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

Good afternoon ladies and gentlemen, and thank you for joining us today.

I am pleased to announce a record high half-year attributable profit for Hang Seng Bank which exceeds general market expectations, and the launch of our internet banking service tomorrow, which will build an even firmer foundation for our business.

For the first time in the Bank's history, we are doing a live webcast. This highlights our commitment to the e-world, and to bringing services and information to our stakeholders with speed and convenience.

Hang Seng's encouraging performance in the first half of 2000 was a result of:

* Satisfactory growth in non-interest income, largely due to our successful wealth management initiatives;

* Strict cost discipline, which saw our cost-to-income ratio improve to a record low 22.6%; and

* A substantial reduction of 89.5% in the charge for bad and doubtful debts, reflecting the improvement in asset quality.

These results were achieved notwithstanding the payment of the HKD7.8 billion special interim dividend last November, and against a backdrop of intense competition and margin pressure in the banking sector. They reflect the progress in implementing our Managing for Value strategy, and our core operating principles of financial prudence, operational efficiency and service excellence.

Operating profit before provisions increased by 5.0% to HKD5,964 million compared with the first half of last year, mainly due to satisfactory growth in other operating income. Net interest income for the first half would have been about HKD234 million higher without the payment of the special interim dividend. If we were to include that sum, operating profit before provisions would have risen by 9.1%.

Pre-tax profit was up by 21.0% to HKD6,104 million, after including the profit on disposal of locally-listed equities.

Profit attributable to shareholders rose by 21.9% to HKD5,195 million, a record high for a half-year. Earnings per share were 22.0% higher at HKD2.72.

The Directors have declared a first interim dividend of HKD2.00 per share, an increase of 25.0% from last year.

Total assets as at 30 June were up by 7.9% to HKD477.0 billion from the end of last year. The return on average total assets was 2.3%, compared with 2.0% for the first half of 1999.

Shareholders' funds rose by 0.8% to HKD39.9 billion from six months earlier. The return on average shareholders' funds improved to 25.3%, from 18.0% for the first half of last year.

Total operating income rose by 3.8% to HKD7.7 billion from the same period last year. Net interest income fell slightly by 0.2% to HKD5.9 billion, mainly affected by the reduction in the contribution from net free funds of HKD234 million because of the special interim dividend payment. Average interest-earning assets grew by 4.3%.

Compared with the second half of last year, the net interest margin improved by 4 basis points to 2.83%. The net interest spread widened by 6 basis points to 2.35%, benefiting from a wider gap between BLR and HIBOR, growth in low cost savings deposits and the recovery of unpaid interest from non-performing advances.

However, compared with the first half of last year, the net interest margin fell by 13 basis points and the net interest spread narrowed by 8 basis points. The adverse effects of the sharp fall in mortgage pricing and narrowing of the gap between BLR and HIBOR outweighed the benefits of the increase in low cost savings deposits and improvement in spread earned on time deposits. The contribution from net free funds fell by 5 basis points to 0.48%, being affected by last year's special interim dividend payment.

Other operating income increased by 19.2% to HKD1.8 billion from the same period last year. Net fees and commissions rose strongly by 46.7%, attributable to income growth from wealth management initiatives, credit facilities and trade finance.

We maintained tight cost control with positive results. Operating expenses fell by 0.1% compared with the first half of last year and by 13.1% compared with the second half of last year. This was achieved despite substantial investment in new businesses, including e-Banking services and the MPF.

We recorded further productivity gains and staff costs fell by 5.0%. The operating profit before provisions per employee rose to a record half-year high of HKD812,000 -- an increase of 8.1% from the same period last year. Reflecting our high cost-efficiency was our record low cost-to-income ratio of 22.6%, which was a 0.9 percentage point improvement from the same period last year.

In the rapidly recovering economy, our asset quality improved, partly due to our policies of early identification of problem loans and prudent provisioning. The

net charge for bad and doubtful debts decreased significantly by HKD706 million, or 89.5%, to HKD83 million compared with the first half of 1999.

The charge for specific provisions fell by HKD736 million to HKD60 million, the combined effect of a reduction in new provisions made and substantial releases and recoveries from doubtful accounts in the improving economy. The net charge for general provisions was HKD23 million, compared with a release of HKD7 million for the same period last year. General provisions of HKD86 million, reflecting loan growth for the period, were offset by a partial release of HKD63 million from the additional general provision of HKD250 million made in 1997.

The ratio of total provisions to gross advances to customers fell by 0.24 percentage point from the end of last year to 2.21% at 30 June. Specific provisions decreased by 0.21 percentage point to 1.53%. General provisions fell from 0.71% to 0.68%.

Gross non-performing advances (after deduction of interest in suspense) fell by HKD1.1 billion, or 12.1%, to HKD7.6 billion compared with the end of last year. The figure includes HKD2.1 billion of advances overdue for three months or less, or which were not yet overdue but considered doubtful, again highlighting our prudence.

The ratio of gross non-performing advances to total gross advances fell by 0.8 percentage point to 3.5%, compared with the end of last year. In line with our prudent provisioning, specific provisions plus collateral that is conservatively valued, amount to almost 100% of non-performing advances.

We recorded increases in both our deposits and loans market share, based on the latest available figures covering the first five months of this year.

Current, savings and other deposit accounts rose by 9.5% from the end of last year to HKD411.5 billion at 30 June. Certificates of deposit in issue grew by 63.3% to HKD19.1 billion.

Advances to customers (after deduction of interest in suspense and provisions) recorded encouraging growth of 7.2% to HKD211.4 billion. This reflected the continuing recovery in the local economy and our successful efforts in increasing corporate and personal lending. Lending to the industrial, commercial and financial sectors grew by 8.3% while advances to individuals rose by 5.7%. Residential mortgages and GHOS mortgages expanded by 5.1% amid intense price competition. Trade finance rose by 11.5%, benefiting from the strong external trade. Total advances to Mainland-related entities grew by 2.6% and Mainland-related advances amounted to 4.7% of total advances.

The advances-to-deposits ratio, however, dropped to 51.4% compared with 52.5% six months earlier, reflecting the higher growth in customer deposits than advances to customers.

Hang Seng continued to maintain a strong liquidity position. We remain well-capitalised with ample ability to invest in new growth opportunities. The total capital ratio was 16.3% at 30 June, compared with 17.3% six months earlier. The tier 1 capital ratio was 12.8%, compared with 13.3%. This represented a more efficient use of capital.

In our business lines, personal banking remained the major profit contributor and provided 51.5% of the HKD5,881 million operating profit after provisions. Corporate and institutional banking contributed 7.8%, commercial banking 9.8% and treasury 10.5% of operating profit. Others, which mainly covers the management of shareholders' funds, investment properties and long-term equity investments, provided 20.4% of operating profit.

Our Managing for Value target is to at least double shareholder value in five years. As part of this, we are increasing wealth management services, growing our commercial business, expanding in mainland China and deploying new technology cost-effectively. Product diversification, segmentation and cross-selling are being vigorously promoted to increase our share of each customer's wallet as well as market share.

In wealth management delivery, fee income from investment and insurance services grew by 80.2% in the first six months compared with the same period last year. The securities trading volume was up by 142.3% and unit trust subscription by 61.2%. The launch of the Hang Seng Managed Forex Fund took the total number of sub-funds under the Hang Seng Investment Series to 14 and in the first half, the funds under the Series grew by 10.0% to HKD3.7 billion. New annualised premiums for life insurance grew by 70.1% and for personal general insurance by 12.6% compared with the same period last year.

Commercial banking focused on expanding services to SMEs, which offer higher margin potential. Phone-banking and ATM services will be launched for this sector in the second half.

We aim to capture a significant share of the MPF market. Given our large sales force of 1,100 registered MPF agents, I am confident that our sales target can be achieved.

We are putting in place a network to take advantage of the vast opportunities that will come with mainland China's entry to the WTO. An application has been lodged to open the Bank's fourth Mainland branch, in Fuzhou, and we are planning to upgrade our Beijing representative office to a branch. When we become qualified at the year-end, we shall apply for a RMB licence in Shanghai. We have also applied to set up an insurance representative office in the Mainland.

Hang Seng intends to become a significant e-force and we are combining the strength of our branch network with an expanding range of value-added e-services. Last month, we set up an e-Banking Unit to coordinate Bank-wide e-policies and standards. In the first half, major initiatives have included:

* The Hang Seng e-shopping MasterCard, which was Hong Kong's first virtual card;

* StockWatcher, which offers comprehensive online investment market information;

* WAP Information Service, which offers financial information via WAP mobile phones; and

* iBusinessCorporation.com, a HKD3 billion e-commerce joint venture with Cheung Kong, Hutchison Whampoa and HSBC.

Tomorrow, we shall launch our internet banking service. The launch will mark an important milestone in our development as a major e-player for our customers. The service is initially being targeted at Bank Smart Prestige, Bank Smart and Bank-in-One Account customers. They will be able to conduct HKD transfers, forex and gold transactions, time deposits, remittances, bill payments and securities trading in the first phase. More details will be announced at a press conference tomorrow.

Our internet banking service is part of our wider efforts to offer customers greater choice, maximum convenience and service excellence through 'anytime, anywhere' banking. It will allow us to move up the value chain by offering higher quality services, attract new customers and increase cost-efficiency.

Although the launch focuses on personal banking, we will expand to cover other business segments, such as SMEs, and other wireless devices in later enhancements. A major feature to build customer loyalty and increase cross-selling will be personalisation.

Our e-presence is being developed in an integrated manner. We are enjoying synergies and reduced costs through shared investment with HSBC in the technical infrastructure developed with IBM.

Our e-services are being marketed under our Hang Seng e-Banking brand, which highlights our commitment to meeting new customer needs as a modern and progressive bank.

Despite the improving economy, in the second half of 2000, the banking sector will face increased competition and margin pressure. In the tough environment, we shall maintain our market leadership by offering superior financial products through versatile and innovative channels. We shall also focus on asset quality, improve productivity and maintain strict cost discipline to achieve profitable growth.

Thank you.