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

Good afternoon, ladies and gentlemen. Thank you for joining us today.

In 1999, although the Hong Kong economy emerged from recession, operating conditions remained difficult. Hang Seng's encouraging performance reflects its substantial financial and operating strengths.

Our Managing for Value strategy, which was implemented during the year, sharpened our focus on higher-margin, value-creating businesses.

Operating profit before provisions increased by 4.1% to HKD11,065 million compared with the previous year, due to a rise in operating income and lower operating expenses.

To comply with the requirement of SSAP24 (Statement of Standard Accounting Practice 24), Hang Seng has chosen the more prudent alternative treatment of booking gains in long-term equity investments under the investment revaluation reserve. The investment revaluation reserve at the year-end came to HKD4.0 billion, including an amount of HKD1.5 billion for 1999. If we had adopted the benchmark treatment of booking such gains under the profit and loss account, operating profit before provisions would have increased by 21.9%.

Taking into account a substantial reduction in provisions for bad and doubtful debts, operating profit after provisions grew by 18.3% to HKD9,646 million. Pre-tax profit was up by 22.7% to HKD9,784 million, benefiting from increased profit on the disposal of long-term investments and the reduction in property revaluation deficit. Profit attributable to shareholders was HKD8,307 million, an increase of 22.4%. Earnings per share of HKD4.35 were 22.5% higher.

The Directors have declared a second interim dividend of HKD2.50 per share in lieu of a final dividend, which will be payable one month earlier than previously. The decision to award a second interim dividend was made in consideration of shareholder interests.

Together with the first interim dividend of HKD1.60 and special interim dividend of HKD4.10 already paid, the total distribution for 1999 will amount to HKD8.20 per share, compared with HKD3.42 for the previous year. Excluding the special interim dividend, which was paid out of retained profits, the total dividend payment for the year represents 94% of the attributable profit.

Total assets at the year-end grew by 4.6% to HKD442.1 billion. The return on average total assets increased to 1.9% from 1.7% in the previous year.

Shareholders' funds decreased by 13% to HKD39.6 billion. Retained profits fell by 29.1% to HKD17.7 billion after the payment of the special interim dividend totalling HKD7.8 billion last November. The special interim dividend reflected active consideration of the Bank's current and planned future capital requirements, and shareholder interests under Managing for Value. The return on average shareholders' funds improved to 17.6% from 13.5%, the combined effect of the increase in attributable profit and reduction in shareholders' funds.

Total operating income rose by 2.1% to HKD14.8 billion, with net interest income increasing by 2.7% to HKD11.7 billion. The 5.8% growth in average interest-earning assets outweighed the impact of a reduction of nine basis points in the net interest margin to 2.87%. Excluding the contribution from net free funds, net interest income would have increased by 12.1%.

Spread widened by 14 basis points to 2.36%. This was despite the adverse effect of a fall in the average ratio of advances to deposits to 54.3% from 58.7% in 1998 and intense price competition for residential mortgages. The improvement was due to the increased spread on time deposits, growth in lower cost savings accounts and the widening of the gap between the best lending rate and interbank rates. The contribution from net free funds, however, fell by 23 basis points to 0.51%.

Other operating income remained at the same level as the previous year at HKD3.1 billion.

We maintained strict cost discipline with good results. Operating expenses fell by 3.2%, largely due to a 6.4% decrease in costs for staff. The headcount was reduced by 310 through natural attrition to 7,485. This takes the total reduction in headcount through natural attrition to 676 from its highest level in 1997. The reduction was achieved alongside further productivity gains and did not affect our growth or efficiency. The operating profit before provisions per employee rose by 8.4% to a record high of HKD1.5 million.

Our cost-to-income ratio also achieved a new record. It reached its lowest yearly level of 25.3% since the ratio was first published for 1989, compared with the previous year's 26.7%. The improvement came even as we continued to invest in new business initiatives. The ratio, which is among the lowest in the banking world, reflects the Bank's high cost-efficiency.

The net charge for bad and doubtful debts fell substantially by 42.7% to HKD1,419 million, mainly due to a reduction of HKD1,082 million in specific provisions. Specific provisions made for trade finance, corporate lending and hire purchase loans decreased but additional provisions were made in respect of mainland China-related exposures, and residential mortgages. There was a release in general provisions of HKD8 million, compared with HKD33 million for the previous year.

The ratio of total provisions to gross advances to customers increased moderately by 0.22 percentage point to 2.45%, reflecting the slowdown in the growth of non-performing advances. The increase was recorded in specific provisions, which stood at 1.74%. General provisions were maintained at 0.71% and included the additional provision of HKD250 million made in 1997 which has been left intact.

Gross non-performing advances (after deduction of interest in suspense) increased by HKD817 million to HKD8,658 million at the year-end. The figure includes advances overdue for three months or less, or which were not yet overdue but considered doubtful, amounting to a total of HKD2.2 billion. This reflects our early identification of problem loans and prudent provisioning policy.

The ratio of non-performing advances (after deduction of interest in suspense) to gross advances rose by 0.4 percentage point to 4.3%. In line with our prudent provisioning, specific provisions plus collateral that is conservatively valued, amount to almost 100% of non-performing advances.

On the balance sheet, current, savings and other deposit accounts increased by 6.6% to HKD375.7 billion. Certificates of deposit in issue grew by HKD958 million to HKD11.7 billion.

Advances to customers (after deduction of interest in suspense and provisions) fell by 0.5% to HKD197.3 billion, although an encouraging pick-up was recorded in the fourth quarter. Advances to the industrial, commercial and financial sectors fell by 1.1% while trade-related advances dropped by 16.4%. Advances to individuals grew by 2.7% and despite intense competition, residential mortgages, including GHOS mortgages, rose by 2.6%. Total advances to Mainland-related entities grew by 3.8% and Mainland-related exposures amounted to 5.1% of total advances.

Hang Seng continued to maintain a strong liquidity position. The average liquidity ratio for 1999 increased to 42.4% from 39.2% a year earlier. Following the payout of the special interim dividend, the total capital ratio was 17.3% at the year-end compared with 21.3%, and the tier 1 capital ratio was 13.3% compared with 17.5%. We remain well-capitalised with ample ability to invest in businesses that create good shareholder value.

Hang Seng's encouraging performance was recorded against a backdrop of intense competition, lower margins and slow loan demand. To expand non-interest income, we focused on increasing wealth management delivery, growing our commercial business and expanding cross-selling as a one-stop financial services provider.

In our business lines, personal banking was the major profit contributor and provided 52.9% of total operating profit after provisions. Corporate and institutional banking, which focuses on major corporate client relationships, contributed 6.0% of the Bank's profit. Commercial banking manages the financial needs of all other companies, including SMEs, and accounted for 1.4% of total profit. The segment's profit was undermined by its specific provisions for bad and doubtful debts. Treasury provided 15.9% of total profit. Others, which mainly covers the management of shareholders' funds, investment properties and long-term equity investments, provided 23.8% of total profit.

In wealth management delivery, unit trusts under management by Hang Seng Investment Management Ltd grew by 140% to HKD3.36 billion. There was substantial growth in personal insurance. New annualised premiums for life insurance grew by 295% and for personal general insurance by 77%.

Increased segmentation helped strengthen services for corporate and commercial customers of all sizes. The Bank was an active participant in corporate loan syndication. SMEs were a major target in efforts to grow our commercial business. Treasury further expanded its product range and increased participation in the capital markets.

In the cyber era, we are gearing up to be a major e-player to stay on the leading edge of financial service developments. Our dot.com strategy is to use innovative technology to provide cost-efficient and value-added solutions, to build and strengthen customer relationships. This will allow our branches to better focus on the sale of specialised products, to gain a larger share of each customer's wallet. Already, off-counter transactions make up over 80% of total transactions.

Major e-initiatives last year included mobile banking, which has been well-received. The number of mobile banking transactions increased by more than six times in five months, and 25% of such transactions last month were related to securities trading. We also launched Hong Kong's first virtual card, the Hang Seng e-shopping MasterCard; and Secure NetPayment Solution, an online payment gateway service for credit card merchants with Hewlett-Packard.

Our e-services will be widened extensively in 2000, building on our premium service, strong brand and synergies with HSBC. These services will leverage on the tremendous investment that HSBC and Hang Seng have made in the technical infrastructure they have developed with IBM, called Interactive Financial Services (IFS).

The IFS platform is flexible and scalable. We shall be able to connect our services to the full spectrum of modern technology, ranging from the internet, WAP (Wireless Application Protocol) phones and PDAs (personal digital assistants) to automated phone banking. By taking advantage of HSBC's global network, our customers will also be able to access international services.

Since 1996, Hang Seng has offered a website that contains comprehensive information about the Bank and its products. Later this year, hangseng.com will roll out a wide range of secure and reliable internet services for retail and business customers. We will promote hangseng.com as a valuable brand name.

In other moves to strengthen our foothold in the e-world, we are co-operating with Hong Kong's leading corporates. We have joined Cheung Kong, Hutchison Whampoa and HSBC in a HKD3 billion e-commerce joint venture.

In 2000, Hong Kong's economic recovery is expected to gain further momentum. Loan demand is expected to improve and asset quality should stabilise. However, operating conditions will remain difficult as competition intensifies.

Given our size and strengths, we are in a strong position to take advantage of opportunities arising from the economic recovery. We shall continue to focus on businesses expected to earn strong returns, such as wealth management, including investment and insurance, and Mandatory Provident Fund services.

To maintain our market share in deposits after deregulation of the remaining interest rate rules, competitive new features will be offered to depositors.

We also intend to expand further in mainland China where the potential is vast, especially in view of its pending accession to the WTO. An application has been lodged to open our fourth Mainland branch in Fuzhou, following the upgrading of our Shenzhen representative office to a branch last year.

Our strong performance has won wide recognition. We were named the Best Bank in Asia by Asiamoney; the No. 1 Hong Kong company for financial soundness for the third consecutive year in the REVIEW 200: Asia's Leading Companies survey; and the winner in the 1999 Hong Kong Awards for Services: Productivity.

The recognition reflects our strong focus on value creation, our financial strength and operational excellence. We shall continue to build on this solid foundation to achieve sound growth. Thank you.