the competitive residential mortgage market. Other loans to individuals fell by 7.6 per cent, with close monitoring of credit risk resulting in a decline in unsecured lending.

Loans for use outside Hong Kong dropped by $4.4 billion, or 12.2 per cent, due mainly to reduced new lending on the Mainland, where we focused on quality loans over business growth.

Amid the global economic slowdown, trade finance fell by 0.8 per cent.

Gross impaired advances as a percentage of gross advances to customers were up 0.1 percentage point at 1.1 per cent.

Customer deposits, including certificates of deposit and other debt securities in issue, rose by 4.1 per cent to $629.2 billion. Current and savings deposits increased, but there were drops in time deposits and certificates of deposit. In the low interest rate environment, we promoted higher-margin foreign currency deposits to help support income from deposits business while providing customers with enhanced yields.

Customer Groups

Personal Financial Services recorded a 34.4 per cent decline in profit before tax to $3,467 million, due mainly to the substantial fall in wealth management income compared with the same period last year. Operating profit excluding loan impairment charges was down 30.4 per cent at $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 $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 increases 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 2008, 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 weak 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 $13 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 $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 for credit cards helped us gain market share, and expand the card base and spending by 9.1 per cent and 5.3 per cent respectively.

We leveraged our online services to maintain a strong position in mortgage lending, ranking first for equitable mortgages and second for residential mortgages during the first quarter of the year.

Commercial Banking’s operating profit excluding loan impairment charges was $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 $10 billion.

Commercial Banking’s profit before tax was down 36.6 per cent at $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 $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 $449 million, profit before tax was up 23 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 $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 a challenging market, we maintained the momentum of customer-driven Treasury business by focusing on increased demand for foreign exchange-linked products.

Treasury’s profit before tax grew by 1.7 per cent to $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 up 19.9 per cent.

Under our strategy for deposits growth, we continued to target the affluent personal customer segment, achieving a 77 per cent rise in Prestige Banking customers compared with a year earlier.

In the uncertain economic conditions, we took a prudent approach towards lending – emphasising loan quality over business expansion – resulting in a 12.9 per cent decline in customer advances. We continued to strengthen 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 moved forward with the launch of its updated corporate image and tagline.

In another demonstration of Hang Seng’s strong commitment to the Mainland, on 16 June we held a Board of Directors meeting in Yantai Bank’s home city in Shandong province.

Including the share of profits from Mainland associates, 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.

Technology

We continued to use a wide range of channels to improve cost efficiency and provide customers with more control over how, when and where they access banking services.

The number of Personal e-Banking customers grew by 13 per cent compared with a year earlier to reach more than 920,000. Online transactions as a percentage of total personal banking transactions rose more than 5 percentage points to 50.4 per cent, including 86 per cent of foreign exchange trading and 73 per cent of securities trading.

In May, we launched Mobile Travelsure, which offers customers the convenience of enrolling for travel insurance via their mobile phone. We also enhanced our online foreign exchange and time deposit services to enable customers to enjoy preferential pricing offers.

As at 30 June 2009, more than 71,000 commercial customers had registered for Business e-Banking – up 22.7 per cent on a year earlier. The number of online business banking transactions grew by 13.9 per cent.

Looking Ahead

The global financial crisis 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.

And last week we became the first financial institution in Hong Kong to obtain permission from the Financial Supervisory Commission (FSC) 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 commercial customer relationships 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 enhance 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.

Thank you.

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