Statement by Mr Raymond C F Or
Vice-Chairman and Chief Executive

Good afternoon ladies and gentlemen. I am particularly pleased to welcome you to this results announcement as it is my first as Chief Executive of Hang Seng. Please note the cautionary words on forward-looking statements on the screen.

Our 2005 interim results reflect both the opportunities and the challenges created by the recent economic environment.

The strengthening local economy enabled us to capitalise on personal and commercial loan demand. Rising interest rates improved interest spreads on deposits but exerted downward pressure on income from Treasury investment and money market portfolios. Competition within the banking sector remained keen.

Before turning to the results, I should point out that a number of changes to Hong Kong’s financial reporting and accounting standards came into effect on 1 January this year. While we have restated our 2004 accounts, there are still certain figures that are not directly comparable.

Results Highlights

In the first half of 2005, Hang Seng’s total operating income grew by 8.9% to HK$10,499 million, underpinned by strong growth of 18.2% in Personal Financial Services income and an improved net interest margin.

Profit attributable to shareholders was HK$6,045 million, a fall of 2.3% compared with the first half of last year which benefited from a HK$698 million release in general provisions. Earnings per share were HK$3.16, a drop of 2.5%.

Operating profit before loan impairment charges was down HK$136 million, or 2.2%.

Net interest income grew by HK$549 million, as rising interest rates improved interest spreads on deposits and enhanced contributions from net free funds. Also important was the rise in personal and commercial lending, which contributed to an expansion in balance sheet size.

These factors outweighed drops in net interest income from Treasury investment and money market portfolios and the mortgage portfolio yield.

Net interest margin increased by 11 basis points to 2.13% and net interest spread rose to 1.99%, up 4 basis points. Contributions from net free funds rose by 7 basis points to 0.14%.

The upward trend in interest rates slowed capital-guaranteed fund sales, which were exceptionally high during the first half of 2004. Along with a change in the accounting treatment of credit facilities fees, this led to a HK$295 million, or 16.2%, drop in net fee income.

Trading income fell by HK$125 million, although sales of structured investment products to commercial and personal customers registered strong growth.

Income from wealth management fell by 3% to HK$1,759 million. However, compared with the second half of 2004, it increased by 8.4%.

This was driven by a shift in focus to yield enhancement products and encouraging growth of 37% in our Private Banking income.

The introduction of several new insurance plans helped insurance agency and underwriting income reach HK$704 million, a year-on-year increase of 14.3%.

Total funds under management grew by 10.6% to reach nearly HK$100 billion.

Investment in business growth saw operating costs rise by 8.8% to HK$2,156 million. Driven largely by the expansion of Personal Financial Services and our Mainland network, our average headcount rose by 193, contributing to a 6.5% increase in personnel costs. We also made investments in IT and in marketing to promote credit card and insurance products.

Our cost-to-income ratio for the first half of 2005 was 26.7%, compared with 24.6% and 28.1% for the first and second halves of 2004 respectively. This remains low in comparison with our peers.

A net loan impairment charge of HK$302 million was recorded in the first half of 2005, compared with a net release of HK$746 million during the same period last year. A net charge of HK$95 million on individually assessed loans was due mainly to loan impairment allowances for certain Commercial Banking accounts. The net charge on collectively assessed loans amounted to HK$207 million, attributable partly to an update of the historical loss rate.

We maintained strong liquidity and remained well capitalised.

Our average liquidity ratio was 43.6%. Our total and tier 1 capital ratios at 30 June 2005 were 12.4% and 10.5% respectively, well above the statutory required minimums.

In June we completed a HK$2.5 billion subordinated notes offering. Qualifying as tier 2 capital, the proceeds helped to balance our capital structure and will support future business growth.

We continue to enjoy strong market ratings. Moody’s and Standard & Poor’s have assigned Hang Seng long-term local currency ratings of ‘Aa3’ and ‘AA-’ respectively, the highest such ratings given to Hong Kong banks.

Shareholders’ funds, excluding proposed dividends, rose by 5.6% to HK$39.4 billion. The return on average shareholders’ funds was 29.7%, compared with 32% and 25.2% in the first and second halves of 2004 respectively.

Customer Group Performance

Personal Financial Services’ (PFS) remains at the heart of our business. Pre-tax profit rose 12.8% year-on-year to HK$3,970 million, contributing 56.2% of our total pre-tax profit.

Net interest income grew by 20.4%, with 3.5% growth in average deposits and a widening of deposit spreads as local market interest rates increased. PFS also benefited from a net release in loan impairment allowances from mortgages and personal loans, reflecting rising property prices and a fall in delinquency rates.

Our insurance business performed well, helped by the introduction of new insurance plans featuring cumulative life protection and wealth benefits. Life annualised premiums rose by 6.7%. According to the most recent industry data, we rank third in terms of new annualised premiums with a market share of 9.9%.

Private Banking business recorded encouraging growth in both customers and asset management portfolios.

Other operating income grew by HK$65 million, or 14.9%.

Credit card services income rose significantly, driven by growth of 10.6% and 20.6% in the card base and cardholder spending respectively. The number of Hang Seng credit cards in issue now exceeds 1.2 million.

Commercial Banking’s (CMB) pre-tax profit fell by 66.7% to HK$437 million, attributable mainly to a HK$453 million net loan impairment charge, compared with a large net release for the same period last year. CMB’s operating profit before loan impairment allowances was up 4.9%.

Lending to both middle market customers and small and medium-sized enterprises (SMEs) continued to enjoy robust growth. Average customer advances grew by 30.9%, helping to drive the 17.4% increase in net interest income.

Customer advances rose by 11.7%. Trade finance grew by 14.1% compared with the end of last year as CMB further leveraged its strong relationship management team, trade services capabilities and branches on the Mainland and in Macau to meet customers’ needs.

Corporate and Institutional Banking (CIB) recorded a 10.8% fall in operating profit before loan impairment allowances, with the HK$70 million drop in net fee income outweighing the HK$43 million increase in net interest income, following growth of 3.5% in customer advances. CIB’s pre-tax profit dropped 60.2%.

The rising cost of funding and flattening of the yield curve saw Treasury’s net interest income decline by 31.5%, contributing to the 40.9% fall in Treasury’s pre-tax profit. Losses from hedging activities and a drop in customer trade turnover saw foreign exchange income fall by HK$91 million. This played a significant role in the 66.3% drop in trading income. Income from derivatives trading rose by HK$47 million.

Business Growth

In an increasingly competitive environment, we continued to actively pursue new growth opportunities.

Total assets grew by 4.2% to HK$569.7 billion, compared with HK$547 billion at the end of 2004. The return on average total assets was 2.2%, up from 2%.

Advances to customers rose by 3.6% to HK$260.5 billion and we continued with our strategy of loan diversification into higher yielding areas such as credit card and personal advances as well as trade finance and SME loans.

Lending to the industrial, commercial and financial sectors increased by HK$5.5 billion, or 5.2%. Wholesale, retail and manufacturing together were up 32.2%, reflecting the continued expansion of the economy.

Lending to individuals rose by 2%, excluding GHOS mortgages. Despite keen competition, we increased our market share of new residential mortgage loan business. This was achieved through the introduction of several new mortgage plans that offer customers a wide range of funding and repayment options. Overall, residential mortgage lending rose by 1.9%.

Card advances and other lending to individuals, mainly personal advances and overdrafts, together grew by 2.3%. Card receivables recorded year-on-year growth of 19.5%. We shall continue to promote consumer finance business.

We also saw encouraging growth in gross advances for use outside Hong Kong, which rose by 17.4% to HK$14,217 million, attributable largely to increased lending by our Mainland branches.

Customer deposits together with certificates of deposit and other debt securities issued amounted to HK$458.9 billion, a fall of 1% from the end of 2004. As interest rates moved up, customers shifted from current and savings accounts to time deposits. Certificates of deposit and other debt securities in issue also gained in popularity, rising by HK$4,939 million to HK$20,994 million.

Mainland Developments

Our mainland China business continues to form an important part of our expansion strategy.

Our investment in Industrial Bank is yielding positive results, contributing approximately HK$190 million to our share of after-tax profits from associated companies in the first half of 2005.

We made good progress in the development of our own Mainland network. In January, we opened a new sub-branch in Shenzhen. We also relocated our Fuzhou branch to accommodate its expansion. Since the end of 2004, our Mainland headcount has risen by 57 to 340.

Lending activity by our Mainland branches grew by 21.3% to HK$9 billion.

Technology

We remain a local leader in using technology to improve and expand banking services.

We now have around 470,000 Personal e-Banking customers and 26,000 companies use Business e–Banking. In June 2005, 28.8% of all customer transactions were conducted online, up from 24% in June last year. Our online securities trading service has proved particularly successful. During the first half of 2005, 62.7% of all securities trading transactions were conducted over the Internet.

In June we launched an e-Loan Centre, which offers the convenience of applying for a wide range of personal loans online. The initial response has been encouraging.

Technology is also playing a role in our commitment to protecting the environment.

Under our “e-Statement Tree Planting Scheme”, we have pledged to sponsor the planting of one tree for every 10 paper statements suppressed by our customers. Over 40,000 Hang Seng customers have already switched to e-Statements.

The Way Forward

The forecast slowing of economic growth in the second half of 2005 will create new challenges amid continuing strong competition. However, the wealth creation effects of the prolonged economic recovery will help underpin consumer demand and this will generate new opportunities. The improved interest margin should also continue to have a positive influence.

We will focus on higher margin businesses, including wealth management, consumer finance, and the commercial banking and SME segments.

We will continue to take advantage of Internet technology and the Bank’s integrated multi-channel network to meet customers’ needs in a fast, efficient manner.

We will move forward with our plan for regional expansion, with a particular focus on southern China. We are finalising preparations to upgrade our Beijing representative office to a branch and over the next two months will open a Dongguan representative office and a third sub-branch in Shanghai. These developments will bring our number of Mainland outlets to 12.

Further to the establishment of a joint credit card centre in April, we will continue to deepen our business co-operations with Industrial Bank in consumer finance and other areas.

Our business will benefit from regional growth that is being driven in part by the overseas expansion of Mainland companies, the further implementation of the Closer Economic Partnership Arrangement and economic development in the Pearl River Delta.

Hang Seng’s sound finances, brand strength, excellent customer service and leading market position provide solid foundations on which to further build our business. We will continue to manage our operations for growth and exceed the expectations of our stakeholders.

Thank you.