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

Good afternoon ladies and gentlemen. Thank you for joining our results announcement, which is being webcast live as usual.

I draw your attention to the cautionary words on forward-looking statements on the screen.

With the Hong Kong economy remaining sluggish and the banking environment challenging in the first half of 2002, Hang Seng Bank achieved an attributable profit of HKD5,220 million. This was a reduction of 2.9% from the first half of 2001 but an increase of 10.1% compared with the second half of that year. Earnings per share of HKD2.73 were 2.8% lower than the same period last year.

Our focus on expanding non-interest income saw other operating income grow by 14.6% and contribute 28.9% of total operating income, an increase of 4.2 percentage points compared with the first half of last year. Our strict cost discipline resulted in a 2.7% reduction in operating expenses.

The results were, however, affected by a 7.6% reduction in net interest income, mainly attributable to the decline in free funds' contribution of HKD623 million as a result of the sharp fall in interest rates.

Operating profit before provisions was HKD5,849 million, a 2% fall from the first half of last year but a 5.7% increase from the second half of last year.

Profit before tax amounted to HKD5,978 million, a reduction of 3.3% from the same period last year. This was after accounting for the increase in profits on disposal of debt securities and locally-listed equities, and the inclusion of the Bank's share of the value arising from the long-term assurance business of Hang Seng Life Limited. Compared with the second half of last year, profit before tax rose by 12.1%.

In view of the Bank's sound business fundamentals, the Directors have declared a first interim dividend of HKD2.10 per share, unchanged from 2001.

Total assets as at 30 June were 0.9% lower, at HKD470.6 billion, from the end of last year. The return on average total assets was maintained at the 2001 first-half level of 2.2%.

Shareholders' funds (excluding proposed dividends) rose by 1.4% to HKD40.3 billion from six months earlier. This mainly reflected an increase of HKD1.3 billion in retained profits and a reduction of HKD672 million in the long-term equity investment revaluation reserve. The return on average shareholders' funds was 23.8%, compared with 24.4% in the first half of last year and 21.4% in the second half of last year.

Total operating income fell by 2.1% to HKD7.7 billion from the same period last year. Net interest income dropped by 7.6% to HKD5.5 billion, while average interest-earning assets fell by 4.1% to HKD442.3 billion. Net interest spread improved by 17 basis points to 2.38%. This was, however, more than offset by a reduction of 26 basis points in the contribution from net free funds to 0.11%, leading to a 9 basis point compression in the net interest margin to 2.49%.

Net interest spread benefited from improved spreads on holdings of fixed rate securities in the lower interest rate environment, growth in lower cost savings deposits and a wider spread earned on time deposits. These were partly offset by a further decline in the average yield on the mortgage portfolio.

The contribution from net free funds was affected by the sharp fall in market interest rates, resulting in a reduction of HKD623 million in net interest income compared with the first half of 2001.

Other operating income rose by 14.6% to HKD2.2 billion compared with the same period last year. The strong growth of 27.6% in net fees and commissions to HKD1.4 billion reflected our success in delivering wealth management services.

Our stringent control of costs saw operating expenses fall by 2.7% to HKD1.8 billion. Among the lowest in the banking world, our cost-to-income ratio fell further by 0.1 percentage point to 23.7%, compared with the first half of 2001.

The net charge for bad and doubtful debts amounted to HKD281 million, compared with HKD21 million for the first half of 2001.

New and additional specific provisions were reduced by 8.3% to HKD528 million, with the reduction in specific charges for corporate accounts and residential mortgages offsetting the rise in specific charges for card advances and personal loans. Releases and recoveries, mainly in corporate accounts and taxi loans, reduced by 55.5% to HKD247 million.

The ratio of total provisions to gross advances to customers fell further to 1.38%, compared with 1.55% at the end of last year. Specific provisions decreased by 0.16 percentage point to 0.75% and general provisions fell slightly to 0.63%.

Gross non-performing advances (after deduction of interest in suspense) fell by HKD208 million, or 3.4%, to HKD6.0 billion compared with the end of last year.

The ratio of gross non-performing advances to gross advances improved to 2.6% from 2.7% six months earlier.

The slight reduction in balance sheet size reflected the decrease of 1.5% in current, savings and other deposits to HKD408.3 billion, compared with the end of last year.

Advances to customers (after deduction of interest in suspense and provisions) grew by 1.5% to HKD225.7 billion, despite subdued loan demand in the uncertain economic environment. The advances to deposits ratio rose to 55.3%, from 53.7% six months earlier.

Lending to the industrial, commercial and financial sectors grew by 3.2%. The manufacturing sector recorded lending growth of 20.7%, reflecting the Bank's efforts in developing middle market and small corporate relationships. Trade finance recorded growth of 6.0%.

Total advances to Mainland-related entities grew by 3.8% to HKD9.9 billion and accounted for 4.3% of total advances at end-June.

Advances to individuals were maintained at the same level as at the end of last year. Credit card advances and other lending to individuals grew by 3.0% and 14.8% respectively, in line with the Bank's strategy to diversify its loan portfolios. Residential mortgages continued to grow amid intense market competition. However, Government Home Ownership Scheme (GHOS) mortgages decreased, following the imposition of a moratorium on GHOS sales between September last year and June.

As a result of the continued reduction in the pricing of new mortgages and the repricing of existing loans, the average yield on the residential mortgage portfolio, excluding GHOS mortgages and staff loans, fell to 138 basis points below BLR for the first half of 2002 - before accounting for the effect of cash incentive payments. This compared with 65 basis points and 103 basis points below BLR in the first and second halves of last year respectively.

The average yield on the residential mortgage portfolio at 30 June was 158 basis points below BLR, compared with 134 basis points below BLR six months earlier.

We maintained strong liquidity and remained well capitalised. The average liquidity ratio for the first half of this year was 43.4%, compared with 46.0% for the year-earlier period. The total capital ratio at 30 June was 15.4%, compared with 15.3% six months earlier, and the tier 1 capital ratio was 12.6%, compared with 12.3%.

Between January 1999 and the end of June, the Bank achieved a total return of 53.1% for shareholders. This was more than double the average return of 16.2% recorded by Hang Seng Index constituents over the same period. In absolute terms, total shareholder value rose by HKD70.3 billion.

In our business lines, personal financial services remained the major profit contributor, providing 49.7% of the HKD5,978 million profit before tax. Commercial banking contributed 9.7% of pre-tax profit, corporate and institutional banking 8.0% and treasury 17.3%. Other businesses, which mainly represent management of shareholders' funds and investments, provided 15.3% of pre-tax profit.

In personal financial services, growth of 7.7% in profit before tax was recorded, compared with the same period last year. Net interest income improved slightly, benefiting from the shift of customer deposits to lower cost savings although mortgage yields continued to fall.

The strong growth of 31.5% in other operating income reflected the success of wealth management initiatives. Comprising investment and insurance services, wealth management recorded a rise in contribution of 62.1% to HKD809 million for the first half of 2002.

The investment fund business performed impressively. A rise of 210.5% to HKD472 million in fees from distribution and management of retail investment funds was recorded.

Sales of retail investment funds, including the popular Hang Seng Investment Series, amounted to HKD15.2 billion, an increase of 156.4% over the same period last year. The Investment Series comprised a total of 48 retail funds at 30 June, including 30 capital guaranteed funds - the largest series of guaranteed funds in Hong Kong.

Total funds under management grew by 44.5% to HKD36.6 billion during the first half of the year.

The life insurance business reported good progress, with growth of 59.6% to HKD142 million in life insurance distribution commissions. There was a 3.2% increase to HKD130 million in securities broking and related income.

In the first half of 2002, the number of Prestige Banking Centres for affluent customers increased by 26 to 59. The Stamina Banking and ezLink Financial Services integrated accounts were launched.

Commercial banking recorded a decrease of 15.8% in pre-tax profit. Despite the growth in trade finance and other lending to the manufacturing sector, net interest income suffered from the reduction in lending margins. The operating result was also affected by a reduction in MPF service income and the substantial release and recovery of bad and doubtful debts in the same period last year.

To increase our focus on SMEs, which make up the cornerstone of Hong Kong's businesses, a Business Banking Division was set up in May.

Corporate and institutional banking recorded a decline of 17.1% in profit before tax. The operating result was affected by the compression in corporate lending margins, a reduction in credit facilities income and lower levels of recoveries of bad and doubtful debts compared with the same period last year.

Treasury achieved encouraging growth of 19.2% in pre-tax profit. Interest income rose by 13.7% as the fixed rate debt securities portfolio continued to benefit in a low interest rate environment. Other operating income increased, helped by the growth in dealing profits and income from corporate treasury services. Profit on disposal of debt securities from the accrual portfolio also grew.

In mainland China, there were several significant developments. Our Shanghai and Guangzhou branches began offering foreign currency services to mainland Chinese residents and enterprises in July, while the Shenzhen branch launched the services today. The Guangzhou branch opened a Prestige Banking Centre in July. Today, the Shanghai branch moved to larger ground-level premises and opened a Prestige Banking Centre. It will shortly launch renminbi services for expatriates and foreign-invested enterprises.

Hang Seng Securities received approval to open a representative office in Shanghai.

e-Banking has become an important part of our multi-channel delivery network since its launch in August 2000.

At the end of June, the number of customers registered for e-Banking had grown to more than 207,000, an increase of about 17% from six months earlier. The number of internet transactions had risen to some 10% of total transactions and online share trading to about 55% of total securities transactions. We are planning to extend the e-Banking service further.

In the second half of 2002, the banking environment will remain difficult, with continued intense competition, pressure on margins, surplus liquidity and weak loan demand.

Hang Seng will put to work its considerable strengths, which include financial soundness, a large customer base, strong brand value and efficient operations, to maximise value for shareholders.

We shall continue to expand our local franchise - especially in the areas of wealth management and commercial banking - and to expand in the Mainland. Our internet banking services will be further enhanced. Prudent banking practices, including asset quality control and strict expense discipline, will remain important.

In the Mainland, applications have been lodged to open a branch in Nanjing and a sub-branch in Puxi, to upgrade our Beijing representative office to a branch, and to operate personal internet banking services. Hang Seng Investment Management Limited has also applied to open a representative office in Shenzhen.

Given our solid track record and sound business strategies, we are well-positioned to meet future challenges and to continue to deliver quality results. Thank you.