FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of August, 2005
HSBC Holdings plc
42nd Floor, 8 Canada
Square, London E14 5HQ, England
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F).
Form 20-F X Form 40-F ......
(Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934).
Yes....... No X
(If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82- ..............)
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
2005 INTERIM CONSOLIDATED RESULTS - HIGHLIGHTS
-Operating profit excluding loan impairment charges and other credit risk
provisions up 7.7 per cent to HK$23,759 million (HK$22,058 million in the
first half of 2004; up 16.9 per cent from HK$20,316 million in the second
half of last year).
-Pre-tax profit up 2.2 per cent to HK$24,163 million (HK$23,644 million in
the first half of 2004; up 21.5 per cent from HK$19,891 million in the
second half of last year).
-Attributable profit up 1.6 per cent to HK$17,564 million (HK$17,287
million in the first half of 2004; up 18.2 per cent from HK$14,860 million
in the second half of last year).
-Return on average shareholders' funds of 39.7 per cent (50.1 per cent and
37.0 per cent in the first and second half of 2004 respectively).
-Assets up 3.7 per cent to HK$2,582 billion (HK$2,489 billion at the end
of 2004).
-Total capital ratio of 12.2 per cent; tier 1 capital ratio of 11.4 per
cent (11.9 per cent and 11.4 per cent at 31 December 2004).
-Cost:income ratio of 38.4 per cent (36.7 per cent and 41.0 per cent for
the first and second half of 2004 respectively).
Comparative figures have been restated to reflect the adoption of a number of
new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting
Standards, details of which are set out in the appendix.
Comment by Vincent Cheng, Chairman
In the first half of 2005, The Hongkong and Shanghai Banking Corporation
continued to make progress developing its customer group businesses. Operating
profit excluding loan impairment provisions was 7.7 per cent higher than in the
comparable period in 2004 at HK$23,759 million. The results reflect a
significant improvement in net interest income in Hong Kong on wider deposit
margins against a backdrop of rising interest rates. The bank's performance was
affected by higher costs in Corporate, Investment Banking and Markets that
include the acquisition of Bank of Bermuda operations in Hong Kong. More
difficult trading conditions also affected treasury revenues. Pre-tax profit for
the group was up 2.2 per cent, reflecting higher net charges for impairment
provisions. Highlights include:
-In Personal Financial Services, net interest income increased by HK$2,937
million or 29.7 per cent over the first half of 2004.
-In Hong Kong, HSBC remained the number one card issuer with 3.6 million
cards in force.
-In the rest of Asia-Pacific, cards in issue increased by 41.6 per cent to
4.2 million.
-Overall insurance income from personal customers rose by 11.7 per cent to
HK$1,905 million.
-In Commercial Banking, net interest income increased by HK$1,846 million
or 57.4 per cent, reflecting 10.0 per cent growth in advances over the same
period last year.
-Net fee income in Commercial Banking was 7.9 per cent higher at HK$2,207
million, supported by strong trade activity in Hong Kong and mainland China.
-In Corporate, Investment Banking and Markets, trading income increased by
20.8 per cent over the first half of 2004.
-HSBC acted as the joint global co-ordinator of the HK$16.8 billion
initial public offering by Bank of Communications and of the HK$9.5 billion
IPO of China COSCO Holdings, two of the three largest IPOs in Asia, ex-Japan,
this year.
In the first half of the year, we continued to invest in the future of our
business. Personal Financial Services increased headcount to support business
expansion across the region, and a number of marketing campaigns targeted at the
personal lending and wealth management sector added to costs. Investment in
technology has also risen as the group has expanded and upgraded the
infrastructure necessary to support the increased product range offered to
customers. In Commercial Banking, the number of relationship managers and
support staff increased. There was significant growth in operating expenses
within Corporate, Investment Banking and Markets, reflecting the inclusion of
the Asia-Pacific operations of Bank of Bermuda and increased headcount to
support business expansion.
Building on the investments in Bank of Communications, Ping An and Bank of
Shanghai, we have made significant progress in the development of our China
strategy. We acquired 1.34 billion shares in Bank of Communications on its
listing in Hong Kong in order to maintain our 19.9 per cent stake in the bank.
In May, we undertook a soft launch, with Bank of Communications, of a co-branded
credit card, the Pacific Credit Card, which is denominated in renminbi and the
US dollar. In respect of Ping An, we have reached an agreement to acquire a
further 9.91 per cent which, added to the existing stake, will lift HSBC's
holding in the company to 19.9 per cent. This agreement is subject to
shareholder and regulatory approval. When these investments have been completed,
HSBC will have invested around US$5 billion in China.
Although we anticipate moderate growth in mainland China and Hong Kong in the
second half of the year, the success of the United States in correcting the
recent slow-down in its economy provides encouragement for the countries and
territories of the Asia-Pacific region. However, the outlook remains challenging
with strong competition and continuing subdued loan demand in Hong Kong. In
these circumstances, the investments made by the customer groups ensure that The
Hongkong and Shanghai Banking Corporation is well positioned to pursue its
strategy of organic growth and to take advantage of business opportunities in
the region.
Results by Customer Group
Corporate,
Investment
Personal Banking
Figures in Financial Commercial and Private
HK$m Services Banking Markets Banking Other Total
Half-year ended
30Jun05
Net interest
income 12,819 5,062 5,034 29 (1,534) 21,410
Net fee income 4,152 2,207 2,452 29 34 8,874
Trading income 449 276 3,701 3 (233) 4,196
Net income from
financial
instruments
designated at
fair value 163 (342) 152 - (29) (56)
Gains less losses
from financial
investments 3 23 (35) - 356 347
Dividend income 3 2 106 - 138 249
Net earned
insurance
premiums 6,546 356 73 - - 6,975
Other operating
income^ 1,028 150 472 7 1,063 2,720
Total operating
income 25,163 7,734 11,955 68 (205) 44,715
Net insurance
claims incurred
and movement in
policyholder
liabilities (5,932) (168) (39) - - (6,139)
Net operating
income before
loan impairment
charges and other
credit risk
provisions 19,231 7,566 11,916 68 (205) 38,576
Loan impairment
charges and
other credit
risk provisions (60) (510) 54 - - (516)
Net operating
income 19,171 7,056 11,970 68 (205) 38,060
Operating
expenses^ (7,912) (2,560) (4,701) (52) 408 (14,817)
Operating
profit 11,259 4,496 7,269 16 203 23,243
Share of profit
in associates 93 566 231 - 30 920
Profit before
tax 11,352 5,062 7,500 16 233 24,163
Share of pre-tax
profit 47.0% 21.0% 31.0% - 1.0% 100.0%
Corporate,
Investment
Personal Banking
Figures in Financial Commercial and Private Total
HK$m Services Banking Markets Banking Other restated
Half-year ended
30Jun04
Net interest
income 9,882 3,216 5,993 15 (1,041) 18,065
Net fee income 4,082 2,045 2,225 22 13 8,387
Trading income 276 231 3,063 3 256 3,829
Net investment
income on
assets backing
policyholder
liabilities 52 175 - - (133) 94
Gains less losses
from financial
investments (9) 3 47 - 541 582
Dividend income 15 4 6 - 86 111
Net earned insurance
premiums 6,398 2,268 69 - - 8,735
Other operating
income^ 1,145 207 330 1 722 2,405
Total operating
income 21,841 8,149 11,733 41 444 42,208
Net insurance
claims incurred
and movement in
policyholder
liabilities (5,197) (2,114) (45) - - (7,356)
Net operating
income before
loan impairment
charges and other
credit risk
provisions 16,644 6,035 11,688 41 444 34,852
Loan impairment
charges and
other credit
risk provisions (637) 1,570 635 - (6) 1,562
Net operating
income 16,007 7,605 12,323 41 438 36,414
Operating
expenses^ (7,490) (2,316) (3,375) (33) 420 (12,794)
Operating profit 8,517 5,289 8,948 8 858 23,620
Share of profit
in associates 15 - - - 9 24
Profit before tax 8,532 5,289 8,948 8 867 23,644
Share of pre-tax
profit 36.1% 22.4% 37.8% - 3.7% 100.0%
Corporate,
Investment
Personal Banking
Figures in Financial Commercial and Private Total
HK$m Services Banking Markets Banking Other restated
Half-year ended 31Dec04
Net interest
income 10,903 3,849 5,265 20 (1,132) 18,905
Net fee income 3,442 2,066 2,787 20 (421) 7,894
Trading income 341 289 2,732 2 (190) 3,174
Net investment
income on assets
backing
policyholder
liabilities 1,036 1,428 - - (138) 2,326
Gains less losses
from financial
investments (4) (2) 17 - 904 915
Dividend income 3 2 11 - 36 52
Net earned insurance
premiums 6,788 2,620 79 - - 9,487
Other operating
income^ 1,294 242 553 - (380) 1,709
Total operating
income 23,803 10,494 11,444 42 (1,321) 44,462
Net insurance
claims incurred
and movement in
policyholder
liabilities (6,244) (3,736) (48) - - (10,028)
Net operating
income before
loan impairment
charges and other
credit risk
provisions 17,559 6,758 11,396 42 (1,321) 34,434
Loan impairment
charges and other
credit risk
provisions (653) (932) 884 - 1 (700)
Net operating
income 16,906 5,826 12,280 42 (1,320) 33,734
Operating
expenses^ (8,169) (2,468) (3,913) (41) 473 (14,118)
Operating profit 8,737 3,358 8,367 1 (847) 19,616
Share of profit in
associates 58 170 20 - 27 275
Profit before tax 8,795 3,528 8,387 1 (820) 19,891
Share of pre-tax
profit 44.2% 17.7% 42.2% - (4.1)% 100.0%
^ Other operating income and operating expenses in 'other' include an
adjustment of HK$2,283 million to eliminate intra-group items (first half of
2004: HK$2,412 million; second half of 2004: HK$2,541 million).
Personal Financial Services reported profit before tax of HK$11,352 million,
which was HK$2,820 million, or 33.1 per cent, higher than the first half of
2004. This reflected strong growth in Hong Kong of HK$2,475 million, or 30.7 per
cent, in profit before tax, driven primarily by the widening of deposit margins
subsequent to the rises in Hong Kong dollar interest rates this year. In the
rest of Asia-Pacific, profit before tax increased by 70.8 per cent to HK$830
million, reflecting continued expansion across the region, particularly in
credit cards and mortgage loans.
Net interest income increased by HK$2,937 million, or 29.7 per cent, compared
with the first half of 2004. In Hong Kong, net interest income improved by
HK$2,257 million, or 30.1 per cent. During the first half of 2005, interest
rates in Hong Kong rose significantly reflecting rising US dollar interest
rates. In addition, adjustments to the HK$:US$ Linked Exchange Rate Mechanism
removed the likelihood of an upward realignment of the Hong Kong dollar,
prompting a reversal of much of the inward flows from investors in 2004 that had
depressed local market rates. This led to a widening of deposit spreads to more
normal levels compared with the exceptionally low levels experienced in 2004.
Competition in the local mortgage market remained intense and margins were
impacted by the rising cost of funds. In the rest of Asia-Pacific, net interest
income rose by HK$680 million, or 28.6 per cent, reflecting strong asset growth
across the region. Mortgage lending increased in Australia, Taiwan, Korea,
Singapore and India, benefiting from increased use of a direct sales force and
successful promotional campaigns. Interest earned on credit cards was higher,
notably in Indonesia, the Philippines, India and Taiwan, reflecting strong
growth in receivables. Net interest income also includes income of HK$400
million from held-to-maturity investments in the insurance business; such income
was included in 'Other operating income' in prior periods.
Net fee income of HK$4,152 million was 1.7 per cent higher than the first half
of 2004, largely attributable to strong growth in the sales of wealth management
and insurance products throughout the rest of Asia-Pacific and higher credit
card fee income. Fee income from unit trust sales fell by 30.0 per cent, driven
by a change in market sentiment in Hong Kong, as in the higher interest rate
environment and with a flattening yield curve, investors reduced their demand
for capital guaranteed funds. Sales of structured products in Hong Kong,
however, remained strong as income grew by 258.9 per cent to HK$361 million,
reflecting increased marketing effort and an enhanced product range.
Fee income from credit cards was HK$190 million, or 21.1 per cent, higher than
the first half of 2004, as the group maintained its position as the largest card
issuer in Hong Kong. In the rest of Asia-Pacific, cards in issue grew by 41.6
per cent. Innovative and targeted promotional campaigns, together with an
enhanced rewards programme, led to increased card spending which grew by HK$13.4
billion across the region.
The group has continued to grow and develop its insurance business throughout
the region. Overall, insurance income from personal customers rose by 11.7 per
cent to HK$1,905 million. In Hong Kong, revenues from general insurance and the
mandatory provident fund business were higher, although demand fell for life
assurance and investment-linked products.
Operating expenses increased by HK$422 million, or 5.6 per cent, over the first
half of 2004. Headcount rose to support business expansion across the region and
included the recruitment of additional financial planning managers in Hong Kong
and sales staff in the rest of Asia-Pacific. Performance-related pay rose in
line with the increase in sales revenues. The various growth initiatives also
incurred higher marketing costs, particularly for mortgages, credit cards,
insurance and investment products, and increased investment in technology to
support higher business volumes and new product lines. The increase was partly
mitigated by the impact of a change in the allocation of certain centrally borne
expenses to customer groups.
The charge for impairment provisions fell markedly, by HK$577 million to HK$60
million, with lower provisions in the credit card, mortgage and other personal
lending portfolios, reflecting the improved credit conditions across much of the
region. In particular, credit conditions improved in Hong Kong as the economy
continued to recover with falling unemployment, lower bankruptcies and higher
residential property prices, while in the rest of Asia-Pacific, provisions
remained relatively flat against a backdrop of significant asset growth.
Income from associates largely represents the share of profits from Bank of
Communications attributable to Personal Financial Services for the six months to
31 March 2005.
Commercial Banking reported profit before tax of HK$5,062 million, a decrease of
4.3 per cent over the first half of 2004, attributable primarily to a net charge
for impairment provisions compared with a net release last year. Operating
profit excluding provisions grew in Hong Kong by 37.8 per cent to HK$3,985
million, and in the rest of Asia-Pacific to HK$1,019 million from HK$830
million.
Net interest income increased by HK$1,846 million, or 57.4 per cent, compared
with the first half of 2004, reflecting a 10.0 per cent growth in advances since
the end of 2004, and improvements in deposit spreads following rises in Hong
Kong dollar interest rates, coupled with increased active management of the
Commercial Banking deposit base. The benefit was, however, partly offset by
competitive pressure on lending margins. In Hong Kong, advances to the
manufacturing, trading and retail sectors grew, with higher new lending and
increased utilisation of existing facilities. The introduction of Core Business
Banking Centres in 2004, together with an increase in the number of dedicated
relationship managers to serve key accounts, and the implementation of a
pre-approved lending programme for small and medium-sized enterprises,
contributed to the growth in lending and deposits. The group continued to
benefit from the growth in international trade and the expansion of the Chinese
economy. Business links between Hong Kong and mainland China continue to be
developed. Throughout the region, the sales force and number of relationship
managers have increased to take advantage of cross-selling opportunities for
insurance and investment products, as well as expanding lending and
deposit-taking activities. In the rest of Asia-Pacific, net interest income
increased, notably in Singapore, mainland China and Taiwan, as a result of asset
and deposit growth and improved deposit spreads. Net interest income also
includes income of HK$350 million from held-to-maturity investments in the
insurance business; this was included in 'Other operating income' in prior
periods.
Net fee income at HK$2,207 million was 7.9 per cent higher than the same period
in 2004. Trade finance activity in Hong Kong and mainland China remained strong,
and fee income rose despite increasing market competition. The marketing of
foreign exchange products to Hong Kong customers engaged in international trade
was also successful in contributing to revenues. Income from the sale of wealth
management products fell, reflecting a fall in demand for unit trusts in Hong
Kong. Net fee income in 2005 additionally includes fees relating to retirement
and other investment schemes; these were included in 'Net earned insurance
premiums' and 'Net insurance claims incurred and movement in policyholder
liabilities' in prior periods.
Operating expenses rose by HK$244 million, or 10.5 per cent, as the number of
relationship managers and support staff increased, although savings were made
from initiatives to handle business via low cost channels, including the further
enhancement of Internet banking. A change in the allocation of certain centrally
borne expenses to customer groups pushed cost growth into double digits.
There was a swing of HK$2,080 million in impairment provisions to a net charge
of HK$510 million from a net credit of HK$1,570 million in the first half of
2004, with higher new specific provisions, and lower releases and recoveries, in
the bank in Hong Kong and Hang Seng Bank.
Income from associates represents the share of profits from Bank of
Communications and Industrial Bank attributable to Commercial Banking for the
six months to 31 March 2005.
Corporate, Investment Banking and Markets reported profit before tax of HK$7,500
million, 16.2 per cent lower than the first half of 2004, as a result of a
decline in net interest income in Global Markets which more than offset a strong
trading performance.
Net interest income fell by HK$959 million, or 16.0 per cent, compared with the
first half of last year. In Corporate and Institutional Banking, deposit spreads
improved following rises in Hong Kong dollar interest rates, which together with
a modest growth in loans, contributed to the increase in net interest income of
33.6 per cent. In addition, Korea, Taiwan and India benefited from the growth in
deposits from securities custody and clearing customers. In Global Markets, the
adoption of new accounting standards affected trading income through the
reclassification of interest and dividend income on trading assets and
liabilties that was formerly recorded as 'Net interest income' and 'Dividend
income', to 'Trading income'. This added HK$568 million to net interest income,
but was, however, more than offset by the maturity of higher yielding assets,
rising short-term rates and flatter yield curves, resulting in less profitable
reinvestment opportunities. In Singapore and Japan, net interest income
declined, due similarly to the maturity of high yielding assets and less
profitable reinvestment opportunities.
Trading income increased by HK$638 million, or 20.8 per cent, over the first
half of 2004, despite the impact of the inclusion of the net interest expense of
HK$568 million on trading assets and liabilities this year. Debt securities
trading benefited from correct positioning, with tightening in short-term
corporate spreads in the low Hong Kong dollar interest rate environment in the
first quarter of 2005. This was, however, partly offset by losses on certain
high yield bonds, following the downgrading of certain companies in the
automobile sector during the second quarter.
In Hong Kong, investments made in enhancing the structured products platform
resulted in increased revenues in foreign exchange options, equity derivatives,
structured credit derivatives and interest rate derivatives, partly offset by
lower revenues generated from capital-guaranteed investment solutions as
investors switched to deposit products in the rising interest rate environment.
In the rest of Asia-Pacific, excellent progress was made in the roll-out of
structured products, particularly in Korea, Singapore and Thailand, with
revenues doubling over the same period last year. Foreign exchange revenues also
improved, benefiting from currency volatility and the group's growing customer
franchise in the region.
Net fee income rose by 10.2 per cent to HK$2,452 million, principally due to the
inclusion of the first six months' results for Bank of Bermuda, which
contributed HK$361 million to revenues. Corporate and Institutional Banking saw
an increase in fees and commissions from the securities custody and clearing
business, which benefited from increased stock market activity across the
region, notably in Korea and India. Investment Banking revenues declined,
reflecting a quiet market in the early part of 2005, although recovery commenced
in the second quarter, particularly in cross-border transactions and advisory
business, with HSBC acting as joint global co-ordinator of the HK$16.8 billion
initial public offering by Bank of Communications and of the HK$9.5 billion IPO
of China COSCO Holdings, two of the three largest IPOs in Asia, ex-Japan, this
year.
Operating expenses increased by 39.3 per cent compared with the first half of
2004, reflecting higher staff costs and the inclusion of costs relating to the
Asia-Pacific operations of Bank of Bermuda. Headcount increased to support
business expansion, including the build up of the investment banking division
and the recruitment of senior relationship managers to extend coverage along
industry sector lines. The cost base was further impacted by a change in the
allocation of certain centrally allocated overheads to customer groups and a
rise in cost recharges in respect of global management functions.
There was a net release of impairment provisions of HK$54 million, HK$581
million lower than in the first half of 2004. New specific individual provisions
were lower, reflecting the benign credit environment in Hong Kong, although
releases and recoveries fell and there was an increase in collective provisions
compared with a release last year.
Income from associates largely represents the share of profits from Bank of
Communications and Industrial Bank attributable to Corporate, Investment Banking
and Markets for the six months to 31 March 2005.
Other includes income and expenses relating to staff housing loans, certain
property activities and investment and other activities that are not allocated
to other customer groups.
Net interest income was lower, reflecting an increase in preference shares
issued coupled with higher funding costs. The surplus on property revaluation
and profits from property sales were higher, offset by lower gains on the
disposal and revaluation of long-term investments.
Consolidated Income Statement
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Interest income 35,859 27,451 30,496
Interest expense (14,449) (9,386) (11,591)
Net interest income 21,410 18,065 18,905
Fee income 10,579 9,883 9,593
Fee expense (1,705) (1,496) (1,699)
Net fee income 8,874 8,387 7,894
Trading income 4,196 3,829 3,174
Net loss from financial
instruments designated
at fair value (56) - -
Net investment income on assets
backing policyholder liabilities - 94 2,326
Gains less losses from financial
investments 347 582 915
Dividend income 249 111 52
Net earned insurance premiums 6,975 8,735 9,487
Other operating income 2,720 2,405 1,709
Total operating income 44,715 42,208 44,462
Net insurance claims incurred
and movement in policyholder
liabilities (6,139) (7,356) (10,028)
Net operating income before loan
impairment charges and other
credit risk provisions 38,576 34,852 34,434
Loan impairment charges and
other credit risk provisions (516) 1,562 (700)
Net operating income 38,060 36,414 33,734
Employee compensation and benefits (8,425) (7,253) (7,512)
General and administrative
expenses (5,402) (4,622) (5,669)
Depreciation of property, plant
and equipment (927) (870) (885)
Amortisation of intangible assets (63) (49) (52)
Total operating expenses (14,817) (12,794) (14,118)
Operating profit 23,243 23,620 19,616
Share of profit in associates 920 24 275
Profit before tax 24,163 23,644 19,891
Tax charge (4,248) (4,027) (2,961)
Profit after tax 19,915 19,617 16,930
Profit attributable
to minority interests (2,351) (2,330) (2,070)
Profit attributable to
shareholders 17,564 17,287 14,860
Extract from the Consolidated Balance Sheet
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Assets
Cash and short-term funds 493,159 417,031 510,644
Placings with banks maturing
after one month 94,560 114,738 74,711
Certificates of deposit 55,427 51,980 51,743
Hong Kong SAR Government
certificates of indebtedness 94,804 85,674 92,334
Trading assets 159,447 113,415 109,899
Financial assets designated
at fair value 35,647 - -
Derivatives 77,137 60,759 94,398
Advances to customers 973,637 849,944 919,192
Financial investments 410,442 418,533 450,165
Amounts due from fellow
subsidiary companies 67,243 43,488 82,592
Investments in associates 20,508 2,387 16,343
Goodwill and intangible assets 6,222 4,128 5,329
Property, plant and equipment 32,978 29,182 30,425
Deferred tax assets 1,238 1,628 1,711
Retirement benefits 1,229 1,561 1,307
Other assets 58,620 53,424 47,851
2,582,298 2,247,872 2,488,644
Liabilities
Hong Kong SAR currency
notes in circulation 94,804 85,674 92,334
Deposits by banks 115,254 75,640 74,980
Customer accounts 1,671,433 1,570,851 1,728,111
Trading liabilities 218,652 35,810 37,281
Financial liabilities
designated at fair value 2,187 - -
Derivatives 75,929 57,603 92,362
Debt securities in issue 59,600 131,688 155,162
Retirement benefit liabilities 359 383 327
Amounts due to fellow
subsidiary companies 23,367 31,997 17,568
Amounts due to ultimate holding
company 748 660 553
Other liabilities 65,380 56,770 60,610
Liabilities to policyholders
under long-term assurance
business - 46,829 54,938
Liabilities to customers under
investment contracts 29,380 - -
Liabilities to customers under
insurance contracts issued 32,525 - -
Current taxation 4,085 3,828 2,333
Deferred taxation 3,540 3,530 3,715
Subordinated liabilities 12,569 12,777 11,142
Preference shares 62,978 47,212 55,602
2,472,790 2,161,252 2,387,018
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Capital resources
Share capital 22,494 16,254 22,494
Other reserves 5,963 3,988 6,525
Retained profits 58,759 46,215 51,497
Proposed dividend 6,000 4,750 4,800
Shareholders' funds 93,216 71,207 85,316
Minority interests 16,292 15,413 16,310
109,508 86,620 101,626
2,582,298 2,247,872 2,488,644
Consolidated Statement of Changes in Equity
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Called up share capital
Balance at the beginning of
the period
- Balance previously
reported 74,213 51,603 59,570
- Effect of transition
to HKFRS (51,719) (35,349) (43,316)
- As restated 22,494 16,254 16,254
New ordinary shares issued - - 6,240
Balance at the end of
the period 22,494 16,254 22,494
Property revaluation reserves
Balance at the beginning of
the period
- Balance previously reported 11,907 7,135 10,856
- Effect of transition to
HKFRS (8,346) (4,817) (7,649)
- As restated 3,561 2,318 3,207
Unrealised surplus on
revaluation 2,007 1,301 537
Transfer of depreciation from
retained profits (65) (62) (96)
Realisation on disposal of
property (438) (370) (47)
Other movements - 20 (40)
Balance at the end of the
period 5,065 3,207 3,561
Other reserves
Balance at the beginning of
the period
- Balance previously reported 5,492 5,060 4,966
- Effect of transition to
HKFRS (excluding the effect
of HKAS 39 and HKFRS 4) (2,528) (3,697) (4,185)
- As restated 2,964 1,363 781
- Effect of adoption of HKAS 39
and HKFRS 4 1,333 - -
- As restated 4,297 1,363 781
Long-term equity investments:
Valuation gains taken to equity - 160 1,406
Transfer to profit or loss on
disposal - (221) (811)
Available-for-sale investments:
Valuation losses taken to
equity (746) - -
Transfer to profit or loss
on disposal (301) - -
Transfer to profit or loss on
change in fair value of
hedged items 306 - -
Share of associates' available-
for-sale reserve (111) - -
Cash flow hedges:
Losses taken to equity (2,132) - -
Exchange differences arising
on monetary items that form
part of a net investment in
a foreign operation (540) (614) 1,457
Employees' options granted cost
free by ultimate holding
company 125 93 131
Balance at the end of the
period 898 781 2,964
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Retained profits
Balance at the beginning of the
period
- Balance previously reported 51,083 37,764 44,204
- Effect of transition to HKFRS
(excluding the effect of HKAS 39
and HKFRS 4) 414 1,371 2,011
- As restated 51,497 39,135 46,215
- Effect of adoption of HKAS 39 and
HKFRS 4 (39) - -
- As restated 51,458 39,135 46,215
Profit for the period attributable to
shareholders 17,564 17,287 14,860
Dividends (10,600) (10,750) (9,550)
Transfer of depreciation to property
revaluation reserves 65 62 96
Realisation on disposal of property 438 393 38
Actuarial losses on defined benefit
plans (168) (110) (250)
Other movements 2 198 88
Balance at the end of the period 58,759 46,215 51,497
Dividend declared but not yet approved 6,000 4,750 4,800
Shareholders' funds at the beginning of
the period 81,810 59,070 66,457
Proposed dividend 4,800 8,450 4,750
86,610 67,520 71,207
Net change in shareholders' funds 5,406 7,387 14,059
Increase/(decrease) in proposed dividend 1,200 (3,700) 50
Shareholders' funds at the end of the
period 93,216 71,207 85,316
Movements in reserves and retained profits are stated net of deferred tax where
applicable.
Consolidated Cash Flow Statement
Half-year ended Half-year ended
30Jun05 30Jun04
Figures in HK$m restated
Operating activities
Cash generated from operations 2,921 22,804
Interest received on long-term
investments 6,313 6,091
Dividends received on long-term
investments 228 104
Dividends received from associates 22 25
Interest paid on loan capital (213) (256)
Dividends paid to minority interests (3,160) (2,178)
Ordinary dividends paid (9,400) (14,450)
Taxation paid (1,971) (2,006)
Net cash (outflow)/inflow from
operating activities (5,260) 10,134
Investing activities
Purchase of long-term investments (140,786) (147,807)
Proceeds from sale or redemption
of long-term investments 153,904 132,586
Purchase of tangible fixed assets (634) (425)
Proceeds from sale of tangible
fixed assets 837 692
Net cash outflow in respect of
acquisition of and increased
shareholding in subsidiary companies (1,247) (972)
Net cash inflow in respect of sales of
subsidiary companies 323 -
Purchase of interest in associates (1,166) (2,010)
Net cash inflow/(outflow) from
investing activities 11,231 (17,936)
Net cash inflow/(outflow) before
financing 5,971 (7,802)
Financing
Issue of cumulative irredeemable
preference share capital 7,376 7,784
Issue of subordinated debt 2,392 -
Net cash inflow from financing 9,768 7,784
Increase/(decrease) in cash and
cash equivalents 15,739 (18)
Additional Information
1. Net interest income
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Net interest income 21,410 18,065 18,905
Average interest-earning assets 2,008,241 1,888,690 1,961,003
Net interest spread 1.95% 1.82% 1.81%
Net interest margin 2.15% 1.92% 1.92%
Net interest income of HK$21,410 million was HK$3,345 million, or 18.5 per cent,
higher than the first half of 2004.
Net interest income from the Personal Financial Services business rose by
HK$2,937 million, or 29.7 per cent, primarily due to improved deposit spreads
resulting from rises in Hong Kong dollar interest rates this year. This was
coupled with strong growth in net interest income in the rest of Asia-Pacific,
driven by increased mortgage lending in Australia, Taiwan, Korea, Singapore and
India, and significant growth in credit card receivables and improved margins in
Indonesia, the Philippines, India and Taiwan. Net interest income from the
Commercial Banking business was HK$1,846 million, or 57.4 per cent, higher than
last year, mainly due to growth in lending and deposits and improved deposit
spreads, notably in Hong Kong, Singapore, mainland China and Taiwan. Net
interest income from Corporate, Investment Banking and Markets fell by HK$959
million, or 16 per cent, largely due to the maturity of high yielding treasury
assets in Hong Kong, and flat yield curves that gave limited opportunity for
position-taking. This was partly offset by the effect of the reclassification
this year of net interest expense of HK$568 million on trading assets and
liabilities to 'Trading income'. In addition, there was loan growth of HK$7
billion in corporate lending, and an increase in customer deposits of HK$8
billion. Included in net interest income this year is income earned on
held-to-maturity investments in the insurance businesses of HK$762 million,
which last year was classified as 'Net investment income on assets backing
policyholder liabilities'.
Average interest-earning assets rose by HK$120 billion, or 6.3 per cent, to
HK$2,008 billion. Average advances to customers grew by HK$112 billion, or 13.4
per cent, with strong growth in mortgage lending in Australia, Singapore,
Taiwan, Korea and India, and increases in commercial lending and trade finance
in Hong Kong and mainland China. Credit card receivables rose in most countries,
notably Hong Kong, Taiwan, Australia and Indonesia. Average loans to banks were
HK$91 billion higher, principally in the bank in Hong Kong, offset by the
reclassification of certain interest-earning assets to 'Trading Assets'.
The group's net interest margin of 2.15 per cent for the first half of 2005 was
23 basis points higher than the comparable period in 2004. Spread widened by 13
basis points, largely due to the exclusion in 2005 of the net interest expense
on trading assets and liabilities. The inclusion of net interest income on
held-to-maturity investments in the insurance businesses increased the margin by
three basis points, while the rise in the number of preference shares issued and
higher funding costs thereon resulted in a fall of five basis points.
For the banking operations in Hong Kong (excluding Hang Seng Bank), net interest
margin increased by 46 basis points to 2.22 per cent for the first half of 2005.
Spread improved by 37 basis points to 2.04 per cent. This increase was
principally due to the reclassification of net interest expense on net trading
liabilities to trading profits. Wholesale rates increased significantly since
the first half of 2004, resulting in higher spreads on Hong Kong dollar and
foreign currency current, savings and deposit accounts. However, spreads on
mortgages and corporate lending were adversely impacted by a higher cost of
funds and competitive pressures on margins. The average yield on the residential
mortgage portfolio, excluding GHOS and staff loans, was 233 basis points below
BLR in the first half of 2005 compared with 187 basis points below BLR in the
same period last year. The contribution from net free funds rose by nine basis
points compared with the first half of 2004.
In Hang Seng Bank, net interest margin improved by 11 basis points to 2.13 per
cent with an increase in spread of four basis points due to the rise in deposit
spreads and inclusion of interest income from the held-to-maturity investment
portfolios held by life assurance funds. Spreads on treasury products narrowed
and mortgage portfolio yields continued to be affected by intense market
competition. The average yield on the residential mortgage portfolio, excluding
GHOS and staff loans, fell to 223 basis points below BLR for the first half of
2005, compared with 192 basis points for the same period last year. The
contribution from net free funds rose by seven basis points, benefiting from the
rise in market interest rates.
In the rest of Asia-Pacific, net interest margin at 2.00 per cent for 2005 was
five basis points higher than for the comparable period in 2004. Spread improved
by eight basis points to 1.86 per cent, with rises in several countries
including mainland China, Australia, Thailand and Taiwan, which benefited from
higher deposit spreads, and increased credit card margins in Indonesia. These
were partly offset by lower margins on non-trading treasury assets in Singapore
and India. The contribution from net free funds was three basis points lower.
2. Net fee income
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Fees and commissions
- Account services 642 597 609
- Credit facilities 584 736 711
- Import/export 1,345 1,264 1,412
- Remittances 591 520 583
- Securities/stockbroking 1,595 1,494 1,348
- Cards 2,027 1,615 1,824
- Insurance 161 104 113
- Unit trusts 959 1,588 900
- Funds under management 1,017 586 630
- Other 1,658 1,379 1,463
Fees and commissions receivable 10,579 9,883 9,593
Fees and commissions payable (1,705) (1,496) (1,699)
8,874 8,387 7,894
Net fee income was HK$487 million, or 5.8 per cent, higher than the first half
of 2004. Credit card fees rose by 25.5 per cent, reflecting the increase in the
number of cards in issue in the rest of Asia-Pacific, and higher cardholder
spending. Revenues from trade finance also grew, notably in Hang Seng Bank and
in the bank in mainland China and India, attributable to strong regional trade
flows. Customer appetite for wealth management products slowed this year in Hong
Kong, although the fall in demand for unit trusts was partially offset by
increased sales of structured products. Bank of Bermuda contributed HK$361
million to net fee income, following its integration into the group during the
second half of last year.
3. Trading income
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Dealing profits
- Foreign exchange 2,578 2,681 1,999
- Interest rate derivatives 1,476 1,254 1,126
- Debt securities 318 (136) (124)
- Equities and other trading 338 30 173
4,710 3,829 3,174
Net interest expense on trading
assets and liabilities (568) - -
Dividend income from trading
securities 54 - -
4,196 3,829 3,174
Trading income rose by 9.6 per cent to HK$4,196 million. Debt securities trading
benefited from correct positioning as short-term spreads on Hong Kong dollar
bonds contracted in the low interest rate environment in the earlier part of
2005, but this was partly offset by losses on certain high yield bonds following
the downgrading of companies in the automobile sector during the second quarter.
Interest rate derivatives trading performed strongly, reflecting an enhanced
capability in structured products in Hong Kong, Korea and Singapore, which more
than offset the fall in demand for wealth management products in Hong Kong as
customers switched to deposit products in the rising interest rate environment.
Credit and equity derivatives revenues also grew, and revaluation gains were
made on private equity investments.
Net interest expense on trading assets and liabilities largely represents
interest payable on the group's own debt and structured deposits managed in the
trading book, partly offset by interest income on debt securities. All such
interest was classified under 'Net interest income' in prior years.
4. Gains less losses from financial investments
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Profit on disposal of
available-for-sale
securities 348 - -
Profit on disposal of
long-term investments - 380 931
Provision for
impairment of
available-for-sale
securities (1) - -
Reversal of/(provision
for) impairment
of long-term
investments - 202 (16)
347 582 915
The profit on disposal of available-for-sale securities primarily comprises
gains on the sale of equity securities, partly offset by losses on the disposal
of US dollar bonds.
In the first half of 2004, there was a partial write-back of a provision against
an equity investment.
5. Dividend income
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Listed investments 52 68 32
Unlisted investments 191 37 14
Other participating
interests 6 6 6
249 111 52
6. Net earned insurance premiums
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Gross insurance premium
income 7,239 9,003 9,744
Less: reinsurance premiums (264) (268) (257)
6,975 8,735 9,487
Premium income decreased compared with the first half of last year largely due
to a change in accounting treatment. In 2004, gross premium receipts on certain
investment plans and the corresponding increase in the bank's liability to
policyholders are disclosed, respectively, under 'Net earned insurance premiums'
and 'Net insurance claims incurred and movement in policyholder liabilities'. In
2005, a net number is included under 'Net fee income'.
7. Other operating income
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Rental income 230 232 230
Movement in present value of
in force insurance business 490 389 444
Profit on disposal of tangible
fixed assets 19 141 51
Profit on disposal of subsidiary
and associated companies 58 309 33
Surplus arising on
property revaluation 1,038 829 209
Other 885 505 742
2,720 2,405 1,709
Profit on disposal of subsidiary and associated companies for the first half of
2005 comprises a gain made on the sale of HSBC Asset Management (Australia)
Limited. Profit for the first half of 2004 included a gain on the exchange of
the group's interest in World Finance International Limited, an associated
company, for an interest in Bergesen Worldwide.
The surplus arising on property revaluation comprises gains on the revaluation
of investment properties and the reversal of previous revaluation deficits that
had arisen when the value of certain premises fell below depreciated historical
cost. As permitted by Hong Kong Accounting Standard 40, prior year revaluation
gains on investment properties have been credited to reserves and accordingly
the prior year profit and loss figures have not been restated.
'Other' includes profits on the sale of a residential property in Hong Kong held
on an operating lease.
8. Loan impairment charges and other credit risk provisions
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Net charge/(release) for
impairment provisions
Advances to customers
- Specific individual
provisions:
New provisions 1,222 1,627 2,389
Releases (1,249) (1,379) (1,071)
Recoveries (161) (336) (281)
(188) (88) 1,037
- Net charge/(release) for
collective impairment
provisions 706 (1,496) (227)
- Country risk
provision (8) - -
510 (1,584) 810
Placings with banks maturing
after one month
- Net release of specific
individual provisions - - (1)
510 (1,584) 809
Other credit risk
provisions 6 22 (109)
Total impairment
charge/(credit) 516 (1,562) 700
There was a net charge for loan impairment and other credit risk provisions of
HK$516 million compared with a net release of HK$1,562 million in the same
period last year. The charge for new specific individual provisions was lower as
credit card provisions were classified as specific individual in 2004, but as
collective in 2005. Excluding this effect, specific individual provisions rose,
largely against lending to commercial banking customers in Hong Kong. Provisions
against mortgages, credit card advances and other personal lending fell, in line
with the improving economy in Hong Kong with lower bankruptcies, falling
unemployment and a rise in property prices. Releases and recoveries were lower,
largely relating to corporates in Hong Kong, Singapore and Thailand, but this
was partly offset by higher releases against personal lending in Hong Kong and
against lending to commercial banking customers in mainland China. There was a
net charge for collective provisions, comprising the reclassification of credit
card provisions and a small charge against corporate lending, reflecting the
stable credit environment across the region.
9. Employee compensation and benefits
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Salaries and other costs 7,991 6,837 7,163
Retirement benefit costs 434 416 349
8,425 7,253 7,512
Staff numbers by region^
At 30Jun05 At 30Jun04 At 31Dec04
Hong Kong 24,240 23,132 23,947
Rest of Asia-Pacific 22,942 19,430 21,009
Americas/Europe 16 16 16
Total 47,198 42,578 44,972
^ Full-time equivalent
Staff costs increased by HK$1,172 million, or 16.2 per cent, compared with the
first half of 2004, attributable to the increase in headcount throughout the
region of 4,620. Staff numbers rose in all customer groups, notably in Personal
Financial Services in India, Taiwan, the Philippines, Thailand and Sri Lanka,
and Commercial Banking in Hong Kong and mainland China. The build-up of the
investment banking division continued in Hong Kong, and the integration of Bank
of Bermuda staff also added to headcount.
10. General and administrative expenses
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Premises and equipment
- Rental expenses 627 597 600
- Other premises and
equipment 855 818 943
1,482 1,415 1,543
Other administrative
expenses 3,716 3,077 4,125
Litigation and other
provisions 204 130 1
5,402 4,622 5,669
The increase in general and administrative expenses of HK$780 million, or 16.9
per cent, reflected additional costs incurred in the business expansion
throughout the region. Advertising and marketing expenditure increased in
Thailand, Taiwan, India, Indonesia and Singapore, in line with the growth in the
Personal Financial Services business in these countries. Other expenses rose,
particularly in support of the expansion of the Corporate and Institutional
Banking businesses in Singapore, India, Korea and Taiwan.
11. Share of profit in associates
Share of profit in associates in the first half of 2005 included the group's
share of post-tax profits from Bank of Communications and Industrial Bank for
the six months to 31 March 2005.
12. Taxation
The charge for taxation in the consolidated profit and loss account comprises:
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
Figures in HK$m restated restated
Hong Kong profits tax 2,663 2,292 1,690
Overseas taxation 1,300 1,423 1,074
Deferred taxation 285 312 197
4,248 4,027 2,961
The effective rate of tax for the first half of 2005 was 17.6 per cent, compared
with 17.0 per cent for the first half of 2004, principally as a result of the
interest expense on preference shares for which tax relief is not available.
13. Dividends
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
HK$ HK$m HK$ HK$m HK$ HK$m
per share per share per share
Dividends
on ordinary
share capital
- Paid 0.51 4,600 0.92 6,000 0.53 4,750
- Proposed 0.67 6,000 0.73 4,750 0.53 4,800
1.18 10,600 1.65 10,750 1.06 9,550
14. Trading assets
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Debt securities 117,682 95,971 89,355
Equity shares 5,860 17,444 20,544
Treasury bills 34,979 - -
Other 926 - -
159,447 113,415 109,899
Treasury bills held for trading have been reclassified from 'Cash and short-term
funds' to 'Trading assets'. Certain equity shares and debt securities are now
classified as 'Financial assets designated at fair value' (see Note 15).
15. Financial assets designated at fair value
At30Jun05 At30Jun04 At31Dec04
Figures in HK$m restated restated
Debt securities 15,884 - -
Equity shares 15,524 - -
Other 4,239 - -
35,647 - -
There was no such category in 2004.
16. Advances to customers
At30Jun05 At30Jun04 At31Dec04
Figures in HK$m restated restated
Gross advances to
customers 980,912 858,625 927,121
Specific individual
provisions (4,114) (6,058) (5,482)
Collective impairment
provisions (3,158) (2,623) (2,447)
Country risk provisions (3) - -
Total provisions (7,275) (8,681) (7,929)
973,637 849,944 919,192
Provisions as a percentage
of gross advances
to customers:
Specific individual
provisions 0.42% 0.70% 0.59%
Collective impairment
provisions 0.32% 0.31% 0.26%
Country risk provisions - - -
Total provisions 0.74% 1.01% 0.85%
17. Impairment provisions against advances to customers
Specific Collective Country
individual impairment risk
Figures in HK$m provisions provisions provisions Total
At 1Jan05 (restated) 4,719 3,179 11 7,909
Amounts written off (571) (901) - (1,472)
Recoveries of advances
written off in
previous years 161 191 - 352
Net charge/(release)
to income (Note 8) (188) 706 (8) 510
Exchange and other adjustments (7) (17) - (24)
At 30Jun05 4,114 3,158 3 7,275
18. Impaired advances to customers and provisions
The geographical information shown below, and in notes 19, 20, 21, and 23, has
been classified by location of the principal operations of the subsidiary
company or, in the case of the bank, by location of the branch responsible for
advancing the funds.
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Total
Half-year ended 30Jun05
Impairment provision charge/
(release) 455 67 (12) 510
At 30Jun05
Advances to customers which are considered to be impaired are as follows:
Gross impaired advances 5,436 3,438 - 8,874
Specific individual
provisions (2,230) (1,884) - (4,114)
3,206 1,554 - 4,760
Specific individual provisions
as a percentage of gross
impaired advances 41.0% 54.8% - 46.4%
Gross impaired advances as a
percentage of gross advances
to customers 0.9% 0.9% - 0.9%
Rest of Americas/ Total
Figures in HK$m Hong Kong Asia-Pacific Europe restated
Half-year ended 30Jun04
Impairment provision charge/
(release) ( 1,744) 160 - (1,584)
At 30Jun04
Advances to customers which are considered to be impaired are as follows:
Gross impaired advances 8,599 4,327 5 12,931
Specific individual
provisions (3,016) (3,037) (5) (6,058)
5,583 1,290 - 6,873
Specific individual provisions
as a percentage of gross
impaired advances 35.1% 70.2% 100.0% 46.8%
Gross impaired advances as
a percentage of gross advances
to customers 1.5% 1.5% 41.7% 1.5%
Impaired advances to customers are those advances where objective evidence
exists that full repayment of principal or interest is considered unlikely.
The specific provisions are made after taking into account the value of
collateral in respect of such advances.
Rest of Americas/ Total
Figures in HK$m Hong Kong Asia-Pacific Europe restated
Half-year ended 31Dec04
Impairment provision charge/
(release) 64 752 (6) 810
At 31Dec04
Advances to customers which are considered to be impaired are as follows:
Gross impaired advances 5,423 4,268 5 9,696
Specific individual
provisions (2,485) (2,992) (5) (5,482)
2,938 1,276 - 4,214
Specific individual provisions
as a percentage of gross
impaired advances 45.8% 70.1% 100.0% 56.5%
Gross impaired
advances as a
percentage of gross advances
to customers 0.9% 1.3% 35.7% 1.0%
19. Overdue advances to customers
Rest of Americas/
Figures in HK$m Hong Kong sia-Pacific Europe Total
At 30Jun05
Gross advances to customers which
have been overdue with respect
to either principal or interest
for periods of:
- six months or less but
over three months 814 886 - 1,700
- one year or less but
over six months 307 379 - 686
- over one year 1,546 1,272 - 2,818
2,667 2,537 - 5,204
Overdue advances to customers as
a percentage of gross advances
to customers:
- six months or less but
over three months 0.1% 0.2% - 0.2%
- one year or less but
over six months 0.1% 0.1% - 0.1%
- over one year 0.2% 0.4% - 0.2%
0.4% 0.7% - 0.5%
Rest of Americas/ Total
Figures in HK$m Hong Kong Asia-Pacific Europe restated
At 30Jun04
Gross advances to customers
which have been overdue
with respect to either
principal or interest for
periods of:
- six months or less but over
three months 1,447 645 - 2,092
- one year or less but over
six months 883 466 - 1,349
- over one year 1,685 1,818 - 3,503
4,015 2,929 - 6,944
Overdue advances to customers as
a percentage of gross advances
to customers:
- six months or less but over
three months 0.2% 0.2% - 0.2%
- one year or less but over
six months 0.2% 0.2% - 0.2%
- over one year 0.3% 0.6% - 0.4%
0.7% 1.0% - 0.8%
Rest of Americas/ Total
Figures in HK$m Hong Kong Asia-Pacific Europe restated
At 31Dec04
Gross advances to customers
which have been overdue with
respect to either principal
or interest for periods of:
- six months or less
but over three months 959 706 - 1,665
- one year or less but
over six months 607 296 - 903
- over one year 1,631 1,430 - 3,061
3,197 2,432 - 5,629
Overdue advances to customers
as a percentage of gross advances
to customers:
- six months or less
but over three months 0.1% 0.2% - 0.2%
- one year or less but
over six months 0.1% 0.1% - 0.1%
- over one year 0.3% 0.4% - 0.3%
0.5% 0.7% - 0.6%
20. Rescheduled advances to customers
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Total
At 30Jun05
Rescheduled advances to
customers 2,327 552 - 2,879
Rescheduled advances to
customers as a percentage
of gross advances to
customers 0.4% 0.1% - 0.3%
At 30Jun04 (restated)
Rescheduled advances to
customers 6,404 385 5 6,794
Rescheduled advances to
customers as a percentage
of gross advances to
customers 1.1% 0.1% 41.7% 0.8%
At 31Dec04 (restated)
Rescheduled advances to
customers 4,009 465 5 4,479
Rescheduled advances to
customers as a percentage
of gross advances to
customers 0.7% 0.1% 35.7% 0.5%
Rescheduled advances are those advances which have been restructured or
renegotiated because of a deterioration in the financial position of the
borrower, or because of the inability of the borrower to meet the original
repayment schedule.
Rescheduled advances to customers are stated net of any advances which have
subsequently become overdue for over three months and which are included in
overdue advances to customers (Note 19).
21. Analysis of advances to customers based on categories used by the HSBC
Group
The following analysis of advances to customers is based on categories used
by the HSBC Group, including The Hongkong and Shanghai Banking Corporation
Limited and its subsidiary companies, to manage associated risks.
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Total
At 30Jun05
Residential mortgages 184,740 108,582 3 293,325
Hong Kong SAR Government's
Home Ownership Scheme,
Private Sector Participation
Scheme and Tenants
Purchase Scheme mortgages 39,131 - - 39,131
Other personal 48,221 42,790 1 91,012
Total personal 272,092 151,372 4 423,468
Commercial, industrial and
international trade 126,034 112,301 - 238,335
Commercial real estate 80,473 29,560 - 110,033
Other property-related
lending 47,560 15,426 - 62,986
Government 3,349 9,309 - 12,658
Other commercial 57,113 36,308 - 93,421
Total corporate and
commercial 314,529 202,904 - 517,433
Non-bank financial
institutions 13,381 19,828 - 33,209
Settlement accounts 3,358 3,444 - 6,802
Total financial 16,739 23,272 - 40,011
Gross advances to
customers 603,360 377,548 4 980,912
Impairment provisions (3,871) (3,404) - (7,275)
Net advances to customers 599,489 374,144 4 973,637
Rest of Americas/ Total
Figures in HK$m Hong Kong Asia-Pacific Europe restated
At30Jun04
Residential mortgages 182,972 84,527 - 267,499
Hong Kong SAR Government's
Home Ownership Scheme,
Private Sector Participation
Scheme and Tenants
Purchase Scheme mortgage 45,057 - - 45,057
Other personal 42,843 31,855 7 74,705
Total personal 270,872 116,382 7 387,261
Commercial, industrial and
international trade 106,210 91,069 - 197,279
Commercial real estate 69,943 24,471 5 94,419
Other property-related
lending 42,202 10,059 - 52,261
Government 6,515 4,612 - 11,127
Other commercial 57,433 33,755 - 91,188
Total corporate and
commercial 282,303 163,966 5 446,274
Non-bank financial
institutions 12,070 7,005 - 19,075
Settlement accounts 3,959 2,056 - 6,015
Total financial 16,029 9,061 - 25,090
Gross advances to customers 569,204 289,409 12 858,625
Impairment provisions (4,664) (4,012) (5) (8,681)
Net advances to customers 564,540 285,397 7 849,944
Rest of Americas/ Total
Figures in HK$m Hong Kong Asia-Pacific Europe restated
At 31Dec04
Residential mortgages 184,631 98,516 2 283,149
Hong Kong SAR Government's
Home Ownership Scheme,
Private Sector Participation
Scheme and Tenants
Purchase Scheme mortgages 41,845 - - 41,845
Other personal 50,741 37,873 7 88,621
Total personal 277,217 136,389 9 413,615
Commercial, industrial and
international trade 109,655 105,133 - 214,788
Commercial real estate 80,726 27,956 5 108,687
Other property-related
lending 46,319 14,070 - 60,389
Government 4,781 5,150 - 9,931
Other commercial 56,607 35,006 - 91,613
Total corporate and
commercial 298,088 187,315 5 485,408
Non-bank financial
institutions 15,008 9,148 - 24,156
Settlement accounts 3,470 472 - 3,942
Total financial 18,478 9,620 - 28,098
Gross advances to
customers 593,783 333,324 14 927,121
Impairment provisions (4,032) (3,892) (5) (7,929)
Net advances to customers 589,751 329,432 9 919,192
Advances to customers increased by HK$54 billion, or 5.9 per cent, since the end
of 2004.
Advances in Hong Kong increased by HK$10 billion, or 1.7 per cent. Excluding the
impact of lending under the Government Home Ownership Scheme, which remained
suspended during 2005, mortgage lending remained flat, in line with the overall
market. Commercial lending rose by 5.5 per cent, with particularly strong growth
in the manufacturing and retailing sectors and in trade finance, which benefited
from focused relationship strategies in the middle-market sector, and the
expansion of business banking centres to better serve the customer base.
In the rest of Asia-Pacific, advances grew strongly by HK$45 billion, or 13.6
per cent, since the end of 2004. Mortgage loans increased by 10.2 per cent,
principally in Korea, Taiwan, India, Singapore and Australia. The cards business
continued to expand and receivables rose by 15.2 per cent, largely in Taiwan and
Indonesia. Lending to corporate and commercial customers rose by 8.3 per cent,
notably in mainland China, India, Korea and Indonesia.
22. Analysis of advances to customers by geographical area according to the
location of counterparties, after risk transfer
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Others Total
At 30Jun05
Gross advances to customers 550,724 357,221 63,356 9,611 980,912
Overdue advances to customers 2,865 2,269 69 1 5,204
At 30Jun04 (restated)
Gross advances to customers 522,134 275,728 56,611 4,152 858,625
Overdue advances to customers 3,979 2,829 135 1 6,944
At 31Dec04 (restated)
Gross advances to customers 543,997 319,512 59,461 4,151 927,121
Overdue advances to customers 3,212 2,343 74 - 5,629
23. Analysis of advances to customers by industry sector based on categories and
definitions used by the Hong Kong Monetary Authority ('HKMA')
The following analysis of advances to customers is based on the categories
contained in the 'Quarterly Analysis of Loans and Advances and Provisions'
return required to be submitted to the HKMA by branches of the bank and by
banking subsidiary companies in Hong Kong.
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Gross advances to customers for
use in Hong Kong
Industrial, commercial and
financial
Property development 37,417 32,820 36,230
Property investment 92,976 85,480 93,696
Financial concerns 13,704 14,282 14,784
Stockbrokers 983 1,201 1,185
Wholesale and retail trade 34,679 29,625 32,099
Manufacturing 18,588 13,125 14,336
Transport and transport equipment 33,145 33,610 35,418
Others 47,570 41,332 41,134
279,062 251,475 268,882
Individuals
Advances for the purchase of flats
under the Hong Kong SAR Government's
Home Ownership Scheme, Private
Sector Participation and Tenants
Purchase Scheme 39,131 45,057 41,845
Advances for the purchase of
other residential properties 168,042 168,537 169,482
Credit card advances 22,205 20,189 23,162
Others 22,557 19,772 20,257
251,935 253,555 254,746
Gross advances to customers for
use in Hong Kong 530,997 505,030 523,628
Trade finance 54,439 48,738 49,408
Gross advances to customers for
use outside Hong Kong made by
branches of the bank and
subsidiary companies in Hong Kong 17,924 15,436 20,747
Gross advances to customers made by
branches of the bank and
subsidiary companies in Hong Kong 603,360 569,204 593,783
Gross advances to customers made by
branches of the bank and subsidiary
companies outside Hong Kong
-Rest of Asia-Pacific 377,548 289,409 333,324
-Americas/Europe 4 12 14
Gross advances to customers 980,912 858,625 927,121
An explanation of the significant differences between the categories of advances
and their definitions used by the HSBC Group and those used by the HKMA is given
on page 18 of the Annual Report and Accounts for 2004.
24. Cross-border exposure
The country risk exposures shown below are prepared in accordance with the HKMA
Return of External Positions Part II: Cross-Border Claims (MA(BS)9) guidelines.
Cross-border claims are on-balance sheet exposures to counterparties based on
the location of the counterparties after taking into account the transfer of
risk.
The tables show claims on individual countries and territories or areas, after
risk transfer, amounting to 10 per cent or more of the aggregate cross-border
claims.
Cross-border risk is controlled centrally through a well-developed system of
country limits and is frequently reviewed to avoid concentration of transfer,
economic or political risk.
Banks and
other Public
financial sector
Figures in HK$m institutions entities Other Total
At 30Jun05
Americas
United States 51,906 75,139 28,191 155,236
Other 40,686 13,491 47,349 101,526
92,592 88,630 75,540 256,762
Europe
United Kingdom 91,103 27 26,182 117,312
Other 335,154 3,746 21,533 360,433
426,257 3,773 47,715 477,745
Asia-Pacific excluding Hong Kong 159,828 12,047 97,209 269,084
At 30Jun04
Americas
United States 22,178 78,603 28,591 129,372
Other 41,665 15,244 48,098 105,007
63,843 93,847 76,689 234,379
Europe
United Kingdom 72,230 16 27,131 99,377
Other 262,703 3,785 23,954 290,442
334,933 3,801 51,085 389,819
Asia-Pacific excluding Hong Kong 134,372 37,255 81,332 252,959
At 31Dec04
Americas
United States 45,518 80,047 32,010 157,575
Other 43,044 16,143 47,297 106,484
88,562 96,190 79,307 264,059
Europe
United Kingdom 86,613 27 23,294 109,934
Other 332,581 4,219 22,168 358,968
419,194 4,246 45,462 468,902
Asia-Pacific excluding Hong Kong 151,183 18,454 77,266 246,903
25. Current, savings and other deposits
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Current accounts and demand
deposits 959,723 948,974 1,069,178
Savings accounts 563,002 501,459 516,237
Other deposit accounts 148,708 120,418 142,696
Customer accounts 1,671,433 1,570,851 1,728,111
Current, savings and other deposits decreased by HK$57 billion, or 3.3 per cent,
compared with the end of 2004.
In Hong Kong, current account balances and demand deposits fell in the first
half of 2005 by HK$118 billion, or 13.3 per cent, reflecting the shift by
customers into savings and time deposits, in line with the increases in market
rates. In the rest of Asia-Pacific, customer accounts rose by HK$29 billion, or
7.0 per cent.
Certain structured deposits that were previously recorded in 'Other deposit
accounts' have, in accordance with revised accounting standards, been
reclassified in 2005 to 'Trading liabilities'.
The group's advances-to-deposits ratio increased to 58.3 per cent at 30 June
2005 from 53.2 per cent at 31 December 2004.
26. Trading liabilities
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Certificates of deposit in issue 83,048 - -
Other debt securities in issue 22,976 - -
Short positions in securities 52,402 35,810 37,281
Deposits by banks 5,044 - -
Customer accounts 55,182 - -
218,652 35,810 37,281
Trading liabilities include customer deposits and certificates of deposit with
embedded options or other derivatives, the market risk of which is managed in
the trading book.
27. Financial liabilities designated as at fair value
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Customer accounts 1,192 - -
Subordinated liabilities 995 - -
2,187 - -
There was no such category in 2004.
28. Debt securities in issue
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Certificates of deposit 43,397 100,301 110,922
Other debt securities 16,203 31,387 44,240
59,600 131,688 155,162
The fall in debt securities in issue compared with the end of 2004 reflects the
reclassification of certain securities as 'Trading liabilities', as detailed in
Note 26.
29. Reserves
At 30Jun05 At 30Jun04 At 31Dec04
Figures in HK$m restated restated
Revaluation reserves
- Premises revaluation reserve 5,065 3,207 3,561
- Available-for-sale
investments reserve 2,399 - -
- Cash flow hedge reserve (2,248) - -
- Long-term equity investment
revaluation reserve - 1,204 1,799
5,216 4,411 5,360
Foreign exchange reserve 303 (614) 843
Other reserves 444 191 322
5,963 3,988 6,525
Retained profits 58,759 46,215 51,497
64,722 50,203 58,022
The bank and its banking subsidiary companies operate under regulatory
jurisdictions which require the maintenance of minimum impairment provisions in
excess of those required under Hong Kong Accounting Standards. The effect of
this requirement is to restrict the amount of reserves which can be distributed
to shareholders by HK$1,017 million.
30. Contingent liabilities, commitments and derivatives
Credit Risk-
Contract equivalent weighted
Figures in HK$m amount amount amount
At 30Jun05
Contingent liabilities
- Acceptances and endorsements 22,273 4,875 4,762
- Guarantees 157,375 134,910 48,035
- Other 40 40 40
179,688 139,825 52,837
Commitments
- Documentary credits and short-
term trade-related transactions 58,058 19,828 11,658
- Forward asset purchases and
forward forward deposits placed 9,710 9,710 8,746
- Undrawn note issuing and
revolving underwriting
facilities 3,982 1,991 1,614
- Undrawn formal standby
facilities, credit lines and
other commitments:
- one year and over 99,653 49,826 44,479
- under one year 715,575 - -
886,978 81,355 66,497
Exchange rate contracts
- Spot and forward foreign
exchange 2,545,957 41,632 10,641
- Other exchange rate
contracts 971,018 42,392 12,576
3,516,975 84,024 23,217
Interest rate contracts
- Interest rate swaps 4,367,557 53,818 13,740
- Other interest rate
contracts 679,471 5,560 1,714
5,047,028 59,378 15,454
Other derivative contracts 163,291 8,805 3,116
Impact of counterparty netting
agreements on derivatives
exposure - (58,343) (12,693)
At 30Jun04
Contingent liabilities
- Acceptances and endorsements 19,538 3,908 3,782
- Guarantees 143,236 126,211 43,358
- Other 67 67 37
162,841 130,186 47,177
Commitments
- Documentary credits and
short-term trade-related
transactions 51,706 13,922 10,170
- Forward asset purchases and
forward forward deposits placed 4,320 4,320 2,140
- Undrawn note issuing and
revolving underwriting
facilities 4,126 2,063 1,686
- Undrawn formal standby
facilities, credit lines and
other commitments:
- one year and over 70,567 35,283 33,817
- under one year 579,396 - -
710,115 55,588 47,813
Exchange rate contracts
- Spot and forward foreign
exchange 2,300,878 35,515 8,732
- Other exchange rate
contracts 650,466 30,711 8,618
2,951,344 66,226 17,350
Interest rate contracts
- Interest rate swaps 2,974,127 46,253 12,519
- Other interest rate
contracts 695,439 2,652 682
3,669,566 48,905 13,201
Other derivative contracts 40,153 2,938 881
Impact of counterparty netting
agreements on derivatives
exposure - (41,574) (8,699)
At 31Dec04
Contingent liabilities
- Acceptances and endorsements 22,714 4,559 4,423
- Guarantees 157,833 136,474 48,837
- Other 35 35 33
180,582 141,068 53,293
Commitments
- Documentary credits and
short-term trade-related
transactions 48,493 13,770 9,591
- Forward asset purchases and
forward forward deposits placed 10,166 10,166 3,716
- Undrawn note issuing and
revolving underwriting
facilities 4,116 2,058 1,680
- Undrawn formal standby
facilities, credit lines and
other commitments:
- one year and over 82,142 1,071 38,311
- under one year 657,682 - -
802,599 67,065 53,298
Exchange rate contracts
- Spot and forward foreign
exchange 2,411,793 46,694 11,759
- Other exchange rate contracts 696,883 39,635 11,180
3,108,676 86,329 22,939
Interest rate contracts
- Interest rate swaps 3,754,053 57,131 14,679
- Other interest rate contracts 684,692 3,117 875
4,438,745 60,248 15,554
Other derivative contracts 71,395 4,030 1,222
Impact of counterparty netting
agreements on derivatives
exposure - (59,487) (12,535)
The tables above give the nominal contract amounts, credit equivalent amounts
and risk-weighted amounts of off-balance sheet transactions. The credit
equivalent amounts are calculated for the purposes of deriving the risk-weighted
amounts. These are assessed in accordance with the Third Schedule of the Hong
Kong Banking Ordinance on capital adequacy and depend on the status of the
counterparty and the maturity characteristics. The risk-weights used range from
0 per cent to 100 per cent for contingent liabilities and commitments, and from
0 per cent to 50 per cent for exchange rate, interest rate and other derivative
contracts. The group has executed close-out netting agreements with certain
counterparties, which allow for positive and negative mark-to-market values on
different transactions to be offset and settled by a single payment in the event
of default by either party. These have been taken into account in calculating
total risk assets.
Contingent liabilities and commitments are credit-related instruments which
include acceptances, letters of credit, guarantees and commitments to extend
credit. The contract amounts represent the amounts at risk should the contract
be fully drawn upon and the client default. Since a significant portion of
guarantees and commitments is expected to expire without being drawn upon, the
total of the contract amounts is not representative of future liquidity
requirements.
Derivatives arise from futures, forward, swap and option transactions undertaken
by the group in the foreign exchange, interest rate and equity markets. The
contract amounts of these instruments indicate the volume of transactions
outstanding at the balance sheet date; they do not represent amounts at risk.
Replacement cost of contracts
Figures in HK$m At 30Jun05 At 30Jun04 At 31Dec04
Exchange rate contracts 35,368 26,380 54,216
Interest rate contracts 39,518 35,328 41,486
Other derivative contracts 2,251 1,318 1,722
77,137 63,026 97,424
Less: netting adjustments (34,831) (24,115) (39,907)
42,306 38,911 57,517
The replacement cost of contracts represents the mark-to-market assets on all
contracts with a positive value, i.e. an asset to the group. This comprises the
mark-to-market assets on contracts with third parties and fellow subsidiary
companies included in the balance sheet in 'Derivatives'.
Replacement cost is a close approximation of the credit risk for these contracts
as at the balance sheet date. The actual credit risk is measured internally as
the sum of positive mark-to-market values and an estimate for the future
fluctuation risk, using a future risk factor.
The netting adjustments represent amounts where the group has in place legally
enforceable rights of offset with individual counterparties to offset the gross
amount of positive mark-to-market assets with any negative mark-to-market
liabilities with the same customer. These offsets are recognised by the Hong
Kong Monetary Authority in the calculation of risk assets for the capital
adequacy ratio.
31. Foreign exchange exposure
The group had the following structural foreign currency exposures which exceeded
10 per cent of the net structural foreign currency exposure in all currencies:
Figures in HK$m Net structural position
At 30Jun05
Chinese renminbi 21,128
Indian rupees 7,603
United States dollars 10,381
At 30Jun04
Australian dollars 3,330
Chinese renminbi 4,361
Indian rupees 4,064
Korean won 2,670
Singapore dollars 3,614
United States dollars (50,013)
At 31Dec04
Australian dollars 4,911
Chinese renminbi 18,154
Indian rupees 4,979
Korean won 3,266
Singapore dollars 3,370
United States dollars (56,355)
Thai baht 1,575
The group had the following non-structural foreign currency position which
exceeded 10 per cent of the group's net foreign currency non-structural
positions in all currencies:
United States Singapore Brunei
Figures in HK$m dollars dollars dollars
At 30Jun05
Spot assets 85,892 5,470
Spot liabilities (77,505) (16,318)
Forward purchases 147,882 -
Forward sales (145,643) -
10,626 (10,848)
At 30Jun04
Spot assets 983,440
Spot liabilities (970,080)
Forward purchases 1,487,766
Forward sales (1,410,343)
Net options position 892
91,675
At 31Dec04
Spot assets 1,126,118 83,986 5,129
Spot liabilities (1,042,445) (74,193) (15,134)
Forward purchases 1,497,043 104,625 -
Forward sales (1,516,913) (104,339) -
Net options position (721) - -
63,082 10,079 (10,005)
32. Reconciliation of operating profit to cash generated from operations
Half-year ended Half-year ended
30Jun05 30Jun04
Figures in HK$m restated
Operating profit 23,243 23,620
Net interest income (21,410) (18,065)
Dividend income (249) (111)
Depreciation and amortisation 990 919
Impairment provisions 516 (1,562)
Advances written off, net of recoveries (1,120) (2,568)
Other provisions for liabilities and
charges 245 358
Provisions utilised (47) (217)
Employees' options granted cost free 140 100
Interest received 28,409 21,966
Interest paid (14,473) (8,383)
Net cash inflow from trading activities 16,244 16,057
Change in treasury bills with original
term to maturity of more than three
months (6,609) (49,775)
Change in placings with banks maturing
after one month (20,867) (1,390)
Change in trading assets (29,507) 5,872
Change in trading liabilities 55,628 6,808
Change in financial assets designated
at fair value 425 -
Change in financial liabilities
designated at fair value (62) -
Change in derivatives (7,063) 5,791
Change in financial investments held
for backing liabilities to long-term
policyholders (5,160) (3,796)
Change in advances to customers (57,847) (31,005)
Change in amounts due from fellow
subsidiary companies 13,872 13,148
Change in deposits by banks 42,599 4,949
Change in other assets (14,816) (6,297)
Change in customer accounts (21,684) 11,596
Change in amounts due to fellow
subsidiary companies 7,530 20,668
Change in amounts due to ultimate
holding company 192 285
Change in debt securities in issue (4,089) 16,732
Change in liabilities to customers
under investment contracts 912 -
Change in liabilities to customers
under insurance contracts 6,213 -
Change in liabilities to policyholders
under long-term assurance business - 5,336
Change in other liabilities 27,064 8,275
Exchange adjustments (54) (450)
Cash generated from operations 2,921 22,804
33. Analysis of cash and cash equivalents
a. Changes in cash and cash equivalents during the period
Half-year ended Half-year ended
30Jun05 30Jun04
Figures in HK$m restated
Balance at beginning of period 411,535 316,678
Net cash inflow/(outflow) before
the effect of foreign exchange
movements 15,739 (18)
Effect of foreign exchange movements (8,151) (877)
Balance at end of period 419,123 315,783
b. Analysis of balances of cash and cash equivalents
Half-year ended Half-year ended
30Jun05 30Jun04
Figures in HK$m restated
Cash in hand and current balances
with banks 62,923 63,700
Placings with banks 326,210 227,456
Treasury bills 26,822 22,251
Certificates of deposit 3,168 2,376
419,123 315,783
c. Analysis of net outflow of cash and cash equivalents in respect
of acquisition of and increased shareholding in subsidiary companies
Half-year ended Half-year ended
30Jun05 30Jun04
Figures in HK$m restated
Cash consideration (1,872) (972)
Cash and cash equivalents acquired 625 -
(1,247) (972)
d. Analysis of net flow of cash and cash equivalents in respect of
sale of subsidiary companies
Half-year ended Half-year ended
Figures in HK$m 30Jun05 30Jun04
Sale proceeds 323 -
323 -
34. Segmental analysis
The allocation of earnings reflects the benefits of shareholders' funds to the
extent that these are actually allocated to businesses in the segment by way of
intra-group capital and funding structures. Common costs are included in
segments on the basis of the actual recharges made. Geographical information has
been classified by the location of the principal operations of the subsidiary
company or, in the case of the bank, by the location of the branch responsible
for reporting the results or advancing the funds. Due to the nature of the group
structure, the analysis of profits shown below includes intra-group items
between geographical regions.
Profit and loss account
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Total
Half-year ended 30Jun05
Interest income 23,529 14,225 275 38,029
Interest expense (8,122) (8,366) (131) (16,619)
Net interest income 15,407 5,859 144 21,410
Fee income 7,057 3,701 1 10,759
Fee expense (1,035) (845) (5) (1,885)
Trading income 2,381 1,928 (113) 4,196
Net income from
financial instruments
designated at fair
value (163) 107 - (56)
Gains less losses
from financial
investments 359 (12) - 347
Dividend income 223 26 - 249
Net earned insurance
premiums 6,746 229 - 6,975
Other operating income 3,555 518 11 4,084
Total operating income 34,530 11,511 38 46,079
Net insurance claims
incurred and movement
in policyholder
liabilities (5,851) (288) - (6,139)
Net operating income
before loan impairment
charges and other
credit risk
provisions 28,679 11,223 38 39,940
Loan impairment charges
and other credit risk
provisions (459) (69) 12 (516)
Net operating income 28,220 11,154 50 39,424
Operating expenses (9,754) (6,406) (21) (16,181)
Operating profit 18,466 4,748 29 23,243
Share of profit in
associates 28 892 - 920
Profit before tax 18,494 5,640 29 24,163
Tax charge (2,873) (1,372) (3) (4,248)
Profit after tax 15,621 4,268 26 19,915
Profit attributable to
minority interests (2,279) (72) - (2,351)
Profit attributable to
shareholders 13,342 4,196 26 17,564
Half-year ended 30Jun04
Interest income 18,238 10,187 258 28,683
Interest expense (5,307) (5,084) (227) (10,618)
Net interest income 12,931 5,103 31 18,065
Fee income 7,068 2,930 1 9,999
Fee expense (865) (740) (7) (1,612)
Trading income 2,474 1,355 - 3,829
Net investment income
on assets backing
policyholder liabilities 53 41 - 94
Gains less losses from
financial investments 548 34 - 582
Dividend income 104 7 - 111
Net earned insurance
premiums 8,292 443 - 8,735
Other operating income 2,704 323 4 3,031
Total operating income 33,309 9,496 29 42,834
Net insurance claims
incurred and movement
in policyholder
liabilities (6,995) (361) - (7,356)
Net operating income
before loan impairment
charges and other
credit risk
provisions 26,314 9,135 29 35,478
Loan impairment charges
and other credit risk
provisions 1,747 (185) - 1,562
Net operating income 28,061 8,950 29 37,040
Operating expenses (8,500) (4,905) (15) (13,420)
Operating profit 19,561 4,045 14 23,620
Share of profit in
associates 24 - - 24
Profit before tax 19,585 4,045 14 23,644
Tax charge (2,929) (1,095) (3) (4,027)
Profit after tax 16,656 2,950 11 19,617
Profit attributable
to minority interests (2,330) - - (2,330)
Profit attributable to
shareholders 14,326 2,950 11 17,287
Half-year ended 31Dec04
Interest income 20,296 11,590 343 32,229
Interest expense (6,905) (6,171) (248) (13,324)
Net interest income 13,391 5,419 95 18,905
Fee income 6,649 3,136 - 9,785
Fee expense (1,048) (838) (5) (1,891)
Trading income 1,939 1,235 - 3,174
Net investment income
on assets backing
policyholder
liabilities 2,138 188 - 2,326
Gains less losses from
financial investments 813 101 1 915
Dividend income 44 8 - 52
Net earned insurance
premiums 9,196 291 - 9,487
Other operating income 1,982 403 4 2,389
Total operating income 35,104 9,943 95 45,142
Net insurance claims
incurred and movement
in policyholder
liabilities (9,762) (266) - (10,028)
Net operating income
before loan impairment
charges and other credit
risk provsions 25,342 9,677 95 35,114
Loan impairment charges
and other credit risk
provisions (63) (643) 6 (700)
Net operating income 25,279 9,034 101 34,414
Operating expenses (9,418) (5,363) (17) (14,798)
Operating profit 15,861 3,671 84 19,616
Share of profit in
associates 28 247 - 275
Profit before tax 15,889 3,918 84 19,891
Tax charge (1,839) (1,119) (3) (2,961)
Profit after tax 14,050 2,799 81 16,930
Profit attributable to
minority interests (2,043) (27) - (2,070)
Profit attributable
to shareholders 12,007 2,772 81 14,860
Interest income and interest expense for the first half of 2005 include
intra-group interest of HK$2,170 million (first half of 2004: HK$1,232 million;
second half of 2004: HK$1,733 million). Fee income and fee expense for the first
half of 2005 include intra-group fees of HK$180 million (first half of 2004:
HK$116 million; second half of 2004: HK$192 million). Other operating income and
operating expenses for the first half of 2005 include intra-group items of
HK$1,364 million (first half of 2004: HK$626 million; second half of 2004:
HK$680 million).
35. Capital adequacy
The table below sets out an analysis of regulatory capital and capital adequacy
ratios for the group.
Figures in HK$m At 30Jun05 At 30Jun04^ At 31Dec04^
Composition of capital
Tier 1:
Shareholders' funds 93,216 124,346 147,495
Less: proposed dividend (6,000) (4,750) (4,800)
property revaluation
reserves^^^ (7,158) (10,856) (11,907)
available-for-sale
investments and
equity revaluation (2,395) (1,070) (1,609)
reserves classified
as regulatory reserve (1,017) - -
term preference shares - (3,900) (3,886)
goodwill (6,043) (1,718) (5,771)
others 2,244 - -
Irredeemable non-cumulative
preference shares 51,718 - -
Minority interests^^ 14,666 14,318 14,384
Total qualifying tier 1
capital 139,231 116,370 133,906
Tier 2:
Property revaluation
reserves (@70%) 5,011 7,599 7,977
Available-for-sale investments
and equity revaluation
reserves (@70%) 1,677 749 1,126
Collective impairment
provision and regulatory
reserve 4,351 2,623 2,447
Perpetual subordinated debt 9,404 9,360 9,328
Term subordinated debt 4,160 1,997 1,814
Term preference shares 3,887 3,120 3,109
Irredeemable cumulative
preference shares 7,373 - -
Total qualifying tier 2
capital 35,863 25,448 25,801
Deductions (25,640) (8,634) (20,251)
Total capital 149,454 133,184 139,456
Risk-weighted assets 1,221,620 1,068,628 1,173,432
^ Comparative amounts for 30 June 2004 and 31 December 2004 are as
previously reported.
^^ After deduction of minority interests in unconsolidated subsidiary
companies.
^^^ Includes the revaluation surplus on investment properties which is now
reported as part of retained profits.
The group's capital adequacy ratios adjusted for market risks calculated in
accordance with the HKMA Guideline on 'Maintenance of Adequate Capital Against
Market Risks' are as follows:
At 30Jun05 At 30Jun04 At 31Dec04
Total capital 12.2% 12.5% 11.9%
Tier 1 capital 11.4% 10.9% 11.4%
The group's capital adequacy ratios calculated in accordance with the
provisions of the Third Schedule of the Banking Ordinance, which does not take
into account market risks, are as follows:
Total capital 12.1% 12.4% 11.9%
Tier 1 capital 11.2% 10.8% 11.4%
36. Liquidity ratio
The Banking Ordinance requires banks operating in Hong Kong to maintain a
minimum liquidity ratio, calculated in accordance with the provisions of the
Fourth Schedule of the Banking Ordinance, of 25 per cent. This requirement
applies separately to the Hong Kong branches of the bank and to those subsidiary
companies which are Authorised Institutions under the Banking Ordinance in Hong
Kong.
Half-year ended Half-year ended Half-year ended
30Jun05 30Jun04 31Dec04
The average liquidity ratio
for the period was as
follows:
Hong Kong branches of
the bank 48.6% 40.4% 41.7%
37. Property revaluation
The group's premises and investment properties were revalued as at 30 June 2005
on the basis of open market value.
Premises and investment properties in the Hong Kong SAR were valued by DTZ
Debenham Tie Leung at 30 June 2005. The valuations were carried out by
independent qualified valuers who are members of the Hong Kong Institute of
Surveyors. Management considered that there had either been no material changes
in the values of the properties located outside Hong Kong since 30 September
2004, when the properties were last revalued or reviewed, or that the values of
the properties were not material.
The property revaluation has resulted in an increase in the group's revaluation
reserves of HK$1,504 million, net of deferred taxation of HK$410 million, as at
30 June 2005, and a credit to the profit and loss account of HK$1,038 million,
of which HK$736 million represents the surplus on the revaluation of investment
properties and HK$302 million relates to the reversal of previous revaluation
deficits that had arisen when the value of certain premises fell below
depreciated historical cost.
38. Transition to new Hong Kong Financial Reporting Standards and comparative
figures
The group has adopted the new Hong Kong Financial Reporting Standards and Hong
Kong Accounting Standards ('new HKFRS') which are equivalent to the new
International Financial Reporting Standards, and are effective for accounting
periods beginning on or after 1 January 2005.
Comparative numbers have been restated to conform with the new accounting
policies, except for those applicable to financial instruments and insurance
contracts (HKAS 39 and HKFRS 4 respectively). Included in the appendix to this
news release is the reconciliation of the consolidated income statements for the
first and second half of 2004 and of the consolidated balance sheets at 30 June
2004 and 31 December 2004, as previously reported and as restated, showing the
effects of the adoption of the new HKFRS (except HKAS 39 and HKFRS 4). Also
included in the appendix is the restatement of the opening consolidated balance
sheet at 1 January 2005, showing the effects of the adoption of HKAS 39 and
HKFRS 4.
39. Accounting policies
The accounting policies adopted in 2005 and 2004 are detailed in the appendix to
this news release.
40. Statutory accounts
The information in this news release is not audited and does not constitute
statutory accounts.
Certain financial information in this news release is extracted from the
statutory accounts for the year ended 31 December 2004 which have been delivered
to the Registrar of Companies and the Hong Kong Monetary Authority. The Auditors
expressed an unqualified opinion on those statutory accounts in their report
dated 28 February 2005. The Annual Report and Accounts for the year ended 31
December 2004, which include the statutory accounts, can be obtained on request
from Group Public Affairs, The Hongkong and Shanghai Banking Corporation
Limited, 1 Queen's Road Central, Hong Kong, and may be viewed on our website:
www.hsbc.com.hk.
41. Ultimate holding company
The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held,
wholly-owned subsidiary of HSBC Holdings plc.
42. Statement of compliance
The information in this news release for the half-year ended 30 June 2005
complies with the Hong Kong Accounting Standard 34 on Interim Financial
Reporting and the module on Interim Financial Disclosure by Locally Incorporated
Authorised Institutions under the Supervisory Policy Manual issued by the Hong
Kong Monetary Authority.
Appendix
Accounting policies
Basis of preparation
The Hong Kong Institute of Certified Public Accountants has issued a number of
new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting
Standards ('new HKFRS') which are equivalent to International Financial
Reporting Standards and are effective for accounting periods beginning on or
after 1 January 2005.
The Hongkong and Shanghai Banking Corporation Limited and its subsidiaries ('the
group') have adopted these new HKFRS in the financial statements in 2005
resulting in various changes in accounting policies.
Comparative numbers have been restated to conform with the new accounting
policies except for those that applied to financial instruments and insurance
contracts, which are driven by HKAS 39 and HKFRS 4, respectively. The policies
applied to financial instruments and insurance contracts for 2004 and 2005 are
disclosed separately below.
Significant changes in principal accounting policies are listed as follows:
(a)Interest income and expense
From 1 January 2005
Interest income and expense for all interest-bearing financial instruments,
except those classified as held for trading or designated at fair value, are
recognised in 'Interest income' and 'Interest expense' in the income
statement using the effective interest rates of the financial assets or
financial liabilities to which they relate.
The effective interest rate is the rate that discounts estimated future cash
payments or receipts through the expected life of the financial asset or
financial liability or, where appropriate, a shorter period, to the net
carrying amount of the financial asset or financial liability. When
calculating the effective interest rate, the group estimates cash flows
considering all contractual terms of the financial instrument but not future
credit losses. The calculation includes all amounts paid or received by the
group that are an integral part of the effective interest rate, transaction
costs and all other premiums or discounts.
Interest on impaired financial assets is recognised at the original
effective interest rate of the financial asset applied to the impaired
carrying amount.
From 1 January 2004 to 31 December 2004
Interest income and expense for all interest-bearing financial instruments
was recognised in the income statement as it accrued, except in the case of
impaired loans and advances. Interest on impaired loans was credited to an
interest suspense account in the balance sheet which was netted against the
relevant loan.
(b)Non-interest income
Following the change in accounting for interest as described above, from 1
January 2005, fee and commission income which is an integral part of the
effective interest rate of a financial instrument (e.g. loan commitment
fees), is recognised as an adjustment to the effective interest rate. Before
1 January 2005, fee and commission income was recognised on an appropriate
basis over the relevant period, even if it was interest in nature.
(c)Trading income
From 1 January 2005
Trading income comprises interest income and expense and dividend income
attributable to trading financial assets and liabilities, together with all
gains and losses from changes in fair value. Income generated from
ineffective hedging activities is also included in 'Trading income'.
From 1 January 2004 to 31 December 2004
Trading income comprised all gains and losses from changes in fair value
(net of accrued coupons) of trading financial assets and financial
liabilities. Interest income and expense, and dividend income were
recognised in 'Net interest income' or 'Dividend income' as appropriate.
(d)Net income from financial instruments designated at fair value
From 1 January 2005
Net income from financial instruments designated at fair value comprises all
gains and losses from changes in fair value (net of accrued coupon) of such
financial assets and financial liabilities, together with interest income
and expense and dividend income attributable to those financial instruments.
There was no such category for financial instruments prior to 1 January
2005.
(e)Loans and advances to banks and customers
From 1 January 2005
Loans and advances to banks and customers include loans and advances
originated by the group, which have not been classified as held for trading
or designated at fair value. They are initially recorded at fair value plus
any transaction costs, and are subsequently measured at amortised cost
using the effective interest method.
Loans and advances classified as held for trading or designated at fair
value are reported as trading instruments, or financial instruments
designated at fair value, respectively.
(f)Impairment of loans and advances
From 1 January 2005
It is the group's policy that each operating company will make provisions
for impaired loans and advances when objective evidence of impairment
exists and on a consistent basis, in accordance with established HSBC Group
guidelines. Impairment provisions, representing the quantification of
incurred losses, can be made on a collective portfolio basis or an
individually assessed basis. Impairment provisions are deducted from loans
and advances in the balance sheet.
Assets acquired in exchange for advances
Non-current assets acquired in exchange for advances in order to achieve an
orderly realisation are reported in 'Other assets' in accordance with HKFRS
5. The asset acquired is recorded at the lower of its fair value less costs
to sell and the carrying value of the advance disposed of, net of
provisions, at the date of the exchange. No depreciation is provided in
respect of such assets. Any subsequent write-down of an asset to fair value
less costs to sell is recorded as an impairment loss and included within
'Other operating income'. Any subsequent increase in fair value less costs
to sell not in excess of any cumulative impairment loss, is recognised as a
gain in 'Other operating income' in the income statement.
Debt securities or equities acquired in debt-to-debt /equity swaps are
included as 'Available-for-sale' securities following the implementation of
HKAS 39.
From 1 January 2004 to 31 December 2004
There were two basic types of provisions, specific and general.
Specific provisions represented the quantification of actual and inherent
losses from homogeneous portfolios of assets and individually identified
accounts. Specific provisions were deducted from loans and advances in the
balance sheet.
General provisions augmented specific provisions and provided cover for
loans that were impaired at the balance sheet date but which would not be
individually identified as such until some time in the future.
(g)Trading securities and trading liabilities
From 1 January 2005
Treasury bills, debt securities, equity shares and short positions in
securities which have been acquired or incurred principally for the purpose
of selling or repurchasing in the near term are classified as held for
trading. Such financial assets or financial liabilities are recognised
initially at fair value and transaction costs are taken to the income
statement. All gains and losses from changes in the fair value of these
assets and liabilities, together with interest and dividends, are
recognised in the income statement as 'Trading income' as they arise. The
same treatment applies to debt issued by the group or structured deposits
taken, where the risk arising from these is actively traded.
From 1 January 2004 to 31 December 2004
Treasury bills, debt securities, equity shares and short positions in
securities were included respectively in 'Cash and short-term funds',
'Trading assets' or 'Trading liabilities' in the balance sheet at market
value. Changes in the clean market value of such assets and liabilities
were recognised in the income statement as 'Trading income' as they arose.
The interest element on such instruments was recognised as interest income
or interest expense as appropriate in the income statement.
(h)Financial instruments designated at fair value
From 1 January 2005
A financial instrument is classified in this category if it meets the
criteria set out below, and is so designated by management. The group
designates financial instruments at fair value because the designation:
- eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring financial assets or
financial liabilities or recognising the gains and losses on them on
different bases; or
- applies to a group of financial assets, financial liabilities or both
that is managed and its performance evaluated on a fair value basis, in
accordance with an HSBC documented risk management or investment strategy,
and where information about the group is provided internally on that basis
to HSBC's key management personnel; or
- relates to financial instruments containing one or more embedded
derivatives which significantly modify the cash flows resulting from the
financial instruments, and which would otherwise require separate
accounting.
Financial assets and financial liabilities so designated are recognised
initially at fair value and transaction costs taken directly to the income
statement. Gains and losses from changes in the fair value of such assets
and liabilities are recognised in the income statement as they arise,
together with interest and dividends, as 'Net income from financial
instruments designated at fair value'.
Gains and losses from the changes in fair value of derivative contracts
matched with financial instruments designated at fair value are presented
in 'Net income from financial instruments designated at fair value'.
From 1 January 2004 to 31 December 2004
The category, 'Financial instruments designated at fair value' was
introduced on 1 January 2005 in accordance with HKAS 39.
(i)Financial investments
From 1 January 2005
Treasury bills, debt securities and equity shares intended to be held on a
continuing basis are classified as available-for-sale securities unless
designated at fair value (see (h)) or classified as held-to-maturity
securities. Available-for-sale securities are measured at fair value
(excluding accrued coupon). Changes in fair value are recognised in
shareholders'equity until the securities are either sold or impaired, while
coupon accrual is recognised as 'Net interest income'. On disposal of
available-for-sale securities, gains or losses held within shareholders'
equity are recycled through the income statement and classified as 'Gains
less losses from financial investments'.
Held-to-maturity investments are non-derivative financial assets with fixed
or determinable payments and fixed maturities that the group has the
positive intention and ability to hold until maturity. Held-to-maturity
investments are initially recorded at fair value plus any transaction costs,
and are subsequently measured at amortised cost using the effective interest
rate method, less any impairment losses.
On 1 January 2005, the group has re-designated certain debt securities
previously described as 'Long-term held-to-maturity investments' as
'Available-for-sale securities' following the implementation of HKAS 39.
From 1 January 2004 to 31 December 2004
Treasury bills and debt securities and equity shares were accounted for in
accordance with HK SSAP 24.
Treasury bills and debt securities intended to be held on a continuing basis
were classified as 'Long-term investments held-to-maturity' and included in
the balance sheet at cost, adjusted for amortisation of premium and discount
on acquisition less provision for permanent diminution in value. Any gain or
loss on realisation of these securities was recognised in the income
statement as it arose and included in 'Profit on tangible fixed assets and
long-term investments', which has been reclassified to 'Gains less losses
from financial investments' to conform with 2005 disclosure.
Equity shares intended to be held on a continuing basis were classified as
'Long-term investments' and included in the balance sheet at fair value.
Gains and losses arising from changes in fair value were accounted for as
movements in the 'Long-term equity investment revaluation reserve'. When an
investment was disposed of, the cumulative profit or loss, including any
amounts previously recognised in the long-term equity investment revaluation
reserve, was included in the income statement for the year in 'Profit on
tangible fixed assets and long-term investments', or 'Gains less losses from
financial investments' in the 2004 restated format.
(j)Derivative financial instruments and hedge accounting
From 1 January 2005
Derivatives are initially recognised at fair value from the date a
derivative contract is entered into and are subsequently re-measured at
their fair value.
The method of recognising the resulting fair value gain or loss depends on
whether the derivative is designated as a hedging instrument, and if so, the
nature of the item being hedged. The group designates certain derivatives as
either: (i) hedges of the fair value of recognised assets or liabilities or
firm commitments (fair value hedge); (ii) hedges of highly probable future
cash flows attributable to a recognised asset or liability, or a forecast
transaction (cash flow hedge); or (iii) hedges of net investments in a
foreign entity (net investment hedge). Hedge accounting is applied for
derivatives designated as fair value, cash flow or net investment in a
foreign entity hedge, provided certain criteria are met.
Fair value hedge
Changes in the fair value of derivatives that are designated and qualified
as fair value hedges are recorded as 'Trading income' in the income
statement, together with any changes in the fair value of the hedged asset
or liability that are attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting, the
adjustment to the carrying amount of a hedged item for which the effective
interest method is used shall be amortised to the income statement over the
period to maturity.
Cash flow hedge
The effective portion of changes in the fair value of derivatives (net of
interest accrual) that are designated and qualified as cash flow hedges are
recognised in shareholders' equity. The gain or loss relating to the
ineffective portion is recognised immediately in the income statement within
'Trading income' along with accrued interest.
Amounts accumulated in shareholders' equity are recycled through the income
statement in the periods in which the hedged item will affect profit or loss
(e.g., when the forecast sale that is hedged takes place).
When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss
existing in shareholders' equity at that time remains in shareholders'
equity and is recognised when the forecast transaction is ultimately
recognised in the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported in
shareholders' equity is immediately transferred to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for similarly
to cash flow hedges. Any gain or loss on the hedging instrument relating to
the effective portion of the hedge is recognised in shareholders' equity;
the gain or loss relating to the ineffective portion is recognised
immediately in the income statement. Gains and losses accumulated in
shareholders' equity are included in the income statement when the foreign
operation is disposed of.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair value of any derivative
instrument that does not qualify for hedge accounting are recognised
immediately in the income statement and reported in 'Trading income',
except where derivative contracts are used with financial instruments
designated at fair value, in which case gains and losses are reported in
'Net income from financial instruments designated at fair value'.
Certain derivatives embedded in other financial instruments, such as the
conversion option in a convertible bond, are treated as separate derivatives
when their economic characteristics and risks are not closely related to
those of the host contract and the host contract is not designated at fair
value. These embedded derivatives are measured at fair value with changes in
fair value recognised in the income statement.
From 1 January 2004 to 31 December 2004
Accounting for derivatives was dependent upon whether the transactions were
undertaken for trading or non-trading purposes.
Trading transactions included transactions undertaken for market-making, to
service customers' needs and for proprietary purposes, together with any
related hedges. Transactions were marked to market through the income
statement as 'Trading income'.
Non-trading transactions were those undertaken for hedging purposes as part
of the group's risk management strategy against cash flows, assets,
liabilities or positions, and were measured on an accruals basis, with the
effect being recognised in 'Net interest income'.
(k)Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in
the balance sheet when there is a legally enforceable right to offset the
recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously. Previously,
netting was applied only where a legal right of set-off existed.
(l)Goodwill and intangible assets
(i)The group has early adopted HKFRS 3 and goodwill was frozen at carrying
value at 1 January 2004. Goodwill is tested for impairment annually and
reported net of accumulated impairment losses. Previously goodwill was
amortised over its estimated useful life.
Negative goodwill is taken to the income statement as it arises.
(ii) Intangible assets include the value of in-force long-term assurance
business, computer software, trade names, mortgage servicing rights,
customer lists, core deposit relationships, credit card customer
relationships and merchant or other loan relationships.
Intangible assets that have a finite useful life, except for the value of
in-force long-term assurance business, are stated at cost less amortisation
and are amortised over their useful lives. A periodic review is performed
on intangible assets to confirm that there has been no impairment such that
the carrying value of the asset requires to be reduced.
(m)Property
Investment property
Investment properties are included in the balance sheet at fair value with
changes in fair value recognised in the income statement (in 'Other
operating income') with effect from 1 January 2005. Previously, the change
in the fair value of investment properties was recognised in the premises
revaluation reserve. The comparative income statement for 2004 has not been
adjusted to reflect the revaluation of investment properties, as permitted
by HKAS 40.
Leasehold land for own use
Land held under leases greater than 500 years is regarded as being under a
finance lease and is capitalised, revalued periodically and included in
'Property'. Leasehold land with lease term less than 500 years is
classified as an operating lease. Lease premiums on operating leases are
accounted for as prepaid rentals and are amortised to the income statement
on a straight-line basis over the remaining lease term. The premises
revaluation reserve has been restated to exclude prior years' revaluations
on such leases. Where the original cost of leasehold land and buildings
cannot be reliably split, both land and buildings are treated as being
under a finance lease, in accordance with HKAS 17.
(n)Pension and other post-retirement benefits
The group implemented HK SSAP 34 (which is materially equivalent to HKAS 19)
in relation to the accounting for pensions in 2003, and adopted the corridor
approach for the recognition of actuarial gains and losses. The group has
changed its policy in 2005 to fully recognise actuarial gains and losses in
the statement of changes in equity.
(o)Equity compensation plans
Where shares of HSBC Holdings plc are awarded to an employee of the group
on commencement of service as an inducement, or as bonuses with a vesting
period, the cost of shares awarded is amortised over the vesting period
from the date the shares are awarded. Shares purchased for such purpose are
classified as available-for-sale and reported under 'Financial
investments'.
For share options, the compensation expense is spread over the vesting
period from the date they are granted. The compensation expense is
determined by reference to the fair value of the options on grant date, and
the impact of any non-market vesting conditions such as option lapses.
Where the group is not charged for this by HSBC Holdings plc, the
corresponding amount is credited to 'Other reserves'.
The group has taken advantage of the transition provision in HKFRS 2
'Share-based payment' and applied the treatment described above to shares
and options granted after 7 November 2002 which were not yet vested at 1
January 2005. Previously, share awards made to employees as part of their
annual bonus were charged to the income statement as incurred. For share
options granted, no compensation cost was recognised previously.
(p)Foreign currencies
Exchange differences arising from the re-translation of opening foreign
currency net investments and the related cost of hedging and exchange
differences arising from re-translation of the result for the period from
the average rate to the exchange rate ruling at the period-end are
accounted for in a separate foreign exchange reserve. Exchange differences
on a monetary item that is part of a net investment in a foreign operation
are recognised in the income statement of separate subsidiary financial
statements. In the consolidated financial statements, these exchange
differences are recognised in the foreign exchange reserve.
(q)Insurance contracts
From 1 January 2005
Through its insurance subsidiaries, the group issues contracts to customers
that contain insurance risk, financial risk or a combination thereof. A
contract under which the group accepts significant insurance risk from
another party, by agreeing to compensate that party on the occurrence of a
specified uncertain future event, is classified as an insurance contract.
Such an insurance contract may also transfer financial risk, but is
accounted for as an insurance contract in accordance with HKFRS 4.
A contract issued by the group that transfers financial risk, without
significant insurance risk, is classified as an investment contract, and
accounted for as a financial instrument in accordance with HKAS 39. The
financial assets held by the group for the purpose of meeting liabilities
under insurance and investment contracts are accounted for as financial
instruments.
Income generated from assets backing contracts is reported in the income
statement on a line-by-line basis according to the classification of assets
as detailed in (i). Claims incurred and movement in policyholder
liabilities for insurance contracts are reported as such in the income
statement. Income allocated to policyholders on investment contracts is
reported as 'Interest expense' and 'Net income from financial instruments
designated at fair value' as appropriate.
From 1 January 2004 to 31 December 2004
Policies issued by insurance subsidiaries on long-term assurance contracts
were all accounted for as insurance contracts. Net investment income on
assets backing policyholder liabilities was reported as such in the 2004
restated format. Allocation of such income to policyholders was reported as
'Net insurance claims incurred and movement in policyholder liabilities'.
(r)Debt securities in issue and subordinated liabilities
From 1 January 2005
Debt securities issued for trading purposes or designated at fair value are
reported under the appropriate balance sheet captions. Other debt
securities in issue and subordinated liabilities are measured at amortised
cost using the effective interest rate method and are reported under 'Debt
securities in issue' or 'Subordinated liabilities'.
From 1 January 2004 to 31 December 2004
Debt securities in issue were measured at cost adjusted for amortised
premiums and discounts, and were reported under 'Debt securities in issue'
or 'Subordinated liabilities'.
(s)Preference shares
Preference shares satisfying certain conditions set out in HKAS 32, are
required to be reclassified as liabilities, with preference dividends
reported as interest expense. Previously, such costs were recorded as
dividends.
(t)Other presentation differences
Certain profit and loss items have also been reclassified to conform with
2005 presentation including the following:
- reclassifying profit on disposal of tangible fixed assets and surplus on
property revaluation to 'Other operating income';
- reclassifying profit on disposal of long-term investments to 'Gains less
losses from financial investments';
- provisions for litigation and other charges are reclassified to 'General
and administrative expenses';
- 'Share of profits in associates' is stated net of taxes.
Consolidated Income Statement for the half-year ended 30Jun04
Reconciliation of HK GAAP and HKFRS
Effect of transition to HKFRS (excluding HKAS 39 and HKFRS 4)
Assets Pension
Half-year acquired and Half-year
ended in other Equity Consol- ended
30Jun04 exchange post- compe- Pre- idation 30Jun04
Figures as for retirement Pro- nsation Insurance ference and Reclass- as
in HK$m reported advances benefits perty Goodwill plans contracts shares others ification restated
Interest
income 27,432 (1) - - - - 130 - (110) - 27,451
Interest
expense (8,812) - - - - - 2 (692) 116 - 9,386)
Net interest
income 18,620 (1) - - - - 132 (692) 6 - 18,065
Fee income 10,072 - - - - - 2 - (191) - 9,883
Fee expense (1,510) - - - - - (26) - 40 - (1,496)
Net fee income 8,562 - - - - - (24) - (151) - 8,387
Trading income 3,708 - - - - - - - 121 - 3,829
Net investment
income on
assets
backing
policyholder
liabilities - - - - - - 94 - - - 94
Gains less
losses from
financial
investments - - - - - - - - - 582 582
Dividend income 139 - - - - - - - (28) - 111
Net earned
insurance
premiums - - - - - - 8,735 - - - 8,735
Other operating
income 2,686 18 - 8 - - (1,575) - (2) 1,270 2,405
Total operating
income 33,715 17 - 8 - - 7,362 (692) (54) 1,852 42,208
Net insurance
claims incurred
and movement in
policyholder
liabilities - - - - - - (7,356) - - - (7,356)
Net operating
income before
loan
impairment
charges and
other
credit risk
provisions 33,715 17 - 8 - - 6 (692) (54) 1,852 34,852
Loan impairment
charges and
other credit
risk
provisions 1,440 (8) - - - - - - - 130 1,562
Net operating
income 35,155 9 - 8 - - 6 (692) (54) 1,982 36,414
Employee
compensation
and
benefits (7,281) - 10 - - (3) 4 - 17 - (7,253)
General and
administrative
expenses (4,451) - - (27) - - (10) - (4) (130) (4,622)
Depreciation of
property,
plant
and equipment (1,019) - - 101 - - - - 48 - (870)
Amortisation of
intangible
assets and
impairment
of goodwill (38) - - - 37 - - - (48) - (49)
Total operating
expenses (12,789) - 10 74 37 (3) (6) - 13 (130) (12,794)
Operating
profit 22,366 9 10 82 37 (3) - (692) (41) 1,852 23,620
Profit on
tangible fixed
assets and
long-term
investments 1,092 (9) - - (62) - - - 10 (1,031) -
Surplus arising
on property
revaluation 853 - - (32) - - - - - (821) -
Share of
profit in
associates (12) - - - - - - - 41 (5) 24
Profit before
tax 24,299 - 10 50 (25) (3) - (692) 10 (5) 23,644
Tax charge (4,015) - - (7) - (17) - - 7 5 (4,027)
Profit after
tax 20,284 - 10 43 (25) (20) - (692) 17 - 19,617
Profit
attributable to
minority
interests (2,365) - - - - 7 - - 28 - (2,330)
Profit
attributable
to
shareholders 17,919 - 10 43 (25) (13) - (692) 45 - 17,287
Reconciliation of HK GAAP and HKFRS
Effect of transition to HKFRS (excluding HKAS 39 and HKFRS 4)
Assets Pension
Half-year acquired and Half-year
ended in other Equity Consol- ended
31Dec04 exchange post- compe- Pre- idation 31Dec04
Figures as for retirement Pro- nsation Insurance ference and Reclass- as
in HK$m reported advances benefits perty Goodwill plans contracts shares others ification restated
Interest
income 30,479 (1) - - - - 136 - (118) - 30,496
Interest
expense (10,867) - - - - - 2 (848) 122 - (11,591)
Net interest
income 19,612 (1) - - - - 138 (848) 4 - 18,905
Fee Income 9,802 - - - - - 8 - (217) - 9,593
Fee Expense (1,674) - - - - - (76) - 51 - (1,699)
Net fee income 8,128 - - - - - (68) - (166) - 7,894
Trading income 2,907 - - - - 8 15 - 244 - 3,174
Net investment
income on assets
backing
policyholder
liabilities - - - - - - 2,326 - - - 2,326
Gains less losses
from financial
investments - - - - - - - - - 915 915
Dividend
income 47 - - - - - (1) - 6 - 52
Net earned
insurance
premiums - - - - - - 9,487 - - - 9,487
Other operating
income 3,244 37 - (5) - - (1,861) - (3) 297 1,709
Total
operating
income 33,938 36 - (5) - 8 10,036 (848) 85 1,212 44,462
Net insurance
claims incurred
and movement in
policyholder
liabilities - - - - - - (10,028) - - - (10,028)
Net operating
income before
loan
impairment charges
and other
credit risk
provisions 33,938 36 - (5) - 8 8 (848) 85 1,212 34,434
Loan impairment
charges and
other
credit risk
provisions (671) (30) - - - - - - - 1 (700)
Net operating
income 33,267 6 - (5) - 8 8 (848) 85 1,213 33,734
Employee
compensation
and benefits (7,462) - 23 - - (92) 4 - 15 - (7,512)
General and
administrative
expenses (5,628) - - (27) - - (12) - (1) (1) (5,669)
Depreciation of
property, plant
and equipment (1,077) - - 141 - - - - 51 - (885)
Amortisation of
intangible assets
and impairment
of goodwill (36) - - - 36 - - - (52) - (52)
Total operating
expenses (14,203) - 23 114 36 (92) (8) - 13 (1) (14,118)
Operating
profit 19,064 6 23 109 36 (84) - (848) 98 1,212 19,616
Profit on
tangible
fixed assets
and
long-term
investments 1,006 (7) - - - - - - - (999) -
Surplus arising on
property
revaluation 171 - - 42 - - - - - (213) -
Share of
profit in
associates 426 - - - 32 - - - (44) (139) 275
Profit before
tax 20,667 (1) 23 151 68 (84) - (848) 54 (139) 19,891
Tax charge (3,071) - (16) (26) - (7) - - 20 139 (2,961)
Profit after
tax 17,596 (1) 7 125 68 (91) - (848) 74 - 16,930
Profit
attributable to
minority
interests (1,950) - - - - 11 - - (131) - (2,070)
Profit
attributable
to
shareholders 15,646 (1) 7 125 68 (80) - (848) (57) - 14,860
Consolidated Balance Sheet at 30Jun04
Reconciliation of HK GAAP and HKFRS
Effect of transition to HKFRS (excluding HKAS 39 and HKFRS 4)
Assets Pension
acquired and
in other Equity Consoli At
At exchange post- compe- Prefe- -dation 30Jun04
Figures 30Jun04 for retirement Pro- nsation Insurance rence and as
in HK$m as reported advances benefits perty Goodwill plans contracts Netting shares others restated
ASSETS
Cash and
short-term
funds 411,902 - - - - - 4,363 684 - 82 417,031
Placings with
banks maturing
after
one month 114,738 - - - - - - - - - 114,738
Certificates
of deposit 51,980 - - - - - - - - - 51,980
Hong Kong SAR
Government
certificates
of
indebtedness 85,674 - - - - - - - - - 85,674
Trading assets 85,738 - - - - - 19,241 7,714 - 722 113,415
Derivatives 35,938 - - - - - - 24,821 - - 60,759
Advances to
customers 850,127 (793) - - - - - 100 - 510 849,944
Financial
investments 402,053 - - - - 548 15,728 - - 204 418,533
Amounts due
from fellow
subsidiary
companies 43,488 - - - - - 5,420 - - (5,420) 43,488
Investments in
associates 2,786 - - (80) - - - - - (319) 2,387
Goodwill and
intangible
assets 907 - - - 43 - 2,968 - - 210 4,128
Property,
plant and
equipment 40,282 - -(10,890) - - - - - (210) 29,182
Deferred tax
assets 1,589 - 26 - - - - - - 13 1,628
Retirement
benefits 1,074 - 487 - - - - - - - 1,561
Other assets 106,427 793 - 2,667 - (59) (56,145) (6) - (253) 53,424
2,234,703 - 513 (8,303) 43 489 (8,425) 33,313 - (4,461) 2,247,872
LIABILITIES
Hong Kong SAR
currency notes
in
circulation 85,674 - - - - - - - - - 85,674
Deposits by
banks 73,900 - - - - - 158 1,582 - - 75,640
Customer
accounts 1,572,387 - - - - - (125) 108 - (1,519) 1,570,851
Trading
liabilities 35,810 - - - - - - - - - 35,810
Derivatives 33,688 - - - - - - 23,915 - - 57,603
Debt
securities in
issue 127,399 - - - - - (55) 7,696 - (3,352) 131,688
Retirement
benefit
liabilities 179 - 204 - - - - - - - 383
Amounts due
to fellow
subsidiary
companies 31,246 - - - 1 - 111 - 751 (112) 31,997
Amounts due
to ultimate
holding
company 660 - - - - - - - - - 660
Other
liabilities 58,898 - 195 - (127) 117 (1,746) 12 (751) 172 56,770
Liabilities to
policyholders
under
long-term
assurance
business 53,870 - - - - - (7,041) - - - 46,829
Current
taxation 3,828 - - - - - - - - - 3,828
Deferred
taxation 4,381 - (113)(1,016) - - 273 - - 5 3,530
Subordinated
liabilities 12,777 - - - - - - - - - 12,777
Preference
shares - - - - - - - - 47,212 - 47,212
2,094,697 - 286 (1,016) (126) 117 (8,425) 33,313 47,212 (4,806) 2,161,252
CAPITAL RESOURCES
Share capital 59,570 - - - - - - - (43,316) - 16,254
Other reserves 15,822 - - (9,745) - 192 - - (3,896) 1,615 3,988
Retained
profits 44,204 - 227 2,458 169 180 - - - (1,023) 46,215
Proposed
dividend 4,750 - - - - - - - - - 4,750
Shareholders'
funds 124,346 71,207
Minority
interests 15,660 - - - - - - - - (247) 15,413
140,006 86,620
2,234,703 - 513 (8,303) 43 489 (8,425) 33,313 - (4,461) 2,247,872
Consolidated Balance Sheet at 31Dec04
Reconciliation of HK GAAP and HKFRS
Effect of transition to HKFRS (excluding HKAS 39 and HKFRS 4)
Assets Pension
acquired and
in other Equity Consoli At
At exchange post- compe- Prefe- -dation 31Dec04
Figures 31Dec04 for retirement Pro- nsation Insurance rence and as
in HK$m reported advances benefits perty Goodwill plans contracts Netting shares others restated
ASSETS
Cash and
short-term
funds 501,207 - - - - - 5,098 4,287 - 52 510,644
Placings with
banks
maturing
after one
month 74,481 - - - - - 230 - - - 74,711
Certificates
of deposit 48,643 - - - - - 3,100 - - - 51,743
Hong Kong SAR
Government
certificates
of
indebtedness 92,334 - - - - - - - - - 92,334
Trading assets 85,356 - - - - - 14,937 8,330 - 1,276 109,899
Derivatives 54,837 - - - - - - 39,541 - 20 94,398
Advances to
customers 919,253 (561) - - - - - - - 500 919,192
Financial
investments 425,635 - - - - 566 23,829 - - 135 450,165
Amounts due
from fellow
subsidiary
companies 82,592 - - - - - 6,330 - - (6,330) 82,592
Investments
in associates 16,918 - - (107) 32 - - - - (500) 16,343
Goodwill and
intangible
assets 1,526 - - - 67 - 3,513 - - 223 5,329
Property,
plant and
equipment 42,080 - -(11,432) - - - - - (223) 30,425
Deferred tax
assets 1,659 - - - - - - - - 52 1,711
Retirement
benefits 1,297 - 10 - - - - - - - 1,307
Other assets 111,227 561 - 2,622 24 (83) (66,259) (1) - (240) 47,851
2,459,045 - 10 (8,917) 123 483 (9,222) 52,157 - (5,035) 2,488,644
LIABILITIES
Hong Kong SAR
currency
notes in
circulation 92,334 - - - - - - - - - 92,334
Deposits by
banks 73,098 - - - - - 2 1,880 - - 74,980
Customer
accounts 1,730,494 - - - - - (227) 221 - (2,377) 1,728,111
Trading
liabilities 37,281 - - - - - - - - - 37,281
Derivatives 50,635 - - - - - - 41,727 - - 92,362
Debt
securities in
issue 150,179 - - - - - (55) 8,315 - (3,277) 155,162
Retirement
benefit
liabilities 211 - 116 - - - - - - - 327
Amounts due
to fellow
subsidiary
companies 17,137 - - - - - 219 - 432 (220) 17,568
Amounts due
to ultimate
holding
company 479 - - - - - - - 74 - 553
Other
liabilities 62,548 - - - (121) (46) (54) 14 (506) (1,225) 60,610
Liabilities
to
policyholders
under
long-term
assurance
business 62,643 - - - - - (9,107) - - 1,402 54,938
Current
taxation 2,333 - - - - - - - - - 2,333
Deferred
taxation 4,676 - (23)(1,074) 50 88 - - - (2) 3,715
Subordinated
liabilities 11,142 - - - - - - - - - 11,142
Preference
shares - - - - - - - - 55,602 - 55,602
2,295,190 - 93 (1,074) (71) 42 (9,222) 52,157 55,602 (5,699) 2,387,018
CAPITAL
RESOURCES
Share capital 74,213 - - - - - - - (51,719) - 22,494
Other
reserves 17,399 - -(10,098) - 332 - - (3,883) 2,775 6,525
Retained
profits 51,083 - (83) 2,255 194 109 - - - (2,061) 51,497
Proposed
dividend 4,800 - - - - - - - - - 4,800
Shareholders'
funds 147,495 85,316
Minority
interests 16,360 - - - - - - - - (50) 16,310
163,855 101,626
2,459,045 - 10 (8,917) 123 483 (9,222) 52,157 - (5,035) 2,488,644
Consolidated Balance Sheet at 1Jan05
Effect of transition impacted by HKAS 39 and HKFRS 4
Balance Balance
excluding including
HKAS 39 HKAS 39
and and
Figures in HK$m HKFRS 4 HKFRS4 HKAS39 HKFRS 4
ASSETS
Cash and short-term funds 510,644 - (33,625) 477,019
Placings with banks
maturing after one month 74,711 - (1,018) 73,693
Certificates of deposit 51,743 - (2) 51,741
Hong Kong SAR Government
certificates of indebtedness 92,334 - - 92,334
Trading assets 109,899 - 20,041 129,940
Financial assets designated at
fair value - - 36,072 36,072
Derivatives 94,398 - (7,237) 87,161
Advances to customers 919,192 - (4,036) 915,156
Financial investments 450,165 - (15,468) 434,697
Amounts due from fellow
subsidiary companies 82,592 - (1,477) 81,115
Investments in associates 16,343 - - 16,343
Goodwill and intangible assets 5,329 - - 5,329
Property, plant and equipment 30,425 - - 30,425
Deferred tax assets 1,711 - (328) 1,383
Retirement benefits 1,307 - - 1,307
Other assets 47,851 (89) (10,384) 37,378
2,488,644 (89) (17,462) 2,471,093
LIABILITIES
Hong Kong SAR currency
notes in circulation 92,334 - - 92,334
Deposits by banks 74,980 - (2,325) 72,655
Customer accounts 1,728,111 28,518 (63,512) 1,693,117
Trading liabilities 37,281 - 125,743 163,024
Financial liabilities
designated at fair value - - 1,254 1,254
Derivatives 92,362 - 654 93,016
Debt securities in issue 155,162 - (91,473) 63,689
Retirement benefit liabilities 327 - - 327
Amounts due to fellow
subsidiary companies 17,568 - (1,731) 15,837
Amounts due to ultimate
holding company 553 - - 553
Other liabilities 60,610 (28,651) 12,540 44,499
Liabilities to policyholders under
long-term assurance business 54,938 - (54,938) -
Liabilities to customers under
investment contracts - - 28,468 28,468
Liabilities to customers under
insurance contracts issued - - 26,312 26,312
Current taxation 2,333 - 29 2,362
Deferred taxation 3,715 - (155) 3,560
Subordinated liabilities 11,142 - 74 11,216
Preference shares 55,602 - - 55,602
2,387,018 (133) (19,060) 2,367,825
CAPITAL RESOURCES
Share capital 22,494 - - 22,494
Other reserves 6,525 3 1,330 7,858
Retained profits 51,497 41 (80) 51,458
Proposed dividend 4,800 - - 4,800
Shareholders' funds 85,316 86,610
Minority interests 16,310 - 348 16,658
101,626 103,268
2,488,644 (89) (17,462) 2,471,093
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HSBC Holdings plc
By:
Name: P A Stafford
Title: Assistant Group Secretary
Date: 1 August, 2005