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

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

Before I present our interim results, I'd like to highlight the way Hang Seng has adopted the new Statement of Standard Accounting Practice 24, which has been a subject of great interest to the media and investors. SSAP 24 requires us to state long-term equity investments at fair value in the balance sheet instead of at cost. In line with Hang Seng's prudent management policy, our revaluation gains have been booked under the investment revaluation reserve instead of the profit and loss account. Our revaluation gains came to HKD3.1 billion at 30 June, including HKD675 million for the first half of this year.

Hong Kong's economy continued to contract in the first half of this year. Despite the difficult economic environment, Hang Seng performed well. Our strong franchise, sound financial fundamentals and operational excellence have placed us in a solid position to withstand the current recession.

Operating profit before provisions increased by 6.1% to HKD5,680 million compared with the first half of last year, reflecting higher net interest income and a marked reduction in operating expenses. Taking into account the drop in provisions for bad and doubtful debts, operating profit after provisions grew by 9.9% to HKD4,891 million. Pre-tax profit was up by 13.3% to HKD5,044 million, benefiting from increased profit on the disposal of locally-listed equities and the absence of property revaluation deficits.

Profit attributable to shareholders was HKD4,261 million, an increase of 12.1%. Earnings per share also rose by 12.1% to HKD2.23.

The Directors have declared an interim dividend of HKD1.60 per share, an increase of 14.3% from the same period last year.

Total assets at 30 June grew by 3.0% to HKD435.5 billion from the end of 1998. The return on average total assets was 2.0%, compared with 1.9% for the first half of last year.

Shareholders' funds increased by 4.1% to HKD47.4 billion from six months earlier. The increase represented retained profit and the rise in the investment revaluation reserve. The return on average shareholders' funds was 18.0%, compared with 14.8% for the first half of last year.

Total operating income rose by 3.1% to HKD7.4 billion from the same period last year. Net interest income increased by 5.6% to HKD5.9 billion, attributable to the 7.5% growth in average interest-earning assets.

The net interest spread increased by 18 basis points to 2.43% per annum, benefiting from the widening of the gap between the best lending rate and HIBOR, and lower deposit interest costs. The contribution from net free funds decreased by 23 basis points due to lower average interest rates. As a result, the net interest margin fell slightly by five basis points to 2.96% per annum. This figure was, however, a five-basis-point improvement from the second half of last year.

Net fees and commissions increased by 5.5% and dealing profits rose by 1.4%.

Other operating income, however, decreased by 5.5% to HKD1.5 billion, largely due to the non-recurrence of profit made on the termination of interest rate swaps.

We maintained tight control over our cost base with positive results. Operating expenses decreased by 5.6%, largely due to lower costs for staff, premises and equipment. Staff costs fell by 4.3%, as the total staff number was reduced by 364 over 12 months through natural attrition to 7,562. I wish to stress that the staff reduction has been achieved without compromising the Bank's growth or quality services. Reflecting improved productivity, the operating profit before provisions per employee rose to a record half-year high of HKD751,000. This was an 11.3% increase from the same period last year.

Our cost-to-income ratio also achieved a new record. It reached its lowest level of 23.5% since the ratio was first published in 1989, compared with 25.6% in the first half of last year. The figure is even lower than our capital adequacy ratio of 24.2% before the appropriation of the dividend, and reflects the Bank's high operational efficiency. I must add, however, that we may not be able to maintain such a record low, as we are making business investments in major areas such as the Mandatory Provident Fund, which will only bring in income later.

As the Hong Kong economy consolidated, the net charge for bad and doubtful debts decreased by HKD113 million to HKD789 million, with a fall of HKD121 million in specific provisions. Specific provisions made for trade finance, corporate lending and hire purchase loans decreased but additional provisions were made in respect of Mainland-related exposures and residential mortgages. Releases in general provisions of HKD7 million for the current period and HKD15 million for the same period last year reflected the contraction in customer advances.

There was a slowdown in the rise of non-performing advances. The ratio of total provisions to gross advances to customers increased by 0.1 percentage point to 2.3%, compared with the end of last year. The increase was recorded in specific provisions, which stood at 1.6%. General provisions were maintained at 0.7% and included the additional provision of HKD250 million made in 1997 which has been left intact.

Gross non-performing advances (net of suspended interest) increased by HKD311 million, or 4%, to HKD8.2 billion at the end of June, taking into account a total write-off of HKD924 million.

Advances overdue for more than three months rose by HKD2.4 billion, or 61%. More advances which were not yet more than three months overdue at the end of last year shifted to the over-three-months category this year. Advances overdue for three months or less amounting to HKD753 million and advances of HKD1.4 billion not yet overdue were also classified as non-performing. These figures reflect our early identification of problem loans and prudent provisioning policy.

The ratio of non-performing advances (net of suspended interest) to gross advances rose by 0.1 percentage point to 4.0% from the end of last year. In line with our prudent provisioning policy, specific provisions plus collateral that is conservatively valued, amount to almost 100% of non-performing advances.

On the balance sheet, current, savings and other deposit accounts increased by 3.6% to HKD365.0 billion compared with six months earlier. Certificates of deposit in issue increased by HKD1.1 billion to HKD11.9 billion, to secure longer-term funding.

Advances to customers (net of suspended interest and provisions) declined marginally by 0.4% to HKD197.3 billion from the end of last year. Corporate lending and trade-related advances fell in the economic downturn but residential mortgages recorded steady growth as the primary property market remained active.

The advances-to-deposits ratio dropped to 54.1% from 56.2% six months earlier, reflecting the growth in customer deposits and a small fall in advances to customers.

Our balance sheet continued to be underpinned by strong liquidity and capital positions. The average liquidity ratio for the first half of the year increased to 42.3%, compared with 38.0% for the same period last year. The total capital ratio rose by one percentage point to 22.7% at the end of June, compared with six months earlier. Excluding the impact of the new SSAP 24, the total capital ratio would be 22.2% at 30 June, compared with 21.3% six months earlier. The tier 1 capital ratio rose by one percentage point to 19.5%.

In the difficult operating environment of the first six months of this year, Hang Seng began to implement its newly adopted Managing for Value strategy. We are creating a higher value organisation to achieve the target of at least doubling total shareholder value in five years.

Under Managing for Value, the speedy satisfaction of customer needs is a major driving force for profit enhancement. To achieve this, the Bank strengthened its one-stop banking services and further deepened customer relationships through segmentation. Cross-selling was increased across business divisions to expand non-interest income.

The retail banking business remained the major contributor to profit and it recorded good results. In wealth management delivery, personal asset management and insurance capabilities were strengthened. The fund size of the Hang Seng Investment Series, established in July 1998, exceeded HKD2.8 billion at the end of June -- an increase of about 240% from last December. In insurance, our sales force of registered agents increased by about 25% to 900 in the first half of this year and the expansion of the insurance product range was well-received.

As part of the Bank's efforts to increase value-added services for customers, the launch of mobile banking in September was announced. Several prestigious credit cards and the Hong Kong Jockey Club Membership Card were also launched to target high net worth customers.

Treasury sustained steady growth by taking advantage of interest rate movements and effectively managing the Bank's money market portfolios. Corporate banking and private wealth management businesses recorded improvements over the same period last year. We continued to tap opportunities on the Mainland, with asset quality remaining the prime focus. Total advances to Mainland-related entities at 30 June amounted to about 5% of total advances to customers, similar to the end of last year.

Hang Seng's strong performance was highlighted when all its ratings were affirmed by Moody's Investors Service in June. That includes our A3 long-term and Prime 2 short-term foreign currency deposits ratings -- the highest for banks in Hong Kong. Also affirmed was our financial strength of B -- which is the highest rating among Moody's rated Asian banks. Two other rating agencies, Fitch IBCA and Thomson BankWatch, have also recently reaffirmed our ratings.

In Hong Kong, while the economic downturn may have bottomed out, there are few indications of a strong turnaround in the remainder of the year. Despite repeated interest rate cuts and the improvement in asset prices, the territory's recovery is still affected by weak consumption, high real interest rates and sluggish exports. In the banking sector, narrowing interest margins, weak credit demand and rising non-performing advances have remained causes for concern.

Given Hang Seng's capital strength, prudent management and service excellence, we are well-placed to take advantage of any improvement in market conditions. We serve more than one-third of Hong Kong's population and there is vast scope for leveraging on our huge customer base to increase cross-selling and diversify earnings.

We will continue to expand our diverse product range to meet changing customer needs. Preparations for the launch of Mandatory Provident Fund products and internet banking are well underway. In corporate lending, we see opportunities in new technology and infrastructure projects, but asset quality will remain the highest priority. We are also placing greater efforts on growing services for small-to-medium-sized businesses. Synergies with other members of the HSBC Group will be increased to enhance cost-efficiency.

As a market leader that consistently delivers good shareholder and customer value, Hang Seng is committed to furthering the interests of its stakeholders. We believe that with our clear focus on long-term growth, we are well-positioned to achieve our Managing for Value target.

Thank you.