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

Good afternoon ladies and gentlemen, and thank you for joining our results announcement today. The event is once again being webcast live, to bring the news to stakeholders with speed and convenience.

I would like to firstly draw your attention to the cautionary words on forward-looking statements showing on the screen. This is made in the light of the evolving global regulatory environment.

Given the slowing Hong Kong economy, Hang Seng Bank's performance in the first half of 2001 was respectable, highlighting its financial strength and sound growth strategies. Attributable profit rose to HKD5,375 million, an increase of 3.5% over the same period last year and a rise of 11.5% compared with the second half of 2000. Earnings per share of HKD2.81 were 3.3% higher than the same period last year.

Our strategy to expand wealth management initiatives and fee-based services saw the ratio of non-interest income to total income rise to 24.7%, compared with 23.6% in the same period last year. Reflecting our asset quality, the net charge for bad and doubtful debts decreased substantially by 74.7% to HKD21 million.

These results were achieved despite difficult market conditions. The local economy lost momentum faster than expected and the banking sector was affected by intense competition, high liquidity, subdued loan demand and narrowing margins.

Hang Seng's operating profit before provisions grew by 0.1% to HKD5,967 million compared with the first half of last year, with an increase in operating income offsetting higher operating expenses. Pre-tax profit was 1.3% higher at HKD6,183 million, after taking account of increased profits on disposal of debt securities and locally-listed equities. Compared with the second half of 2000, operating profit before provisions and profit before tax rose by 7.0% and 11.0% respectively.

The Directors have declared a first interim dividend of HKD2.10 per share, compared with HKD2.00 per share for the first half of last year.

Total assets as at 30 June fell by 3.6% to HKD482.6 billion from the end of last year. The return on average total assets was 2.2%, compared with 2.3% for the first half of 2000.

Shareholders' funds (excluding proposed dividends) grew by 1.4% to HKD41.2 billion from six months earlier, reflecting an increase of HKD1.4 billion in retained profits and a reduction of HKD776 million in the long-term equity investment revaluation reserve. The return on average shareholders' funds was 24.4%, compared with 24.2% for the first half of last year.

Total operating income rose by 1.7% to HKD7.8 billion from the same period last year, with net interest income growing slightly by 0.3% to HKD5.9 billion. Although average interest-earning assets grew by 10.1%, the net interest margin fell by 25 basis points to 2.58%. This was attributable to the 14 basis point reduction in the net interest spread to 2.21% and the 11 basis point fall to 0.37% in the contribution from net free funds.

The net interest spread was adversely affected by a further decline in the average yield on the mortgage portfolio and narrower spread earned on time deposits in the low interest rate environment. These factors outweighed the benefits of growth in lower cost savings deposits, a higher yield on investment securities and a wider gap between BLR and HIBOR.

Income from net free funds fell by HKD287 million due to the reduction in market interest rates. Excluding this factor, net interest income would have grown by 5.2%.

Compared with the second half of 2000, net interest income improved by 1.6%, with a three basis point rise in the net interest margin of 2.58% and a 17 basis point rise in the net interest spread of 2.21%.

Other operating income rose by 6.1% to HKD1.9 billion compared with the same period last year. Net fees and commissions rose by 7.5% to HKD1.1 billion.

Operating expenses rose by 7.3%. Staff costs increased by 1.9%, largely due to the award of a pay rise. Premises and equipment expenses rose by 26.2%, mainly reflecting the growth in IT expenditure to support new e-initiatives. The cost-to-income ratio was 23.8%, compared with 22.6% for the first half of 2000. This is still low in the banking world. Reflecting the Bank's cost-efficiency, pre-tax profit per employee rose by 0.2% to HKD833,000.

Despite the economic slowdown, the net charge for bad and doubtful debts fell substantially by 74.7%. The net charge for specific provisions fell by 65.0% to HKD21 million, benefiting from a substantial increase in recoveries and releases of specific provisions from corporate accounts. The increase in new and additional provisions was mainly for residential mortgages and commercial banking customers. As the balance of the additional general provision of HKD125 million was transferred to general provisions at the end of last year, no charge for general provisions was made against loan growth during the first half of 2001.

The ratio of total provisions to gross advances to customers continued to fall, by 0.23 of a percentage point to 1.78% compared with the end of last year. Specific provisions decreased from 1.36% to 1.14%, and general provisions fell from 0.65% to 0.64%.

Gross non-performing advances (after deduction of interest in suspense) fell by HKD830 million, or 11.2%, to HKD6.6 billion compared with the end of last year. Highlighting our prudent management, the figure includes HKD1.8 billion of advances overdue for three months or less, or which were not yet overdue but considered doubtful.

The ratio of gross non-performing advances (after deduction of interest in suspense) to total gross advances fell by 0.3 of a percentage point to 3.0%. In line with our prudent provisioning, specific provisions plus collateral that is conservatively valued amounted to almost 100% of non-performing advances.

Current, savings and other deposit accounts declined by 3.3% to HKD415.5 billion compared with the end of last year. The decline in HKD deposits was mainly in time deposits and certificates of deposits issued, while savings deposits continued to grow.

We increased our market share of loans despite weak demand in the market. Advances to customers (after deduction of interest in suspense and provisions) grew by 1.0% to HKD219.8 billion, compared with a 5.9% fall in the market. The advances to deposits ratio rose to 52.9% from 50.6% six months earlier.

Lending to the industrial, commercial and financial sectors declined by 3.3%, reflecting the lack of demand in the corporate lending market. Advances to individuals grew by 2.7%, reflecting our increased focus on consumer financing. Residential mortgages fell by 1.7%, due to intense competition and lack of activity in the secondary property market. Government Home Ownership Scheme (GHOS) mortgages, however, grew by 9.3%.

Due to the further fall in the pricing of new mortgages and the repricing of existing loans, the average yield of the residential mortgage portfolio, excluding GHOS mortgages and staff loans, fell to 109 basis points below BLR at the end of the first half-year, before accounting for the effect of cash incentive payments. This compared with 22 basis points and 80 basis points below BLR at the end of the first and second halves of 2000 respectively.

Credit card advances showed satisfactory growth of 5.1% to HKD5.0 billion as a result of the expansion in the card base. Personal lending increased by 21.9% to HKD5.9 billion, reflecting the success of the Bank's strategy to diversify its individual loan portfolio.

We maintained strong liquidity and remained well-capitalised. The average liquidity ratio for the first half of 2001 was 46.0%, compared with 41.4% for the year-earlier period. The total capital ratio at 30 June was 15.8%, compared with 15.3% six months earlier, and the tier 1 capital ratio was 12.6%, compared with 11.9%.

Between January 1999, when our Managing for Value strategy was implemented, and the end of June, the Bank's total return for shareholders was 39%. This was in line with the average return recorded by Hang Seng Index constituents. In absolute terms, total shareholder value increased by HKD51.6 billion.

Economic profit - the difference between post-tax profit and the cost of invested capital - increased by HKD128 million, or 4.2%, compared with the first half of last year.

In our business lines, personal financial services remained the major profit contributor, providing 44.6% of the HKD6,183 million pre-tax profit. Corporate and institutional banking contributed 9.4%, commercial banking 11.1% and treasury 14.0% of pre-tax profit. Others, which mainly represents shareholders' funds and investments in premises, investment properties and long-term equities, provided 20.9% of pre-tax profit.

We made good progress in developing our major focus on wealth management and commercial banking. Our e-Banking services, which continued to grow quickly, have become a major channel for reaching out and cross-selling to our target customers. We also expanded further our operations in mainland China.

Personal financial services recorded a fall of 10.8% in pre-tax profit compared with the same period last year. This was mainly due to the decline in mortgage yields, which outweighed the income growth in wealth management businesses.

In wealth management delivery, income from investment and insurance services grew by 4.9% in the first half compared with the same period last year. Investment fund subscription rose by 24.2%, benefiting from the successful launch of capital-guaranteed funds suited for the current environment. Nine new funds were launched under the Hang Seng Investment Series, taking the total to 26 at the end of June. Funds managed under the Series grew by 123.2% to HKD8.9 billion from the year-end.

Securities broking and related income were adversely affected by the depressed stock market but the Bank's market share in stock trading increased.

Hang Seng Life performed impressively, with annualised new premiums for life insurance growing by 68.1%. Our Mandatory Provident Fund business began to generate income, with the number of enrolled employees and sel-employed persons rising to 198,500 at the end of June.

The Bank continued to enhance the scope of its e-Banking services, which are available to credit card holders, employees enrolled in its MPF schemes and sole proprietors as well as integrated account customers. More than 134,500 customers had registered at the end of June. Internet transactions made up 8.8% of total transactions in June, and about 50% of the Bank's securities transactions by count were conducted online.

Commercial banking showed an increase of 7.0% in pre-tax profit. In the first half of this year, trade finance advances recorded encouraging growth of 16.0% despite dampened export trade and the Bank's market share increased. Steady growth was also recorded in commercial lending.

In the Mainland, Fuzhou Branch opened in February and the first representative office of Hang Seng Insurance Company Limited opened in Shenzhen in April. Total advances to Mainland-related entities grew by 2.2% to HKD10.5 billion at the end of June, and Mainland-related advances amounted to 4.7% of total advances.

Corporate and institutional banking achieved growth of 26.4% in pre-tax profit, mainly benefiting from a substantial recovery of bad and doubtful debts. Treasury recorded growth of 40.0% in pre-tax profit, reflecting successful positioning of portfolios to benefit from the downward trend in interest rates.

The uncertain outlook for the US economy affects prospects for the second half of 2001. The business environment for banks remains difficult.

Hang Seng will continue to focus on value-creating businesses and build more profitable long-term customer relationships to achieve sustainable growth. Product diversification, segmentation and needs-based cross-selling will be strengthened to gain maximum customer wallet share. Asset quality and cost discipline will remain important.

As part of our efforts to use leading edge technology to reach more customers, plans are afoot for the launch of business internet banking.

In July, the final phase of interest rate deregulation took effect. It is, however, still too early to say what the impact on margins and earnings will be. As the deregulation coincided with abundant market liquidity, competition for deposits among banks is not likely to be strong in the short term.

Following a review of its savings deposits price structure, Hang Seng put in place measures offering customers choice about the nature of their banking relationship with us while rewarding them for their total banking relationship with the Bank. The measures strike a balance between our role as a community bank and our responsibilities to shareholders. We shall closely monitor the market and continue to enhance our products and services as part of our relationship-building.

In view of the Mainland's vast opportunities in the medium term, we are planning to increase our network of branches and offices in strategically important locations. Hang Seng Securities Limited has recently submitted applications with a view to obtaining B shares trading seats on both the Shanghai and Shenzhen Stock Exchanges and to setting up a representative office in Shanghai.

Applications were lodged by the Bank last year for a RMB licence in Shanghai, to open a branch in Nanjing and to upgrade its Beijing representative office to a branch.

In March, Hang Seng was named the Strongest Bank in Asia by Asiamoney magazine. We believe that the Bank's fundamental strengths of financial prudence, a strong customer franchise and efficient operations position it well to meet the challenges ahead.

Thank you.