Ladies and Gentlemen: good afternoon.

It is a pleasure to address fund managers and stock analysts for the first time as Vice-Chairman and Acting Chief Executive of Hang Seng Bank. For the fourth year running, the CLSA Investors' Forum has provided Hang Seng with a good opportunity to update the investment community on the Bank's business and direction.

That said, I must admit I am conscious of the results of a survey from a number of years ago. It says that close to 20 per cent of the respondents admitted to falling asleep during business presentations. In trying to stay awake, many professed to daydreaming, doodling or reading. I assure you that these options are still available.

In my presentation today I am going to focus on three main areas: 1) where Hang Seng stands in the current economic climate; 2) how each of our major business units are performing; and 3) our plans to remain competitive.

But first a brief overview of Hang Seng Bank.

Overview of Hang Seng Bank

Let me begin by saying that although I took up my current position two months ago, I have long been familiar with Hang Seng as I became part of the Bank's policy-making team in 1994 in my capacity as a Director.

Since assuming my new role, I have been frequently asked if Hang Seng's policies are going to change, given that changes in management often result in changes in direction. The answer is NO. The corporate strategies and culture will remain unchanged. Hang Seng's financial strength, prudent management and premium service have made the Bank a success. Quite frankly, I see no reason for changes. I came to Hang Seng not because it had a problem. It's just because the former CEO had left us.

The history of Hang Seng Bank traces back to its modest origins in 1933 as a money-changing shop. Today, Hang Seng is the second-largest locally-incorporated bank in Hong Kong and the fifth-largest publicly-listed company in terms of market capitalisation, with 146 branches in Hong Kong and four branches and representative offices in Mainland China.

On the financial side, the Bank's operating profit grew by 11.6 per cent in 1997 to HKD10.1 billion. Profit attributable to shareholders increased by 10.3 per cent to HKD9.4 billion. Our contribution to the attributable profit of our parent company, HongkongBank, which owns 62.1 per cent of Hang Seng, increased by two percentage points to 29.1 per cent last year. Earnings per share were up by 10.5 per cent to HKD4.85.

Total assets at the year-end increased to HKD396.7 billion. And our return on average total assets was 2.4 per cent, compared with the average of 1.65 per cent for locally-incorporated banks. Return on average shareholders' funds rose to 19.1 per cent versus 18.6 per cent at the end of 1996 and an industry average of 15.6 per cent.

Hang Seng's performance has been well recognised in the marketplace. In April, Asiamoney named Hang Seng as the Commercial Bank of the Year in Hong Kong for the fourth consecutive year and described Hang Seng as one of the most efficient banks in the world.

Last month, Hang Seng was voted the Top Company in Hong Kong in the 1998 Asia's Most Admired Companies Survey commissioned by Asian Business. Hang Seng was also voted Asia's top banking and financial institution and took the ninth place in the overall list of 250 companies.

Such recognition does not mean we can be complacent. In fact, it means we must work harder than before, particularly in the current tough economic climate. Which brings me to the first question I want to address: where does Hang Seng stand in this tough operating environment?

Hang Seng and the tough operating environment

The year 1998 will be one of challenge and consolidation for Asia, including Hong Kong. For banks, the operating environment has become much more difficult than before. The industry is facing reduced loan and deposit growth, reflecting the slow-down in domestic economic activities in the wake of the Asian currency crisis.

As a bank focusing on Hong Kong and the Mainland, our exposure to the Asian countries which suffered serious turbulence, is immaterial.

Despite Hong Kong's strong economic fundamentals, the SAR has felt the pain of the Asian financial turmoil, with the stock and property markets plummeted and interest rates remaining high. The knock-on effects have been reflected in reduced private consumption and a rapid rise in the unemployment rate to 3.5 per cent in the first quarter of this year.

I would not be surprised if Hong Kong's GDP growth dropped below 3 per cent in 1998 versus last year's 5.3 per cent.

Loans for use in Hong Kong fell slightly in the first quarter of 1998 compared with the end of 1997, whereas we achieved modest growth in Hong Kong dollar deposits. In Hong Kong, banks -- especially small ones -- are competing fiercely for local currency deposits, pushing deposit rates to well above HIBOR. With rising funding costs and contracting credit demands, there is pressure on net interest margins.

Hang Seng Bank is not immune to this situation. However, our financial strength, prudent operating policies and increased diversification put us in a solid position to withstand the tough economic climate.

For example, despite slower deposit growth, we have managed to slightly increase our market share in low-cost savings deposits in the first quarter of 1998. Our large amount of interest-free funds, which include shareholders' funds, has also helped to minimise the adverse impact on margins.

Earlier this year when Moody's downgraded Hong Kong's short-term foreign currency deposit rating from P-1 to P-2 -- the sovereign ceiling for Hong Kong -- the short-term ratings of Hang Seng and other major banks were affected. However, Moody's later reaffirmed the B financial strength rating of Hang Seng -- the highest for local banks -- noting that our "very strong capital base, clean loan portfolio, generous reserves and strong earnings would prevent regional credit problems from damaging the Bank's credit standing." I should add that our A3 long-term foreign currency deposit rating and A2 long-term local currency deposit rating also remained unchanged.

At the end of 1997, the Bank's total capital ratio stood at 22 per cent, much higher than the BIS ratio of 8 per cent and the 17.5 per cent consolidated capital ratio of locally-incorporated banks. The average liquidity ratio at the year-end was 39.3 per cent, also exceeding the statutory requirement of 25 per cent.

Our financial position is the result of a prudent lending policy and strict expense discipline. At the end of last year, our net charge for bad and doubtful debts decreased by 11.2 per cent to HKD635 million. As a precautionary measure, this figure includes an additional provision made in the light of the prevailing market conditions. Our net bad debts charge as a percentage of average gross advances to customers in 1997 was 0.3 per cent, down from 0.5 per cent in 1996 and well below the industry average of 0.57 per cent.

Our ratio of total provisions to gross advances at year-end 1997 was maintained at the 1996 level of 1.3 per cent. At the same time, our ratio of non-performing advances to total advances fell by 0.1 of a percentage point to 0.8 per cent. In short, these figures reinforce Hang Seng's very high asset quality and effective credit management.

During the first quarter of 1998, we did not see a significant deterioration of our loan portfolio. However, I will not be surprised to see a rise in loan delinquency for the whole year as a result of the economic downturn. That said, we will monitor our loan portfolio with frequent credit assessments and further enhance our risk management.

The advances-to-deposits ratio of banks soared significantly as a result of the rapid loan growth in the first half of last year. This trend is expected to be reversed this year as domestic loan growth slows down and banks become more selective with their lending. Our objective in 1998 is to stabilise our advances-to-deposits ratio, which rose to 62.1 per cent at the end of 1997. This ratio is still low when compared with the industry average of 68.6 per cent.

Consequently, the strict expense discipline will be even more important in 1998. In the past five years, our cost-to-income ratio averaged 26.88 per cent. At the end of 1997 the ratio was kept at 25.7 per cent, well below the local industry average of 37.8 per cent.

The Bank has also recorded impressive gains in staff productivity in recent years: operating profit per employee rose from HKD840,000 in 1994 to HKD1.26 million in 1997. That translates into an increase of 50 per cent in the last three years.

To increase shareholders' value, we are determined to maintain our lean cost structure to improve returns. This is particularly critical given the current economic environment and brings me to the second area I want to cover today, the performance of our major business units.

Major business units

In 1997, retail banking contributed 51.8 per cent of the Bank's operating profit, corporate banking accounted for 13.2 per cent and treasury services 10.6 per cent.

The performance of these businesses reflects the state of the economy. As a result of slackened credit demand from quality customers, interest income is under pressure. Our strategy to deal with this is further diversification into non-interest income and diversification of our loan portfolio. We also intend to do more cross-selling of our products to better leverage our broad customer base. Plus we intend to continue to focus on customer segmentation and to develop new products and services to meet the increasingly diverse needs of our customers.

Retail Banking

In retail banking, the growth of residential mortgages, which took up more than one-third of the loan portfolio, slowed down due to the reduced number of property transactions in the first quarter of the year. Driven by primary market activities, new loans approved rose in March. Whether this trend will continue depends on the pricing policies of property developers, movement of the interest rates and the unemployment level.

Despite a general decline in the demand for consumer loans, the market share of our credit card business increased in terms of both the number of cards issued and cardholder spending in the first quarter of the year.

In our retail banking business, the main areas of expansion this year will be in insurance and investment services. For example, the Bank offers a full range of life and non-life insurance products through Hang Seng Insurance, a wholly-owned subsidiary, and Hang Seng Life Limited, a 50:50 joint venture between Hang Seng and HSBC Life Holdings Limited. More than 500 of our staff, including branch managers, have been trained and registered as insurance agents to provide professional insurance services to our customers.

To enhance investment services, we introduced an innovative automated securities trading service in March, following last year's successful launch of SmartInvest Services, a personal financial planning tool. In the next few months we will introduce an investment series that can help customers manage and diversify their global investment portfolio.

In line with our customer segmentation strategy, nine Business Banking Centres have recently been set up inside key branches to specifically serve small to medium companies.

We are also expanding our branch network to improve customer convenience. Ten new branches will be opened in the new Airport Railway stations in July. And just a week ago, we opened a new branch at the Lok Fu Shopping Centre to capture more Home Ownership Scheme loans.

We are also offering the new Tenant Purchase Scheme loan. It is worth noting that these loans are guaranteed by the Housing Authority, so they are not classified as property exposure and their credit risks are extremely low.

Corporate Banking

Moving onto corporate banking, lending was slow in the first quarter of this year due to reduced credit demand from quality companies. Fee income from corporate lending dropped accordingly but was better than expected. We will continue to expand non-property lending in line with our overall strategy of diversifying our loan book. Areas of focus include infrastructural projects in Hong Kong and on the Mainland, transportation, utilities and Government bodies.

In light of Hong Kong's sluggish trade performance, utilisation of loans and advances under trade finance facilities declined. However fee income from trade finance exceeded our target in the first quarter.

We have recently reorganised our Trade Services Centre to make its operations more customer-oriented and strengthen our competitiveness in trade finance services.

Treasury Services

In the treasury services area, market volatility has given rise to more trading opportunities. Our Treasury Division has actively managed our portfolio to enhance interest income growth.

The Treasury Division also set up a fixed income team last year and has since become more active in the Hong Kong dollar capital market. The Bank launched HKD4 billion Floating Rate Certificates of Deposit and a number of private CD placements under a HKD30 billion 10-year CD programme. Also worth noting is the fact that in the first quarter of this year, Hang Seng was ranked the fifth in terms of bookrunning in the Hong Kong dollar capital market by Basis Point magazine.

The demand for capital market issues has slackened due to the high volatility of interest rates. Our Treasury team will focus on quality companies as issuers, and develop our investor base in both Hong Kong dollar and US dollar debt securities through more cross-selling and proactive marketing. We will also further expand our range of treasury products and trading capabilities to support customer-related business.

Private Wealth Management and Fund Management

Our private wealth management business has progressed steadily since it was launched in October 1996 to cater for high net worth customers with investable assets of HKD10 million or more. Apart from private banking service, we also offer property consultancy, trust services, and asset management services for private banking customers. Hang Seng Investment Management Limited, the fund management arm of the Bank, will also develop advisory portfolios for private banking customers.

With a total of HKD5 billion worth of assets under its management, including the Hang Seng Index Fund, Hang Seng Investment Management has been expanding its fund management capabilities and working closely with other business divisions to develop investment products.

Mandatory Provident Fund

On the subject of new products, the Mandatory Provident Fund, expected to be launched by next year, offers enormous business potential for the local financial sector. The Government estimated that contributions in the first year would hit HKD12 billion, increasing to between HKD30 billion and HKD40 billion per year in 10 years.

Hang Seng has been exploring this business potential and together with fellow HSBC Group member HongkongBank, we are studying ways to offer Mandatory Provident Fund products to our customers in the most efficient and cost-effective manner. Let me add that while Hang Seng does compete with HongkongBank, we also closely cooperate in a number of areas to achieve greater economies of scale. For example, the Hang Seng Life joint venture, sharing of the same mainframe EDP system and the joint launch of Mondex card in 1996.

Mainland China

Moving onto our business in Mainland China. Hang Seng recently opened a Mainland branch in Shanghai. We are now actively developing our trade finance business in Shanghai and nearby areas. And we will also offer end-user mortgage finance on a selective basis on the Mainland. Our Guangzhou branch recorded satisfactory growth in 1997.

In addition to our Shenzhen and Xiamen representative offices, we have applied to set up another representative office in Beijing, in line with our strategy to extend our network to other strategic locations on the Mainland. We also intend to turn our Shenzhen representative office into a branch.

Staying ahead in the competitive market

The third and final area I want to address today is Hang Seng's plans for staying competitive.

To move forward in a tough and competitive market is a great challenge. In a deflationary economy, competition focuses on maintaining adequate liquidity and funding rather than aggressively expanding loans.

Our stance on dealing with competition has not changed. We do not advocate unhealthy price competition. Rather, we match major banks on pricing and compete on offering value-added products supported by premium customer service.

In the deposit business, we counter competition by enhancing the investment and banking services offered under the integrated phonebanking accounts, namely, BankSmart and Bank-In-One accounts.

We will continue to place emphasis on risk management and credit control functions to ensure asset quality and minimise exposure to market and operational risks.

We now have a centralised credit and risk management department, which reports directly to me. Large credit proposals recommended by business divisions have to be independently reviewed and concurred by this department. It also analyses the macro trends of loan performance and evaluates the loan portfolio and other outstanding and off-balance sheet credit exposures from a broader perspective.

Staying lean and improving efficiency will enhance our competitive edge. We have increased productivity by streamlining operations and re-engineering over the past few years. And a major reorganisation of the Bank's business divisions took place in 1994 to make them more customer-focused. Since that time, re-engineering of operational processes has remained a key priority. I believe such exercises will prepare us well for an upturn of the economy.

Conclusion

In closing, let me reiterate that the corporate strategies which have driven Hang Seng Bank's success remain unchanged. We will continue to be guided by five core business principles: 1) offering premium service: 2) maintaining strong capital and liquidity; 3) ensuring good asset quality; 4) focusing on cost leadership; and 5) maintaining efficient and effective operations.

Given Hang Seng Bank's deep-rooted tradition of premium service and financial prudence, combined with strong fundamentals, I am confident that the Bank is not only in a good position to weather the current economic storm, but in fact in a position to further strengthen our market position.

Thank you.