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

Good afternoon ladies and gentlemen. Thank you for joining our results announcement today.

We are pleased to report resilient results in Hang Seng's core businesses in 2003, underpinned by wealth management, which provides a steady source of non-interest income. It was a year when the Hong Kong economy was affected by SARS and the banking sector was up against tough operating conditions.

Results Highlights

Operating profit before provisions rose by 2.0% to HK$11,475 million, reflecting the increase in our core business activities.

Attributable profit, at HK$9,539 million, was 3.8% lower than the previous year. This was mainly affected by two factors – the rise in the profits tax rate for the year and a large release in general provisions in 2002. If we exclude these two factors, attributable profit would have increased by 0.7%.

Although the economy picked up from the third quarter of 2003, HKD interest rates fell substantially, affecting our net interest income. As such, the second-half attributable profit was lower than that for the first-half.

We wish to highlight our accounting treatment of investment securities. If we had adopted the 'benchmark' approach and recognised unrealised gains or losses on equity investments through the profit and loss account, our operating profit before provisions would have grown by 14.1% and our attributable profit would have increased by 10.2%, reflecting the stock market rally in 2003.

However, using the same approach, the 2002 results would have suffered, with operating profit before provisions and attributable profit falling by 2.2% and 3.7% respectively.

In order that our core operating results can be truly reflected, we have adopted a more prudent alternative approach of showing unrealised gains or losses on equity investments through the reserves. At the year-end, the Bank's equity investments carried an unrealised gain of HK$1.0 billion which was not booked through the profit and loss account.

We remained well-capitalised with strong liquidity. The total capital ratio at the year-end was 13.2%, compared with 14.2% a year earlier. The tier 1 capital ratio was 11.3%, compared with 11.9%.

Earnings per share of HK$4.99 were 3.9% lower. Our return on average shareholders' funds was a record 23.4%, compared with 23.1% a year earlier.

The Directors have declared a third interim dividend of HK$1.80 per share, bringing the total distribution for 2003 to HK$4.90 per share. Excluding a special dividend of 50 cents per share in 2002 on the occasion of the Bank's 70th anniversary, the total distribution for both years is the same. Our average dividend yield over the past five years was 6.7% including special dividends, or 5.6% excluding special dividends.

Operating profit before provisions benefited from encouraging growth of 21.4%, or HK$0.9 billion, in other operating income, which rose to HK$5.2 billion. As we increased our focus on wealth management, other operating income contributed a record 33.8% of total operating income, compared with 28.4% in 2002.

Income from wealth management grew strongly by 38.7% to HK$2.5 billion, representing 48.9% of total other operating income. Commissions from the sale of retail investment funds rose by 31.6% to HK$921 million. Securities-related fees rose by 48.0%, while insurance commissions and underwriting profit together grew by 90.1%.

Net interest income decreased by 5.8% to HK$10.2 billion as the net interest margin narrowed by 18 basis points to 2.28%. It was affected by a further decline in the mortgage portfolio yield, the narrowing of spreads on time deposits and interbank placings, and the fall in contribution from our large portfolio of net free funds.

Operating expenses increased by 1.8%, mainly for expansion in the Mainland branch network and the marketing of new products. Faster growth in revenue and strict cost discipline saw the cost-to-income ratio maintained at 25.4%, a level which is among the lowest in the banking world.

Staff costs decreased by 0.8% as the total number of staff was maintained at the same level as a year earlier. Reflecting our cost efficiency, attributable profit per employee was HK$1.31 million.

Our asset quality improved. The ratio of gross non-performing advances to gross advances to customers improved to 2.3% from 2.7% a year earlier.

Specific provisions decreased by 11.4% to HK$798 million, mainly reflecting the reduction in new and additional provisions. However, the net charge for bad and doubtful debts amounted to HK$792 million, an increase of 38.7%. This was attributable to the release of HK$330 million in general provisions at the end of 2002 to recognise the reduction in estimated latent losses in our loan portfolio.

Our provisioning policies remain very prudent, particularly on mortgages and corporate lending, and our collateral valuation is also conservative. Specific provisions plus collateral that is conservatively valued amounted to 100% of non-performing advances.

In our major lines of business, personal financial services remained the major profit contributor. It reported a growth of 1.4% in profit before tax and provided 50.6% of the Bank's HK$11,137 million pre-tax profit.

Commercial banking's profit before tax was 6.0% higher and contributed 10.6% to the Bank's total. Corporate and institutional banking suffered a decline of 18.1% in profit before tax and contributed 6.9% to the Bank's total.

Treasury achieved a growth of 14.6% in pre-tax profit, which was equivalent to 20.4% of the Bank's total. Its net interest income rose by 8.3%, and its debt securities portfolio carried an unrealised revaluation gain of HK$0.9 billion at the year-end.

2003 was a year when we recorded good progress in our major focus areas of:
Managing for Value
Mainland developments
Market growth
Wealth management and
Commercial banking

Managing For Value

We exceeded our Managing for Value target of doubling shareholder value over five years. From 1999 until the end of 2003, the Bank achieved a total return of 106.3% for shareholders, as measured by share price appreciation and reinvested dividends. This was substantially more than the average return of 46.2% recorded by Hang Seng Index constituents over the same period.

In absolute terms, our total shareholder value increased by HK$140.7 billion in the five-year period. This included HK$54.3 billion in dividend payments.

Mainland Developments

We made substantial progress in our target of becoming a major foreign bank in mainland China.

In a milestone development, we signed an agreement last December to acquire 15.98%, subject to regulatory approval, of Industrial Bank Co Ltd's enlarged capital for a consideration of 1,726 million renminbi. With this transaction, Hang Seng will become the first foreign bank to acquire more than 15% of a Mainland bank.

The deal will enable us to supplement our organic growth in the Mainland with a strong partnership. It provides for joint ventures with Industrial Bank in the development of credit card and unsecured personal loan businesses as and when the relevant regulations permit.

We are expanding our own network and capabilities, especially in the Pearl and Yangtze River Deltas, to help customers capture new business opportunities arising from CEPA.

Our network in the Mainland increased to five branches, a sub-branch and two representative offices, spanning seven cities. We shall continue to open more branches and sub-branches in strategic cities. An application has been lodged to upgrade our Beijing representative office to a branch.

In addition to building prudent lending relationships with corporates, we are expanding personal financial services. We are also leveraging on our premium brand to strengthen our position in the Mainland.

In Hong Kong, renminbi services have been introduced to meet rising demand from both visitors and outgoing travellers to the Mainland.

Market Growth

The Bank's core businesses continued to show improvement, as reflected by the increase in market shares in deposits, advances to customers, the residential mortgage business and trade finance.

Total assets rose by 6.0% to a record HK$503.0 billion. Total funds under management grew by 42.5% to HK$57.9 billion at the year-end.

Customer deposits rose by 6.3% to HK$439.9 billion. Total advances grew by 2.2% to HK$229.5 billion whereas the market recorded a decline of 1.5%. Our lending to the industrial, commercial and financial sectors rose by 5.3%, while trade finance recorded an encouraging growth of 16.1%. Our Mainland branches contributed with an impressive rise of 76.7% in their loan portfolios.

Lending to individuals, however, was lower by 3.1%, affected by the fall in GHOS mortgages and credit card advances. Residential mortgages though rose by 1.7%, following the pick-up in property market activities in the second half of the year.

Wealth Management

Our higher margin business of wealth management bore fruit. The focus in this business is on meeting total customer needs through customised and value-added solutions, at the same time gaining a high share of customer wallet penetration.

We continued to introduce innovative wealth management products. The Hang Seng H-Share Index ETF, the first exchange-traded fund tracking the Hang Seng China Enterprises Index, had attracted HK$1.74 billion in funds as at the end of February since its December listing.

A total of 40 investment funds were launched in 2003, taking the total number of such funds in the Hang Seng Investment Series to 90. This included 69 capital guaranteed funds – the largest group of such funds in Hong Kong.

Our securities trading volume rose by 77%, benefiting from the buoyant stock market in the second half of the year.

Hang Seng ranked fifth in the market for new life insurance business in 2003, one notch up from the previous year, commanding a 7.7% market share in terms of total new regular business.

Our e-Banking services have become an important means of delivering wealth management services. Online share trading accounted for 52.9% of total securities transactions and the number of internet transactions represented 23.1% of total transactions in December.

Efforts to reach the high net worth segment will be further stepped up in our private banking business, where we aim to become a leading domestic player in terms of assets under management, client base and profitability.

Commercial Banking

In our commercial banking business, we are increasing our capabilities in Hong Kong, the Mainland and Macau, growing commercial loans and trade finance.

We serve more than one-third of Hong Kong's SMEs, which are the cornerstone of the local economy. In 2003, we continued to increase our customer base among SMEs and lending to this group rose by 33.7%.

To offer SMEs greater convenience in the form of comprehensive one-stop financial services, the Integrated Business Solutions Account was launched.

In view of the growing economic convergence between Hong Kong and the Mainland, we are offering integrated cross-boundary services to customers.

Our first branch in Macau was opened in December to serve the trade finance needs of customers with operations there.

Future Outlook

The economic recovery in Hong Kong is expected to accelerate in 2004. It will be underpinned by improving sentiment and external demand, although structural problems such as unemployment and the fiscal deficit remain.

Hang Seng is cautiously optimistic about prospects for the year. Although the economy is improving, the banking industry continues to face the challenges of rising customer expectations, subdued credit and depressed margins.

In order to build on the achievements of Managing for Value, we shall be guided by our new five-year strategy. The financial target will remain focused on total shareholder return, by achieving strong competitive performances in earnings per share growth and operating efficiency in terms of the cost-to-income ratio.

In order to be the preferred bank of customers, we shall continue to deepen relationships with them and launch innovative products and services.

Our relatively low advances to deposits ratio, which was 52.2% at the year-end, will allow us plenty of room for loan growth as the economy improves.

Hang Seng is a financially-strong, forward-looking bank focused on Hong Kong and the Mainland. We shall continue to offer high standards of excellence in everything we do to create value for our stakeholders, sustain profitability and enhance our market position. Thank you.