Statement by Mr Vincent H C Cheng
Vice-Chairman and Chief Executive

Good afternoon ladies and gentlemen and thank you for joining us today. To bring our results to stakeholders with speed and convenience, our results are, once again, being webcast live.

Before we start the presentation, I would draw your attention to the cautionary words on forward-looking statements showing on the screen. This is made in the light of the evolving global regulatory environment.

I am pleased to announce that after a very good year in 1999, Hang Seng Bank's attributable profit, return on shareholders' funds and cost-to-income ratio reached record levels in 2000. Our attributable profit rose by more than 20% for the second consecutive year. We also made good progress in value creation for shareholders under our Managing for Value strategy.

Attributable profit increased by HKD1,707 million, or 20.5 %, to HKD10,014 million - for the first time exceeding the HKD10 billion mark. Earnings per share were 20.5% higher at HKD5.24. This encouraging performance reflects our sound fundamentals and market leadership. In particular, the results highlight:

* The achievements in our personal wealth management initiatives;

* Strict cost discipline which saw our cost-to-income ratio improve to a record low   24.4%; and

* Improving asset quality, with a substantial reduction of 86.2% in provisions for   bad and doubtful debts.

These results were achieved under difficult operating conditions. Despite the economic recovery in 2000, the banking sector was affected by intense competition, margin pressure and weak loan demand.

Hang Seng's operating profit before provisions rose by 4.3% to HKD11,540 million. Pre-tax profit was up by 19.3% to HKD11,675 million, benefiting from the substantial reduction in provisions for bad and doubtful debts and increased profit on the disposal of long-term investments.

The Directors have declared a second interim dividend of HKD2.80 per share, bringing the total distribution for the year to HKD4.80 per share. This compares with HKD4.10 per share for 1999, excluding the special interim dividend of HKD4.10.

Total assets at the year-end grew by 13.3% to HKD500.8 billion. The return on average total assets increased to 2.1% from 1.9% in the previous year.

Shareholders' funds rose by 2.6% to HKD40.6 billion, mainly from profit after appropriation for the year. The return on average shareholders' funds improved substantially by 6.0 percentage points to a record high 23.6%. This was due to the growth in attributable profit and lower average shareholders' funds following the distribution of the special interim dividend in 1999.

Total operating income rose by 3.1% to HKD15.3 billion, with net interest income increasing by 0.2% to HKD11.7 billion. Although average interest-earning assets grew by 7.3%, the net interest margin fell by 19 basis points to 2.68%. This was attributable to the 17 basis point reduction in the net interest spread to 2.19% and the 2 basis point fall to 0.49% in the contribution from net free funds.

The reduction in net interest spread was due to the adverse effect of the continued fall in the mortgage portfolio yield and the fall in the average advances-to-deposits ratio from 54.3% to 52.7%. These factors outweighed the benefits of the growth in savings deposits, improvement in the spreads earned from time deposits and the widening of the BLR/HIBOR gap. As a result of intense price competition, the average portfolio yield of residential mortgages - excluding those under the GHOS and Staff Housing Loan Scheme - fell from 49 basis points above BLR in 1999 to 26 basis points below BLR in 2000.

The contribution from net free funds declined due to the reduction in average balances, following the payment of the HKD7.8 billion special interim dividend in 1999. This was despite the improvement in average yield due to higher market interest rates.

Other operating income increased by 13.8% to HKD3.6 billion. Net fees and commissions rose substantially by 33.6%, highlighting the encouraging growth in income from wealth management initiatives and our policy of increasing non-interest income. The ratio of other operating income to total operating income increased by 2.2 percentage points to 23.4%.

The cost-to-income ratio was the lowest since it was first published in 1989. The ratio fell by 0.9 percentage point to 24.4% without affecting our quality operations. Operating expenses fell by 0.5% despite the Bank's significant investments in IT and business development. Staff costs decreased by 6.7%, mainly due to careful headcount control as total staff fell further to 7,449 at the year-end. Reflecting the Bank's high cost-efficiency, pre-tax profit per employee rose by 19.9% to a record high HKD1.57 million.

In the improving economy in 2000, the net charge for bad and doubtful debts decreased significantly by HKD1,223 million, or 86.2%, to HKD196 million. Specific provisions fell by HKD1,228 million to HKD199 million, the combined effect of a substantial reduction in provisions made and increases in releases of provisions and recoveries from doubtful accounts.

There was a net release of HKD3 million from general provisions, with provisions of HKD122 million made and a release of HKD125 million from the additional general provision of HKD250 million made in 1997. In view of the slowdown in the US economy and its possible implications for the Hong Kong economy, the balance of the additional provision of HKD125 million has been transferred to general provisions for bad and doubtful debts.

The ratio of total provisions to gross advances to customers continued to fall, by 0.44 percentage point to 2.01%. Specific provisions decreased from 1.74% to 1.36%. General provisions fell from 0.71% to 0.65%.

Gross non-performing advances (after deduction of interest in suspense) fell by HKD1.2 billion, or 14.1%, to HKD7.4 billion compared with a year earlier. This is attributable to the amounts written-off against specific provisions on final settlement and the upgrading of certain rescheduled advances and doubtful accounts to performing status. In line with our prudent management, the figure includes HKD2.5 billion of advances overdue for three months or less, or which were not yet overdue, but considered doubtful.

The ratio of gross non-performing advances to total gross advances fell by 1.0 percentage point to 3.3%. Once again highlighting our prudence, specific provisions plus collateral that is conservatively valued, amounted to almost 100% of non-performing advances.

In the difficult operating environment, we increased our deposits and loans market share. Current, savings and other deposit accounts rose by 14.3% to HKD429.6 billion at the year-end. Certificates of deposit in issue grew by 26.2% to HKD14.7 billion.

Advances to customers (after deduction of interest in suspense and provisions) recorded encouraging growth of 10.3% to HKD217.5 billion and we substantially outperformed the Hong Kong banking sector. This reflects our success in expanding our personal and corporate loan portfolios, despite weak loan demand and strong competition.

Lending to the industrial, commercial and financial sectors grew by 12.0%. We have become more active in consumer financing, which offers better margins, and advances to individuals rose by 8.3%. Despite severe price competition, our market share in mortgage lending increased, with residential mortgages expanding by 5.6%.

Hang Seng continued to maintain a strong liquidity position. The average liquidity ratio for 2000 increased to 43.3% from 42.4% a year earlier. Representing more efficient use of capital, the total capital ratio was 15.3% at 31 December, compared with 17.3% a year ago. The tier 1 capital ratio was 11.9%, compared with 13.3%.

Our Managing for Value target is at least to double shareholder value in five years, as measured by the combination of share price appreciation and reinvested dividends. In the two years since the adoption of the strategy in January 1999, the Bank outperformed the average return of 58% recorded by Hang Seng Index constituents. We achieved a total return of 77% for shareholders and total shareholder value increased by HKD102 billion in absolute terms.

In our business lines, personal banking remained the major profit contributor and provided 49.1% of the HKD11,344 million operating profit after provisions. Corporate and institutional banking contributed 8.5%, commercial banking 9.8% and treasury 10.6% of operating profit. Others, which mainly covers the management of shareholders' funds, investment properties and long-term equity investments, provided 22.0% of operating profit.

To increase non-interest income and pave the way for future growth, the Bank's major business strategies focus on personal wealth management, commercial banking and expansion in mainland China. In all these areas, we can report significant progress. The response to our launch of e-Banking services last August has also been very positive. In January, internet transactions made up more than 8% of total transactions. Counter transactions fell from 18.4% to 15.8% of total transactions in the 12 months to December 2000.

Our wealth management initiatives target our affluent and mass integrated account segments, and our priority is to satisfy changing customer needs by strengthening total customer relationship management. To allow more customers to enjoy the benefits of our integrated accounts, the minimum balance requirement for Bank-In-One Account customers was halved to HKD5,000 last November. Through a customer-oriented approach, data-mining and needs-based cross-selling, we aim to increase our share of wallet as well as market share.

Income from investment and insurance services grew impressively by 43.7% in 2000 compared with the previous year. The securities trading volume was up by 77.2% and our market share rose. Investment fund subscription rose by 44.5%. Funds managed under the Hang Seng Investment Series grew by 17.9% to HKD4.0 billion at the year-end and their sale was extended to Macau. Since the start of 2000, six new sub-funds have been created under the Series, two of them earlier this month, taking the total to 19.

Hang Seng Life was the fastest growing life insurer in Hong Kong in 2000 in terms of annualised new premiums, according to the Hong Kong Federation of Insurers. Annualised new premiums for life insurance grew by 51.0% last year. Sales of provident fund products for the implementation of the government's Mandatory Provident Fund scheme exceeded the Bank's target. We have enrolled over 160,000 employees.

Our e-Banking services have become an important tool in reaching our target group of integrated account customers and delivering wealth management services to them. The number of integrated account openings increased by an average 44.7% monthly in the six months after the August launch of e-Banking, compared with the pre-launch period in 2000. At the end of January, we had registered more than 100,000 e-Banking customers.

New securities accounts grew by an average 90% monthly from August to January 2001, compared with the pre-launch period in 2000. Last month, about 40% of our securities transactions by turnover were conducted over the internet. Hang Seng was among the first batch of brokers to offer straight-through securities trading when AMS/3 became available.

Based on a survey by ACNielsen.online, Hang Seng's internet customers made up about 25% of Hong Kong's estimated 370,000 online banking customers at the end of 2000.

In the e-age, we have adopted a clicks-and-mortar approach. We continue to strengthen the role of our branches as financial advisory and sales centres to promote cross-selling.

Our credit card base grew substantially by 25.2% to over 875,000 in 2000. Credit card advances increased by 23.7% to HKD4.7 billion and cardholder spending rose by 25.6% to HKD15.4 billion, reflecting the improvement in consumer sentiment.

Our commercial banking business, which focuses on expanding one-stop services to small and medium-sized enterprises, recorded satisfactory growth. Lending to the SME sector grew by 6.7%. Our trade finance rose by 2.6%, compared with a market fall of 5.5%.

Expansion continued in mainland China. Total advances to Mainland-related entities grew by 4.6% to HKD10.3 billion and amounted to 4.6% of total advances at the year-end. Fuzhou Branch, our fourth Mainland branch, opened earlier this month. The Bank has lodged applications for a RMB licence in Shanghai, to upgrade its Beijing representative office to a branch and to open a branch in Nanjing. As an initial step in developing our insurance business in the Mainland, the first representative office of Hang Seng Insurance Company Limited is expected to open in Shenzhen in April. Our Shenzhen Branch has also applied for an insurance trade-related agent licence.

The Bank was an active participant in loan syndication and corporate lending recorded good growth. The treasury performance was affected by reduced market volatility. The Bank was ranked the No. 2 bookrunner for Hong Kong dollar capital market issues by basis point.

In 2001, the Hong Kong economy is expected to reflect the US economic slowdown. Operating conditions will remain difficult as banks contend with more intense competition, continued margin pressure, rising costs and moderate loan demand. Following full interest rate deregulation in July, banks will have to compete on pricing as well as services. We shall make every effort to find ways to provide choices for different customer segments.

In our major focus areas of wealth management and commercial banking, we shall add to our extensive range of products and services to increase our customer base, cross-selling and non-interest income. Our MPF clientele has provided us with a large new base to cross-sell financial products to.

Our e-services will be widened extensively in 2001 as we continue to develop as a significant e-banking force. An online business banking platform will be launched for commercial customers later this year. Also to be introduced this year are online loans approval, bill presentment, a wide range of credit card services, treasury services and real estate agency services. We are also preparing to launch wireless banking when the platform becomes mature.

In the challenging operating environment, Hang Seng will build on its many strengths - including its financial prudence, trusted brand and strong customer relationships - to increase performance. Our solid track record and sound growth strategies have placed us in a good position to continue to deliver quality earnings and superior service.

Thank you.