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

Good afternoon ladies and gentlemen. Thank you for joining our interim results announcement. Please note the cautionary words on forward-looking statements on the screen.

Hang Seng Bank achieved a creditable growth in operating profit of 0.9% to HKD5,617 million, compared with the same period last year. This reflected the resilience of the Bank's core business despite the effects of SARS and the sluggish economy in the first half of 2003.

Attributable profit fell by 3.8% to HKD5,022 million due to increased provisions, a higher rate of profits tax and a further decline in the value of properties held. However, it represented an increase of 6.9% compared with the second half of last year.

Earnings per share, at HKD2.63, were 3.7% lower than the same period last year.

Significant progress was made in expanding non-interest income and in managing costs. The ratio of other operating income to total operating income, which rose to a record 33.9%, was an increase of 5.0 percentage points from the same period last year and of 11.4 percentage points from the same period in 1998.

The cost-to-income ratio, among the lowest in the banking world, improved to 23.1%. This was 0.6 percentage point lower than the same period last year and 4.1 percentage points below the level of the second half of last year.

Operating profit before provisions rose by 3.8% to HKD6,073 million, while profit before tax decreased by 0.8% to HKD5,928 million from the first half of 2002. Compared with the second half of last year, operating profit before provisions and profit before tax increased by 12.3% and 12.6% respectively.

In view of the Bank's strong balance sheet, the Directors have declared a first interim dividend of HKD2.10 per share, unchanged from 2002. Acknowledging the increasing importance of dividend flows to our shareholders, the Board has decided to move to a programme of quarterly dividends, starting in 2004.

Total assets of HKD482.3 billion as at 30 June were 1.6% higher from the end of last year. The 2.1% return on average total assets was 0.1 percentage point lower.

Shareholders' funds (excluding proposed dividends) declined by 0.2% to HKD36.7 billion. This was the net result of the increase in retained profits and the reductions in the long-term equity investment revaluation reserve and property revaluation reserves. The return on average shareholders' funds was 24.4%, compared with 24.1% in the first half of last year and 21.9% in the second half.

Total operating income rose by 3.0% to HKD7.9 billion from the same period last year.

Net interest income dropped by 4.3% to HKD5.2 billion. Net interest margin narrowed by 8 basis points to 2.41%. There was a 5 basis point reduction in net interest spread to 2.33% and a 3 basis point fall in contribution from net free funds to 0.08%.

Net interest income was affected by the fall in the average mortgage portfolio yield, contraction in the GHOS mortgage portfolio and the narrowing of time deposit spread. This was partly offset by the growth in savings and current accounts and the expansion of the fixed rate debt securities portfolio. Contribution from net free funds was affected by the further decline in market interest rates.

Compared with the second half of 2002, net interest margin fell by 2 basis points, net interest spread was unchanged and the contribution from net free funds fell by 2 basis points.

Other operating income recorded encouraging growth of 20.9% to HKD2.7 billion, compared with the same period last year. Highlighting the success of our wealth management initiatives, income from investment and insurance services grew strongly by 37.2% to HKD1.4 billion, representing 52.2% of total other operating income.

Card services income decreased by 11.6% to HKD258 million, mainly because of the SARS outbreak in the second quarter.

Operating expenses rose by HKD5 million, or 0.3%, to HKD1.8 billion. Compared with the second half of last year, however, operating expenses fell by 9.7%.

Staff costs dropped by 1.4% from the first half of 2002, due to the reduction of 147 staff members. The total staff number of 7,174 was a decrease of 874 from its height in 1997.

The net charge for bad and doubtful debts amounted to HKD456 million, an increase of 62.3%.

New and additional specific provisions rose by 26.1% to HKD666 million. This reflected the fall in value of property collateral and higher provisions on residential mortgages and credit card advances due to the rise in delinquencies amidst unemployment and personal bankruptcies. Releases and recoveries were reduced by 17.4% to HKD204 million, reflecting the decrease in recoveries from residential mortgages and taxi loans.

The ratio of total provisions to gross advances to customers fell further to 1.17%, compared with 1.28% at the end of last year. Specific provisions dropped by 0.10 percentage point to 0.69%. General provisions fell slightly to 0.48%.

Gross non-performing advances (after deduction of interest in suspense) fell by 6.7% to HKD5.7 billion. The figure includes HKD2.2 billion of advances overdue for three months or less, and those not yet overdue, but considered doubtful. The ratio of gross non-performing advances to total gross advances improved further to 2.5%, from 2.7% at the end of 2002. Specific provisions plus collateral that is conservatively valued amounted to 100% of non-performing advances.

Rescheduled advances to customers increased by HKD1.1 billion, or 61.6%, to HKD3.0 billion at 30 June and represented 1.3% of gross advances to customers. The increase was mainly due to the debt restructuring of certain corporate customers.

Hang Seng increased its market share of total deposits and loans for use in Hong Kong in the first half of this year.

Deposits rose by 1.3% to HKD419.1 billion from the end of last year. Funds continued to shift from time deposits to savings and current accounts.

Advances to customers (after deduction of interest in suspense and provisions) grew by 0.7% to HKD226.2 billion.

Lending to the industrial, commercial and financial sectors grew by 2.7%. Trade finance rose by 13.1%, benefiting from the improvement in external trade.

Advances to individuals declined by 2.5%. Lending under the GHOS scheme dropped by 6.3% following the indefinite cessation of the sale of new flats. Residential mortgages and credit card advances fell moderately as a result of the SARS outbreak.

The average yield on the residential mortgage portfolio, excluding GHOS mortgages and staff loans, fell to 170 basis points below BLR, before accounting for the effect of cash incentive payments. This compared with 138 basis points and 160 basis points below BLR in the first and second halves of 2002 respectively.

Total advances to Mainland-related entities were maintained at HKD9.7 billion and accounted for 4.3% of total advances.

We maintained strong liquidity and remained well-capitalised. The average liquidity ratio for the first half of 2003 was 45.0%. The total capital ratio was 14.0% and the tier one capital ratio was 12.3% at 30 June.

Since the launch of the Managing for Value strategy in January 1999, the Bank's total return for shareholders was substantially more than the average return recorded by Hang Seng Index constituents. We achieved a total return of 61.2% for shareholders, compared with the average return of 9.4% recorded by HSI constituents. In absolute terms, total shareholder value rose by HKD81.1 billion.

Economic profit was HKD2.8 billion in the first half of this year. A benchmark cost of capital of 15.0% has been applied for consistency since 1999. The true cost of capital in the low interest rate environment, however, was less.

Personal financial services, our major profit contributor, provided 51.2% of the profit before tax. Commercial banking contributed 11.0% of pre-tax profit, corporate and institutional banking 6.1% and treasury 18.6%. Other businesses, which mainly represent management of shareholders' funds and investments, provided 13.1% of pre-tax profit.

In the first half of 2003, we continued to expand our large franchise by deepening customer relationships and gaining a larger share of customers' financial spending. Our focus on the higher margin businesses of wealth management and small and medium-sized enterprises (SMEs) was strengthened. We also made headway in our trade finance and mainland China operations.

Personal financial services recorded growth of 2.2% in pre-tax profit, compared with the same period last year. Net interest income fell by 4.4% because of the further decline in the average mortgage yield and contraction in the GHOS mortgage portfolio.

Other operating income, including wealth management, rose by 30.9%. The contribution from investment and insurance services rose by 37.0% and 37.6% respectively.

Sales of retail investment funds, including the popular Hang Seng Investment Series, increased by 48.8%. A total of 17 investment funds were launched under the Investment Series in the first half, taking the total to 77 at 30 June. The total included 56 capital-guaranteed funds - the largest group of capital-guaranteed funds in Hong Kong.

Total funds under management by Hang Seng's asset management and private banking business units grew by 18.8% to HKD48.3 billion.

Commercial banking recorded growth of 13% in pre-tax profit. The results benefited from the increase in fee income, mainly trade services related, and the substantial release in bad debt provisions. Despite satisfactory growth of 13.7% in customer advances due to improved external trade, net interest income was affected by the compression in lending and deposit spreads.

Corporate and institutional banking suffered a 24.2% decline in pre-tax profit. The operating result was affected by the compression in corporate lending spread, a reduction in credit facilities income and the absence of substantial releases in specific provisions.

Treasury achieved growth of 6.3% in pre-tax profit. Net interest income rose by 4.4% as more funds were redeployed from interbank placings to capital market investments for enhancement of interest yield. At the same time, the fixed rate debt securities portfolio continued to benefit in the low interest rate environment. Dealing income grew by 41.6%, mainly in foreign exchange.

In mainland China, our Guangzhou branch received approval in June to operate renminbi services. It will become our second branch, after Shanghai, to offer renminbi services. We have also applied for a renminbi licence for the Shenzhen branch.

The Bank will expand its Mainland network with the opening of a branch in Nanjing and a sub-branch in Puxi, Shanghai.

We continue to enhance our e-Banking services in Hong Kong and mainland China. At the end of June, the number of customers registered for Personal e-Banking services in Hong Kong had grown to about 290,000, an increase of about 14% from six months earlier. The number of internet transactions had risen to 17.7% of total transactions and online share trading to 56.3% of total securities transactions.

In the second half of 2003, the Hong Kong economy will remain difficult. The banking sector will continue to face the challenges of subdued loan demand and narrowing margins.

Our wealth management and SME businesses will be further strengthened, to increase non-interest income. We shall keep widening our product range to meet evolving customer needs.

We are increasing our focus on private banking. Our aim is to become a leading domestic player in terms of assets under management, client base and profitability.

To serve the trade finance needs of customers who have offshore operations in Macau, we are planning to open a branch there, subject to regulatory approval.

We also intend to expand our personal financial and trade services in mainland China, particularly in the rapidly growing Pearl River Delta. Following the signing of the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Mainland, we shall strengthen integrated cross-boundary services for commercial customers.

Earlier this year, Hang Seng's high standards were recognised when it was named the Best Domestic Commercial Bank by The Asset and Asiamoney magazines respectively.

As a premier financial services provider, we shall build further on our financial strength, clear customer focus and operating efficiency to create value for shareholders and customers. Thank you.