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, which falls on the very special occasion of our 70th anniversary. We have made great progress in the last 70 years and I would like to take this opportunity to thank our customers, our shareholders, our colleagues, our predecessors, and those who have helped make Hang Seng what it is today.

Please note the cautionary words on forward-looking statements on the screen.

Hang Seng Bank's results for 2002 were resilient despite sluggish economic and difficult operating conditions. Attributable profit decreased by 1.5% to HK$9,961 million, compared with 2001. Earnings per share fell by 1.5% to $5.21.

Operating profit before provisions decreased by 2.2% to $11,255 million. We continued to expand our business and increased other operating income by 8.5%. Our strict cost discipline reduced operating expenses by 6.6%. However, net interest income decreased by 7.3%, mainly attributable to the decline in contribution from net free funds, which dropped by about $850 million as a result of lower interest rates.

Pre-tax profit fell by 2.4% to $11,242 million, taking into account the increase in profits on disposal of long-term investments and the inclusion of the Bank's share of the value of the long-term assurance business of Hang Seng Life Limited.

The Directors have declared a second interim dividend of $2.80 per share. To mark the Bank's 70th anniversary, the Directors have also decared a special interim dividend of $0.50 per share or $956 million in total. This brings the total distribution for the year to $5.40 per share, compared with $4.90 for 2001.

Total assets of $474.6 billion at the year-end were only $0.2 billion lower than a year earlier. The return on average total assets was maintained at 2.1%.

Shareholders' funds (excluding proposed dividends) declined by 6.2% to $37.3 billion. This was due to a decrease in retained profits after appropriation, and reductions in the long-term equity investment revaluation reserve and property revaluation reserves. The return on average shareholders' funds was 22.9%, compared with 23.0% for 2001.

Total operating income dropped by 3.3% to $15.1 billion. Net interest income decreased by 7.3% to $10.8 billion, mainly due to less contribution from net free funds. A compression of 10 basis points in net interest margin to 2.46% was the net effect of a rise of 8 basis points in net interest spread and a reduction of 18 basis points in the contribution from net free funds.

Net interest spread was 2.36%, gaining from improved spreads on investment securities, growth in lower cost savings deposits and wider spread earned on time deposits. These were partly offset by a further decline in the average yield on the mortgage portfolio. The contribution from net free funds fell to 0.10%, or by about $850 million.

Compared with the first half of 2002, net interest income in the second half of the year fell by $101 million, or 1.9%, and net interest margin fell by 6 basis points to 2.43%. Net interest spread decreased by 5 basis points to 2.33%, mainly due to the further decline in the average yield on the mortgage portfolio. The contribution from net free funds was one basis point lower at 0.10%.

Other operating income rose by 8.5% to $4.3 billion. Net fees and commissions grew by 8.2% to $2.6 billion, mainly attributable to the increase of 89.2% to $700 million in fees from the distribution and management of retail investment funds. Wealth management income grew strongly by 32.6% to $1.6 billion and represented 37.6% of total other operating income.

Consequent to our efforts to grow non-interest income, the ratio of other operating income to total operating income rose by 3.1 percentage points to 28.4%.

Operating expenses fell by 6.6%, reflecting the Bank's strict cost discipline. Staff costs decreased by 9.2%, mainly due to non-recurrence of the special top-up contribution to the staff retirement benefit scheme made in 2001. The total staff number fell by 209 to 7,279, and by 769 from its height in 1997.

Our cost-to-income ratio fell by 0.9 percentage point to 25.4%, among the lowest in the banking world. Indicating high productivity, attributable profit per employee was a record $1.37 million, up from $1.35 million in 2001 and $0.79 million in 1992.

The net charge for bad and doubtful debts amounted to $571 million, an increase of 34.7% compared with 2001.

New and additional specific provisions rose by 8.5% to $1,231 million. A reduction in specific charges for corporate accounts and residential mortgages was offset by the increase in specific charges for card advances and personal loans due to the rise in bankruptcies. Releases and recoveries were reduced by 53.6% to $330 million, mainly from taxi loans and corporate accounts.

There was a release of $330 million from general provisions. This reflected a reduction in our estimate of the latent loan losses which had occurred at the balance sheet date. The estimate was based on the historical experience of the rate at which such losses occur and are identified, the structure of our loan portfolio and the prevailing economic and credit conditions.

The ratio of total provisions to gross advances to customers fell to 1.28% at the end of 2002, compared with 1.55% a year earlier. Specific provisions decreased by 0.12 percentage point to 0.79%. General provisions fell by 0.15 percentage point to 0.49%.

Gross non-performing advances (after deduction of interest in suspense) fell by 1.5% to $6.1 billion. The figure includes $2.4 billion of advances overdue for three months or less, and those not yet overdue, but considered doubtful. The ratio of gross non-performing advances to total gross advances was maintained at 2.7%. Specific provisions plus collateral that is conservatively valued amounted to almost 100% of non-performing advances.

Hang Seng increased its market share of total deposits and loans for use in Hong Kong in 2002.

Customer deposits were maintained at $413.7 billion, which was only marginally lower than the $414.3 billion at the end of 2001. Funds continued to shift from time deposits to savings deposits under the low interest rate environment.

Advances to customers (after deduction of interest in suspense and provisions) recorded modest growth of 1.0% to $224.6 billion, as loan demand remained subdued under the uncertain economic environment. The advances to deposits ratio rose to 54.3% at the year-end, compared with 53.7% a year earlier.

Lending to the industrial, commercial and financial sectors grew by 4.6%, mainly recorded in lending to property investment companies and working capital financing of large corporations.

A decrease of 10.8% was recorded in advances under the suspended Government Home Ownership Scheme (GHOS) and other government sponsored home purchasing schemes. Excluding such advances, total lending to individuals rose by 1.7%. Residential mortgages and credit card advances grew amid intense market competition.

The average yield on the residential mortgage portfolio, excluding GHOS mortgages, fell from 84 basis points below BLR in 2001 to 149 basis points below BLR in 2002. This was before accounting for the effect of cash incentive payments, and was a result of the continued reduction in the pricing of new mortgages and the re-pricing of existing loans.

Trade finance rose by 3.4%, benefiting from the improvement in Hong Kong's external trade.

Total advances to Mainland-related entities grew by 2.3% to $9.8 billion and accounted for 4.3% of total advances at the year-end.

We maintained strong liquidity and remained well-capitalised. The average liquidity ratio in 2002 was 44.4%, compared with 45.6% in 2001. The total capital ratio at the year-end was 14.2%, compared with 15.3% a year earlier. The tier 1 capital ratio was 11.9%, compared with 12.3%.

In the four years since the launch of our Managing for Value strategy in January 1999, the Bank's total return for shareholders was substantially more than the average return recorded by Hang Seng Index (HSI) constituents. We achieved a total return of 55.9%, compared with the average return of 3.6% recorded by HSI constituents. In absolute terms, total shareholder value increased by $74.1 billion.

In our business lines, personal financial services was the major profit contributor, providing 49.4% of the $11,242 million pre-tax profit. Commercial banking contributed 9.9% of pre-tax profit, corporate and institutional banking 8.3% and treasury 17.7%. Other businesses, which mainly cover the management of shareholders' funds and investments in premises, investment properties and long-term equities, provided 14.7% of pre-tax profit.

In 2002, we strengthened segmentation and widened our comprehensive range of one-stop solutions to develop strong, lasting customer relationships. We continued to focus on the high growth businesses of wealth management and services for small and medium-sized enterprises (SMEs). We set up a Business Banking Division to better serve SMEs.

Personal financial services recorded growth of 6.6% in profit before tax. Despite the prolonged decline in the average mortgage yield and the contraction in the GHOS mortgage portfolio, net interest income only recorded a marginal fall of 1.7%. It benefited from the continued shift of customer deposits to lower cost savings accounts. Other operating income rose by 16.8%, mainly in wealth management services.

Sales of retail investment funds, including the popular Hang Seng Investment Series, increased by 46.7% from the previous year. The Investment Series had a total of 60 retail funds at the year-end, including 42 capital guaranteed funds – the largest set of capital guaranteed funds in number in Hong Kong.

Total funds under management, including investment funds and private banking funds, grew by 60.1% to $40.6 billion at the year-end.

Commercial banking recorded satisfactory loan growth of 13.1%. However, net interest income suffered from the compression in lending and deposit margins, and profit before tax decreased by 6.9%. The operating result was also affected by a reduction in fee income, including Mandatory Provident Fund services income.

Corporate and institutional banking reported a decline of 4.9% in pre-tax profit. The operating result was affected by the compression in lending margins.

Treasury recorded growth of 2.9% in pre-tax profit as net interest income rose by 3.8%. More funds were redeployed from interbank placing to the capital market for yield enhancement. The fixed rate debt securities portfolio continued to benefit from low interest rates.

In the Mainland, major milestones were recorded. Our Shanghai branch launched renminbi services in August. The Guangzhou, Shanghai and Shenzhen branches began foreign currency services to mainland Chinese citizens and corporations, and opened Prestige Banking Centres.

Hang Seng Securities Limited opened a representative office in Shanghai and Hang Seng Investment Management Limited obtained approval to open a representative office in Shenzhen.

We are preparing for the opening of our Nanjing branch. A sub-branch in Puxi, Shanghai, will commence business later this year.

In 2002, we also opened a representative office in Taipei.

We continued to enhance our Personal e-Banking services. At the year-end, the number of registered customers had grown to more than 250,000, an increase of 42.6% from a year earlier. The number of internet transactions had risen to over 14% of total transactions and online share trading to about 55% of total securities transactions.

We also launched Business e-Banking in Hong Kong and Personal e-Banking services in mainland China.

2003 will be another challenging year. Hang Seng will continue to exercise great vigilance in its business in an environment of intense competition, weak loan demand and narrowing margins.

The Bank will build on its large customer franchise, financial strength and strong brand, at the same time offering customers added value and premium service. We shall continue to increase non-interest income, cross-selling and market share wherever we can.

In Hong Kong, there is increasing awareness of the need for lifetime wealth management and we shall capitalise on the vast potential this offers. SMEs are the cornerstone of Hong Kong businesses and we shall expand our customer base in this sector.

The Mainland remains a long term strategic investment. We are expanding our network with more branches and sub-branches in major cities, and developing our internet banking services.

We have applied for our Guangzhou and Shenzhen branches to offer renminbi services. We are also looking into the Mainland credit card market. Our insurance, securities and investment businesses are positioning themselves in the Mainland.

Over the past 70 years, Hang Seng Bank has grown and prospered with Hong Kong. Today, we stand for financial soundness, trustworthiness, value creation and service excellence. As we mark our 70th anniversary, we renew our commitment to enhancing shareholder value and service excellence. We shall make the most of our many strengths to maximise profitability and to be the bank of choice.

Thank you.