CHIEF
EXECUTIVE’S
REPORT

Ongoing international trade tensions abroad and the social situation at home in Hong Kong made 2019 a challenging year for our industry. Given the difficult operating conditions, I am pleased to report that Hang Seng recorded a solid financial performance by continuing to focus on achieving sustainable growth by taking a customer-centric approach to making banking simpler and easier.

Our good performance is reflected beyond the figures. Our investments in technology and systems infrastructure have also reaped significant results in 2019. More than 100 digital innovations and enhancements were rolled out to bring more convenient online and mobile banking solutions to customers. Among the highlights, Hang Seng is the first bank in Hong Kong to use near-field communication technology for mobile cash withdrawal services at its ATMs.

Overall, we increased net operating income before change in expected credit losses and other credit impairment charges by 6% and recorded a 2% rise in operating profit. Operating profit excluding change in expected credit losses and other credit impairment charges grew by 5%. We maintained good momentum in the expansion of our balance sheet, growing loans and deposits by 8% and 5% respectively. All our business lines except Global Markets reported revenue and bottom-line growth.

We maintained a proactive approach to credit risk management, through which we achieved a HK$375m reduction in expected credit loss charges on actual impaired credit exposures compared with 2018. The overall increase in our credit risk provisions for 2019 reflects the effects of adjustments to key variables in our assessment model in line with current global and regional economic outlooks. While this has had an adverse impact on our bottom line, we are confident in our overall asset quality and the actions we have taken to mitigate potential credit risks.

Our more dynamic and responsive business structure enhanced our capability to provide more services to different types of customers. Our principal aim is excellent service by people and technology to make it faster, simpler and more convenient for clients to take care of their daily banking needs and work towards their long-term financial goals.

On the technology side, we introduced mobile cash withdrawal and e-ticketing services to help customers save time. A new standalone stock trading app, Invest Express, makes it easy for customers to review their portfolios at a glance and act swiftly on investment opportunities in rapidly moving markets. And our digital cash management solutions are supporting a major initiative to improve the efficiency and competitiveness of port services in Hong Kong.

Leveraging data analytics and other digital tools, we have strengthened our ability to provide expert and personalised financial services. Customer access has been widened with the introduction of lower investment thresholds for online-exclusive investment products and the waiving of minimum balance fees for general and Preferred accounts.

In today’s environment, speed and efficiency are crucial to business success. In response, we have dramatically reduced transaction and application processing times for commercial customers. Our new mobile real-time payment tracking service has streamlined cash flow management, allowing businesses to make faster operational decisions.

Although global economic uncertainties moderated trade activity in 2019, our strong cross-border connectivity helped to maintain good momentum for future growth in Mainland-related businesses, particularly in the economically dynamic Greater Bay Area. Hang Seng China achieved a 17% increase in total operating income in 2019. Profit before tax nearly doubled due to solid broad-based growth in the balance sheet as well as active management of credit risks and operating costs.

In the challenging market environment, we became even more closely connected with clients on all fronts by being sensitive to their situations and introducing various relief initiatives.

Our increased capacity to meet a diverse range of customer needs in a wide range of market conditions reinforces our position as a leading provider of banking services and will make our business more resilient over the long term.

Financial Performance

Overall, our customer-centric approach to service drove solid growth momentum in difficult market conditions, with a 6% increase in net operating income before change in expected credit losses and other credit impairment charges to HK$43,514m. Looking at the bottom line, operating profit was up by 2% to HK$28,610m and attributable profit to shareholders increased by 3% to HK$24,840m, reflecting the effects of our investments to support long-term business growth. Operating profit excluding change in expected credit losses and other credit impairment charges was up by 5% at HK$30,447m.

Net interest income grew by 7% to HK$32,255m, due mainly to the 7% increase in average interest-earning assets, improved deposit spreads and increased contribution from net-free funds. The net interest margin increased by 2 basis points to 2.20% compared with a year earlier.

Non-interest income remained resilient, increasing by 1% to HK$11,259m. New and enriched retirement and healthcare offerings and improved investment returns from the life insurance portfolio underpinned good growth in insurance income. This offset the impact of reduced income from stockbroking and related services and retail investment fund sales. Overall, wealth management income grew by 7%.

Operating expenses rose by 7% to HK$13,057m, due primarily to investments in people, technology and service enhancements that will drive greater operational efficiency and improve our ability to respond quickly to the changing needs of customers and new market opportunities. Our cost efficiency ratio of 30.0%, up just half a percentage point on 2018, remains one of the lowest in the industry.

At the end of December 2019, our common equity tier 1 capital ratio was 16.9% and our tier 1 capital ratio was 18.7%, compared with 16.6% and 17.8% respectively at 31 December 2018. Our total capital ratio was 20.8%, compared with 20.2% at 2018 year-end.

Driving Stronger Connections in an Era of Change

‘Business-as-usual’ no longer exists. Fast-moving markets, changing lifestyles and service developments in other industries are driving dramatic shifts in what customers expect from and value in financial service providers.

As we start off 2020, we are also facing the additional challenges posed by the novel coronavirus outbreak, which is already having a disruptive impact on economic activity in the Mainland and Hong Kong.

While the situation is continuing to evolve, any prolonged economic slowdown could have an adverse impact across the industry, dampen consumer appetite and put pressure on our forecast for expected credit losses.

With our commitment to supporting customers and the health and well-being of our staff as primary concerns, we will continue to monitor the situation closely and take appropriate action. We have already established a number of relief measures for customers facing particular difficulties.

Working closely with our people and customers to overcome long-term and short-term challenges, we will continue to move ahead with our progressive, customer-centric strategy for transforming our business.

Combining digital innovations with our vast branch network and other existing competitive strengths, our business is becoming more agile and resilient for delivering valued outcomes for customers – simple and convenient banking, more personalised offerings, greater flexibility and choice, and high security standards.

We are placing more emphasis on engagement and building stronger connections: stronger connections with customers by gaining a deeper understanding of their financial priorities and aspirations; stronger connections between our online and offline offerings to deliver a seamless banking experience; stronger connections with strategic partners to develop innovative fintech and lifestyle offerings that make banking easier and add value to our service proposition; and stronger connections with and among our people to enhance communication and collaboration, as well as encourage a creative and supportive workplace culture.

The drive to build stronger connections extends beyond financial services. As a bank with deep local roots, we are actively involved in community initiatives that promote social mobility and well-being, particularly among younger generations.

Our flagship community partnership with the Hong Kong Table Tennis Association is heading towards its 30th year. Over the decades, Hang Seng Table Tennis Academy programmes have benefitted hundreds of thousands of individuals. They promote a more physically active community, help youngsters to develop valuable life skills such as courage and perseverance, and nurture young elite athletes – many of whom have gone on to represent Hong Kong on the international stage.

If our customers and community are at the foundation of our decision making, our people are the cornerstone of our success. In an era where ‘innovation of service’ rapidly becomes ‘proliferation of service’, we are investing heavily in the professional development and personal well-being of our staff. We believe that the expertise and human touch provided by our people will continue to be a key differentiating factor that marks us out as an industry leader into the future. So while we continue with transformation through technological means, we are also expanding our broad-based employee engagement and training initiatives to attract and nurture talented individuals and strengthen our competitive advantage.

I wish to express sincere appreciation to my colleagues for demonstrating adaptability, creativity, professionalism and resilience during a challenging year for Hong Kong. Their unwavering commitment to serving customers right, and from the heart, was central to our achievements in 2019.

Since the onset of the novel coronavirus outbreak, the staff of Hang Seng have worked tirelessly to protect the health and safety of our customers and each other. Our frontline employees have remained steadfast in their posts to provide essential banking services to customers. I commend them for their selfless dedication and hard work.

In an era of dramatic change, what remains unchanged is Hang Seng’s commitment to Hong Kong, and the creation of lasting benefits for our customers, shareholders and the community.

Louisa Cheang
Vice-Chairman and Chief Executive
18 February 2020