Statement by Mr Vincent Cheng
Vice-Chairman and Chief Executive
Hang Seng Bank
3 August 1998

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

The 1998 interim results of the Hang Seng Bank Group cover a period of painful economic adjustment for the Hong Kong Special Administrative Region in the wake of the Asian financial turmoil.

Against this backdrop, the Bank recorded an operating profit before provisions of HKD5,265 million, a marginal decline of 0.8% compared with the first half of last year. Operating profit after provisions was HKD4,363 million, a decrease of 14.5%. Pre-tax profit fell by 22.4% to HKD4,451 million.

Profit attributable to shareholders contracted by 23.7% to HKD3,802 million and earnings per share dropped by 22.9% to HKD1.99 from the same period last year.

In the unfavourable economic environment, the Bank's financial performance was affected by a number of factors, including a substantial increase in specific provisions for bad and doubtful debts, the charge of a deficit on the revaluation of bank premises and fewer disposals of locally-listed equities. We continued, however, to move forward in our business, at the same time reinforcing our core operating principles of financial prudence, efficient operations and service excellence.

The Directors have declared that the interim dividend be maintained at last year's level of HKD1.40 per share, in view of the inherent soundness of the Bank's business and our commitment to shareholders. The dividend as declared should not be taken as an indication of the level of profit or dividend for the year.

Total assets as at 30 June were up by 2.7% to HKD407.2 billion from the end of 1997. The return on average total assets was 1.9%, compared with 2.6% for the first half of last year.

Shareholders' funds fell by 6.1% to HKD46.7 billion from the end of 1997, affected by the reduction in the property revaluation reserve following the revaluation exercise in June. The return on average shareholders' funds was 15.9%, compared with 20.3% for the first half of last year.

Total operating income rose by 1.7% to HKD7.2 billion from the same period last year. Average interest-earning assets grew by 3.6% to HKD373.5 billion and net interest income increased by 1.5% to HKD5.6 billion. The lower average pricing of the residential mortgage portfolio and the narrower spread between the best lending rate and HIBOR were balanced by higher yields from free funds and the growth in average advances to customers. As a result, the Bank was able to maintain its net interest margin at over 3%, indicating its inherent operating strengths. The figure fell by a mere seven basis points from a year earlier to 3.01% per annum.

Other operating income increased by 2.7% to HKD1.6 billion over the first half of last year. Satisfactory growth in dealing profits and a substantial increase in other income were overshadowed by a 17.3% fall in net fees and commissions, mainly due to the decline in fee income from credit facilities, trade finance and stockbroking in the weak economy.

Operating expenses increased by 9.3%, including the deficit of HKD86 million on the June property revaluation. The revaluation was conducted to reflect property market movements in the first half of the year. Of the HKD3.9 billion total revaluation deficit, HKD3.8 billion represented a reduction in the property revaluation reserve. The balance of HKD86 million marked the fall in value below the original acquisition cost (less depreciation) of bank premises acquired in recent years. Excluding the revaluation deficit, operating expenses rose by 4.4%.

The cost-to-income ratio was 26.8%. Excluding the revaluation deficit, the ratio would be 25.6% compared with the 25.0% recorded for the first half of last year, and a slight improvement from the 25.7% recorded for the whole of 1997. Hang Seng's cost-to-income ratio reflects the Bank's strict expense discipline and remains among the lowest in the banking world.

The net charge for bad and doubtful debts increased substantially by HKD697 million to HKD902 million compared with the same period last year. This was mainly due to higher specific provisions made for certain corporate and trade finance loans as a result of the deterioration in the financial and liquidity positions of borrowers and the fall in collateral value in the economic downturn. There was, however, a general provisions write-back due to the marginal decrease in customer advances.

At the end of June, the ratio of total provisions to gross advances increased by 0.4 of a percentage point to 1.7%. The increase was recorded in specific provisions, which stood at 1.0%. General provisions were maintained at 0.7%, comprising normal provisions made at the rate of 0.6% and the additional provision of HKD250 million brought forward from last year. The ratio of non-performing advances to total advances rose to 1.7% from 0.8% at the end of last year. Adequate specific provisions have been made in respect of non-performing advances, taking into account the value of collateral. In line with its financial prudence, the Bank continues to strengthen credit risk management as part of its focus on asset quality.

Profit on disposal of tangible fixed assets and investment securities was only HKD53 million due to fewer disposals of listed equities in the depressed market, compared with HKD602 million in the same period last year.

On the balance sheet, current, savings and other deposit accounts increased by 4.6% to HKD343.9 billion compared with six months earlier. Certificates of deposit in issue increased by HKD2.9 billion to HKD8.4 billion under the Bank's HKD30 billion CD programme to secure longer-term funding and enhance asset and liability management.

Advances to customers (net of provisions and suspended interest) fell marginally by 1.2% to HKD201.5 billion from the end of last year, as demand for financing slowed. Declines in advances to the commercial sector were recorded mainly in property development and corporate lending activities. The fall in trade finance was in line with the market which was affected by the SAR's weak external trade. Moderate growth was recorded in residential mortgages while satisfactory growth was reported in mortgages under the Government Home Ownership Scheme.

The ratio of advances to deposits was lowered to 58.6% at the end of June from 62.1% last December and is at a level we are comfortable with in the current market conditions.

Hang Seng's liquidity remained strong. The average liquidity ratio for June 1998 was 38.6%, compared with 39.3% last December. The capital base also remained strong, even after accounting for the fall in the property revaluation reserve and higher loan provisions. The total capital ratio was a high 21.5% compared with 22.0%, while the tier 1 capital ratio was 17.2% compared with 16.3% at the end of last year.

Hong Kong's banking sector has been operating in difficult conditions in the current economic downturn. It has had to contend with reduced loan demand, high interest rates, intense competition for deposits and increased funding costs.

In the tough market conditions, the Bank has been further strengthening its prudent operations and equipping itself for future growth in Hong Kong and Mainland China. We continued to expand our branch network, increase our already wide range of innovative products and optimise organisational efficiency, as part of our focus on service enhancement, earnings diversification and cost control.

Retail banking remained the major contributor to profit. In Hong Kong, a new branch appeared in Lok Fu in May and four of 10 planned branches were opened along the Airport Express and Tung Chung Line in July, taking the total number of branches to 150. Our customer segmentation strategy was strengthened with the opening of eight Business Banking Centres and two more BankSmart Prestige Centres to offer one-stop financial services to business owners and high net worth customers respectively.

New products were introduced to offer customers more investment choices and to increase non-interest income. They included three global funds under the Hang Seng Investment Series. Our insurance business is increasingly important and a major promotion of personal insurance products was launched.

The Bank's corporate banking business was affected by the slowdown in corporate activity in the territory, but treasury performed well by actively managing the Bank's money market and investment portfolios and expanding its range of corporate treasury services. The private wealth management business focused on expanding its client base.

In Mainland China, the Guangzhou and Shanghai branches performed satisfactorily. In view of the vast potential on the Mainland, the Bank has applied to upgrade its Shenzhen representative office to a branch. An application to open a Beijing representative office also awaits approval.

Hang Seng's many strengths have continued to win recognition. The Bank was voted the top company in Hong Kong and Asia's top banking and financial institution in the 1998 Asia's Most Admired Companies Survey commissioned by Asian Business. We were also described as one of the world's most efficient banks by Asiamoney when it named us Commercial Bank of the Year in Hong Kong for the fourth consecutive year.

Despite the current economic downturn, Hang Seng remains confident about Hong Kong's prospects. The downturn is cyclical and although painful, it is expediting economic restructuring and will restore the competitive positioning of Hong Kong. Recent government measures to stabilise the economy are welcomed. Steady expansion in Mainland China will continue to provide economic stimulus. The territory's recovery will, however, also depend on regional stability.

As a bank with strong financial fundamentals, Hang Seng is well-placed to withstand the economic downturn. We will continue to capitalise on future growth opportunities such as the Mandatory Provident Fund and euro launches while consolidating existing businesses. We will leverage on our well-established customer franchise to do more cross-selling and diversify earnings.

But in all our business operations, we will seek to further enhance cost efficiency, and emphasise risk management and credit control functions to ensure asset quality. The focus on strong capital and liquidity will also be unchanged. This will allow us to emerge from the economic downturn as more efficient and competitive. Our market leadership will be further secured.

Thank you.