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 is being webcast live as usual.

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

2001 was another difficult year for the banking industry. In the unfavourable operating environment, Hang Seng Bank maintained the profitability of its core business. Our results reflect our sound fundamentals and value-creating strategies.

Attributable profit rose to $10,114 million, an increase of $100 million, or 1.0%, compared with 2000. Earnings per share were 1.0% higher at $5.29.

Operating profit before provisions decreased marginally by 0.3% to $11,503 million. Net interest income remained flat. The growth in other operating income offset a rise in operating expenses due mainly to a special contribution to the staff retirement benefit scheme.

Pre-tax profit amounted to $11,514 million, a reduction of 1.4%, after taking into account profit on disposal of long-term investments and a deficit on property revaluation.

The Directors have declared a second interim dividend of $2.80 per share. This brings the total distribution for the year to $4.90 per share, compared with $4.80 for 2000.

Total assets at the year-end fell by 5.2% to $474.8 billion, following our decision to let go some deposits to maintain profitability and net interest margin. The return on average total assets was unchanged from the previous year at 2.1%.

Shareholders' funds (excluding the proposed dividend) were 2.1% lower at $39.7 billion. The increase in retained profits was offset by reductions in the revaluation reserves on properties and long-term equity investments. The return on average shareholders' funds rose to 23.0%, compared with 22.7% for 2000.

Total operating income rose by 2.2% to $15.6 billion. Net interest income fell by 0.3% to $11.7 billion, although average interest-earning assets grew by 4.4%. Net interest spread improved by 9 basis points to 2.28%, but this was offset by a reduction of 21 basis points in the contribution from net free funds to 0.28%. As a result, there was a 12 basis point drop in net interest margin to 2.56%.

The improvement in net interest spread was helped by the growth in low cost savings deposits and a wider gap between BLR and HIBOR. The positioning of the treasury portfolios and holding of fixed rate securities also benefited significantly from falling interest rates. These were partly offset by a further decline in the average yield of the mortgage portfolio and narrower spreads earned on time deposits.

Other operating income rose by 10.4% to $3.9 billion, with net fees and commissions growing by 16.2% to $2.4 billion. Highlighting the success of our initiatives to increase wealth management services and our policy of growing non-interest income, the ratio of other operating income to total income rose by 1.9 percentage points to 25.3%.

The 10.2% increase in operating expenses was largely due to a special contribution of $213 million to maintain the fully funded position of the staff retirement benefit scheme. Premises and equipment expenses rose by $101 million, or 13.2%, mainly owing to our continued investment in e-Banking initiatives to strengthen ourselves as a major e-force. Attributable profit per employee was a record $1.35 million, up from $1.34 million a year earlier.

Although the cost-to-income ratio grew by 1.9 percentage points to 26.3%, it remains low in the banking sector and reflects the Bank's strict expense discipline. Excluding the special contribution to the staff retirement benefit scheme, the cost-to-income ratio would have grown by 0.5 percentage point to 24.9%.

In the deteriorating economy, the net charge for bad and doubtful debts amounted to $424 million, an increase of 116.3% compared with 2000.

New specific provisions for doubtful accounts rose by 14.9% to $1,135 million, mainly in residential mortgages and card advances. Recoveries and releases decreased by 9.9% to $711 million, mainly in corporate accounts.

The ratio of total provisions to gross advances to customers fell to 1.55% at the end of 2001, compared with 2.01% a year earlier. Specific provisions decreased by 0.45 percentage point to 0.91%. This was attributable to the write-off of the irrecoverable portion of large corporate accounts and residential mortgages upon repossession, as well as the upgrading of rescheduled advances and doubtful accounts to performing status.

Gross non-performing advances (after deduction of interest in suspense) fell by $1.3 billion, or 16.9%, to $6.2 billion. In line with our prudent management, the figure includes $1.4 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 also improved to 2.7% from 3.3% at the end of 2000. Once again highlighting our prudence, specific provisions plus collateral that is conservatively valued amounted to almost 100% of non-performing advances.

The final phase of interest rate deregulation, which involved lifting the interest rate rules on HKD savings and current deposits last July, had minimal impact. Reflecting customers' preference for liquidity in the low interest rate environment, savings and current account deposits grew but time and other deposits fell. Overall, deposits dropped by 4.6% to $395.8 billion at the year-end, compared with a year earlier.

Despite weak loan demand, advances to customers (after deduction of interest in suspense and provisions) grew by 2.3% to $222.4 billion. The advances to deposits ratio rose to 53.7% at the year-end, compared with 50.6% a year earlier.

Lending to the industrial, commercial and financial sectors decreased by 1.4%, reflecting the sluggish corporate loan market. Advances to individuals grew by 3.7%, reflecting our increased focus on consumer financing. Credit card advances grew by 10.9% to $5.3 billion as the card base increased to more than 930,000. Other lending to individuals, mainly tax and personal loans, rose by 24.1% to $6.1 billion.

In our mortgage business, Government Home Ownership Scheme (GHOS) mortgages continued to grow due to the draw-down of commitments made before the imposition of the moratorium of GHOS sales between September 2001 and June 2002. Residential mortgages fell slightly amid intense competition. Due to the further reduction in the pricing of new mortgages and the re-pricing of existing loans, the average yield of the residential mortgage portfolio, excluding GHOS mortgages and staff loans, fell to 134 basis points below BLR at the end of 2001 from 80 basis points below BLR a year earlier. This was before accounting for the effect of cash incentive payments, which were charged to interest expenses as incurred.

We maintained strong liquidity and remained well-capitalised. The average liquidity ratio for 2001 increased to 45.6% from 43.3% a year earlier. The total capital ratio was unchanged at 15.3% at the year-end, compared with a year earlier. The tier 1 capital ratio rose to 12.3%, compared with 11.9%.

In the three years since the launch of our Managing for Value strategy in January 1999, the Bank's total return for shareholders was more than double the average return recorded by Hang Seng Index (HSI) constituents. We achieved a total return of 52.4%, compared with the average of 22.8% by HSI constituents.

In our business lines, personal financial services remained the major profit contributor, providing 45.2% of the $11,514 million pre-tax profit. Commercial banking contributed 10.4%, corporate and institutional banking 8.6% and treasury 16.8% of pre-tax profit. Other businesses, which mainly cover the management of shareholders' funds, investment properties and long-term equity investments, provided 19.0% of pre-tax profit.

2001 was a year in which we deepened the relationships we have with customers by strengthening segmentation and widening our range of one-stop solutions. Good progress was recorded in our focus areas of wealth management and commercial banking. The groundwork was also laid for our future expansion in mainland China.

Our integrated accounts have become a major platform to develop customer relationships and expand wealth management services. To reach different customer segments, Prestige Banking targeting affluent customers and Femina Banking targeting women, were launched. ezLink Financial Services, an integrated account for customers commuting between Hong Kong and the Mainland, was launched last month.

The M.I. Kid Account reaches out to young customers. Private Banking has also been strengthened for high net worth customers.

Personal financial services recorded a marked growth in income from the wealth management business. However, its profit before tax fell by 7.3% compared with the previous year, affected by the decline in the mortgage portfolio yield and higher bad debt charges for residential mortgages and card advances.

Income from wealth management, which comprises investment and insurance services, grew by 27.1%.

Investment fund subscription rose impressively by 128%. Funds managed under the Hang Seng Investment Series had grown by 204% to $12.1 billion at the year-end. Since 2001, 17 investment funds have been launched under the Investment Series, bringing the total to 34. This includes 15 capital guaranteed funds in the uncertain investment environment - the largest series of similar funds in Hong Kong.

Hang Seng Life recorded good progress, with annualised new premiums for life insurance growing by 96.6%. Our Mandatory Provident Fund (MPF) business began to generate income, with the number of enrolled individuals increasing to more than 214,300 during the year. Securities broking and related income fell due to the depressed stock market.

We continued to enhance our e-Banking services, which have become a convenient and cost-efficient channel to deliver wealth management services. In 2001, the number of customers registered for e-Banking rose to more than 173,000. Internet transactions had grown to account for about 9% of total transactions and online share trading for about 50% of total securities transactions at the year-end.

Commercial banking, which manages middle market and small corporate relationships, recorded an increase in lending. Trade finance grew by 4.7%, which saw the Bank gain market share despite dampened export trade. Commercial banking, however, showed a decrease of 1.9% in pre-tax profit, affected by a lower level of bad debt recoveries.

In the Mainland, Fuzhou Branch opened in February and the first representative office of Hang Seng Insurance Company Limited opened in Shenzhen in April. Our lending portfolio to Mainland-related entities fell by 7.2% to $9.5 billion and amounted to 4.2% of total advances at the year-end.

In Taiwan, we opened our first representative office in Taipei in January this year.

Corporate and institutional banking achieved growth of 2.9% in pre-tax profit, benefiting mainly from the substantial recovery of bad and doubtful debts.

Treasury recorded encouraging growth of 60.6% in pre-tax profit, as the fixed rate debt securities portfolio and the assets and liabilities re-pricing gap benefited significantly in the falling interest rate environment. Increased profit on disposal of debt securities also contributed to the growth.

The economic outlook for 2002 largely depends on the prospect of a recovery in the United States. In the banking sector, intense competition, high liquidity, sluggish credit demand and narrowing margins will remain challenges.

In order to build more profitable customer relationships, Hang Seng will increase segmentation and cross-selling. Lifestyle banking services will become more important in our efforts to offer added value to different groups of customers. We shall continue to emphasise wealth management to increase our share of wallet as well as non-interest income.

e-Banking services will be further enhanced for service differentiation. Online investment services will be expanded with the launch of retail margin services planned. Business internet banking will be available in the middle of the year. e-Treasury services will also be introduced for corporate customers.

We shall further increase our customer base of small and medium-sized businesses in commercial banking.

To take advantage of China's WTO entry, Hang Seng is strengthening its presence and range of services in the Mainland. We intend to be an important player in the Mainland, providing corporate, commercial and personal financial services.

Applications to open a branch in Nanjing and to upgrade the Beijing representative office to a branch have been submitted.

Our branch in Shanghai is expected to receive a licence for renminbi banking services. We are also ready to take advantage of the initial liberalisation of banking regulations which will allow foreign banks to provide foreign currency services to mainland Chinese companies and individuals. An application to operate internet banking services in the Mainland is planned.

Hang Seng Securities Limited has submitted applications for the purpose of obtaining B share trading seats on the Shanghai and Shenzhen stock exchanges and setting up a representative office in Shanghai.

As a premier financial services provider, Hang Seng is well-positioned to ride out the current economic downturn. Our strong focus on financial prudence, building long-term customer relationships and growing value-creating businesses will increase our ability to compete successfully in the market and create value for shareholders.

Thank you.