By Mr Vincent H C Cheng
Vice-Chairman & Chief Executive

Ladies and Gentlemen. It is a great pleasure to be back at the CLSA Investors' Forum, to provide an update on Hang Seng Bank developments.

In 2000, Hong Kong's banks experienced a strong rebound in profitability. However, this was driven to a large extent by a sharp drop in the bad and doubtful debt charge. We are all aware of the competitive and difficult environment banks are facing.

Against this backdrop, Hang Seng has set a course that brings both old values and new strategies into play, and offers the best of both worlds. We remain committed to the core values that have powered the Bank's growth into Hong Kong's second largest locally incorporated bank. These core values include:

In the rapidly changing times, the Bank has also put in place new strategies to increase shareholder value and meet new customer needs. These involve:

2001 is going to be more difficult as banks contend with a slowing economy, weak loan demand, continued margin pressure and more intense competition.

After experiencing real GDP growth of 10.5% last year - the highest since 1987 - the Hong Kong economy is reflecting the slowdown in the US and the region. Consumption growth is sluggish and exports are falling. In the first quarter of 2001, the value of total exports of goods decreased by 2.7%, compared with the previous quarter on a seasonally adjusted basis.

Although the government has forecast real GDP growth of 4%, market sentiment is that this may not be achievable.

Despite a 2 percentage point fall in the prime rate so far this year, loan demand remains weak. Total loans and advances declined by 12.5% in 2000 and at the end of March, had fallen further by 3.4% from the year-end.

The strong liquidity of banks and weak loan demand has pressured banks to compete for limited business by reducing interest margins, especially in residential mortgage lending.

Mortgage rates are at their lowest in 30 years and continuing to be squeezed. In March, 75% of new mortgage loans approved were priced at more than 2% below BLR and 45.9% were priced at more than 2.25% below BLR.

A wave of mergers and consolidation in the industry to achieve economies of scale has increased competition among banks. The competition is expected to intensify following the final phase of interest rate deregulation in July.

Hang Seng Bank overview

In the difficult operating environment, Hang Seng's values and strategies have positioned it strongly to meet the challenges. Before I describe our approach, I'd like to present a brief overview of the Bank.

Our business focus is Hong Kong and mainland China. In Hong Kong, we serve more than one-third of the population.

In 2000, our attributable profit rose by more than 20% for the second consecutive year to a record HKD10,014 million. The return on average shareholders' funds improved by 6.0 percentage points to a record high 23.6%.

Hang Seng is a principal member of the HSBC Group, 62.14% owned. We contributed 24% of the Hongkong and Shanghai Banking Corporation's attributable profit and 12% of the HSBC Group's after goodwill amortisation in 2000.

Under our Managing for Value strategy, our target is to at least 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, we achieved a total return of 77% for shareholders. This compares favourably with the average return of 58% recorded by Hang Seng Index constituents.

Economic profit - the difference between post-tax profit and the cost of invested capital - increased substantially by 84.9% to HKD5.5 billion, compared with 1999.

Highlighting Hang Seng's financial prudence and cost discipline, Hang Seng continued to outperform local banks in many areas in 2000, according to Hong Kong Monetary Authority figures.

Our 2.1% post-tax return on average total assets was high compared with the 1.44% recorded by local banks. Our net interest margin of 2.68% was favourable compared with the sector's 2.33%. Our low cost-to-income ratio of 24.4% -- one of the lowest in the banking world - was most attractive against the local bank average of 36.4%.

Our total loans and advances recorded encouraging growth of 10.3%, compared with the 12.5% industry drop. Reflecting prudent lending, Hang Seng's loans overdue for more than three months as a ratio of total loans were much lower at 2.4%, compared with 4.39% for local banks at the year-end. Non-performing loans fell to 3.3%, compared with 5.37% for local banks.

In March, Hang Seng was named the Strongest Bank in Asia by Asiamoney, topping the rankings for Asian banks for the second successive year.

Relationship banking and pricing

In order to maximise profitability, we are developing our large franchise to establish and manage customer relationships so that they are economically viable. The focus is on meeting total customer needs and gaining a high share of customer wallet penetration.

We are encouraging customers to open integrated accounts through which we can cross-sell a comprehensive range of financial solutions. These customers are segmented according to their potential and needs. Data-mining helps the Bank to tailor value-added products for them and increase its share of their financial spending.

At the lower end, customers can open a Bank-In-One integrated account with a minimum total relationship balance of only HKD5,000. At the higher end, the minimum balance for a Prestige Banking customer is HKD500,000.

Last month, we announced related measures to strengthen relationships with customers, encourage them to look to us for all their banking needs, and reward them for total banking relationships.

Because we value our customers, 2 million-plus savings accounts will be exempted from the new fee to be introduced from July on Hong Kong dollar savings accounts with an average balance below HKD5,000.

New accounts opened by certain groups of people, including senior citizens and minors, will not be subject to the new fee. Customers with integrated accounts and other bank products will also get exemptions. I am pleased to say that public reaction has been positive and the number of daily savings account openings has remained largely unchanged.

In order to reward customers for total banking relationships as well as manage down savings deposit costs, this month we introduced a four-tier interest rate structure for certain types of savings accounts. After full deregulation, customers with deposits of HKD150,000 or above will be offered a fifth tier of higher interest rate which will depend on market conditions.

To further promote integrated accounts, extra bonus interest will be offered after full deregulation to such customers if their total relationship balance reaches HKD150,000.

Distribution channel management

Hang Seng has been restructuring its distribution channels to reach more customers, offer them greater convenience and further reduce costs. As part of this, we are encouraging customers to switch to automated channels, which can cost almost five times less than a counter transaction. Counter transactions have fallen to about 16% of total transactions.

Our rapidly expanding e-Banking services, launched in August 2000, target integrated account customers and have become an important part of our integrated multi-channel delivery network. A wide range of financial services is available at hangseng.com/e-Banking, and the range continues to widen.

Currently, more than 120,000 customers have registered for e-Banking services and internet transactions accounted for 7% of the Bank's total transactions last month. Last week, e-Banking services were extended to about 800,000 Hang Seng credit card members.

In another move to promote automated services, the ATM Savings Account was launched last month and offers free ATM services. Despite the pending full interest rate deregulation, this account has no minimum balance requirement. About 200 such accounts are opened daily.

The Bank is also increasing self-service machines. The number of ATMs we operate will grow from 370 to 450 by 2003.

Alongside the rise in automated transactions, our branches are being re-configured to provide more specialist sales services. In March, we opened 26 Prestige Banking Centres to provide wealth management services to our high-end customers. Eleven Business Banking Centres cater for the needs of small and medium-sized enterprises. Four large-scale investment centres are also available to the public.

At present, the estimated ratio of branch space for customer service to administration is about 60:40. We plan to change this to 70:30 in two years to increase product sales.

To reach out to people who rarely visit branches, our 40-strong mobile team of financial services executives will be expanded to about 100 this year.

Higher-margin value-creating businesses

Under Managing for Value, our focus is on higher-margin activities, which include personal wealth management delivery and our commercial business. This focus also allows us to increase non-interest income. In 2000, our ratio of other operating income to total operating income increased by 2.2 percentage points to 23.4%.

Our wealth management initiatives comprise investment and insurance services, and target our affluent and mass integrated account segments.

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%.

e-Banking has become a major means to deliver wealth management to integrated account customers. The number of integrated account openings increased by an average of 28% from the launch of e-Banking last August to last month, compared with the pre-launch period in 2000. New securities accounts grew by an average of 22%. Last month, 48% of our securities transactions by count were conducted over the internet.

Funds managed under the Hang Seng Investment Series grew by 71% to HKD6.8 billion in the first four months of this year. Over this period, 9 new sub-funds have been created under the Series, taking the total to 26.

We are strengthening our image as an investment services provider and expanding our product range. In the volatile and low interest rate environment, we have successfully launched a number of capital guaranteed funds. In February this year, the Hang Seng Capital Guaranteed Technology Fund Series attracted about HKD2.8 billion and 12,000 new investment fund customers.

The sale of the Series was extended to Macau last year and we are exploring opportunities to sell the Series in other markets outside Hong Kong.

Hang Seng Life was the fastest growing life insurer in Hong Kong in 2000 in terms of annualised new premiums and the third fastest in the first quarter of 2001, according to the Hong Kong Federation of Insurers. Sales of Mandatory Provident Fund products have exceeded the Bank's target. We have enrolled over 170,000 employees and self-employed persons, and are leveraging on this database to cross-sell more products.

In consumer financing, we have increased our focus on personal lending and the credit card business, which also offer higher margins.

Our commercial banking business focuses on expanding products and services to small and medium-sized enterprises. An online business banking platform will be introduced later this year.

Medium-term growth will be underpinned by expansion in mainland China. We intend to open one branch or representative office there each year, to take advantage of the vast opportunities that will come with its WTO entry. We recently opened our fourth Mainland branch in Fuzhou and our first insurance representative office in Shenzhen. We have also lodged applications for a RMB licence in Shanghai, to upgrade our Beijing representative office to a branch and to open a branch in Nanjing.

Conclusion

I'd like to end by highlighting Hang Seng's strengths once again. We have a large customer base and offer prudent financial operations, one-stop solutions and an efficient distribution network. At the same time, we are building long-term relationships with customers and focusing on higher-margin businesses to effectively develop our franchise.

We believe the successful mix of our core values and new business strategies is a win-win formula to achieve sustainable growth.

Thank you.