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 March 2006
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- ..............)
HANG SENG BANK LIMITED
2005 RESULTS - HIGHLIGHTS
- Total operating income up 17.3 per cent to HK$23,246 million (HK$19,825
million in 2004).
- Operating profit excluding loan impairment charges and other credit risk
provisions down 1.1 per cent to HK$11,686 million (HK$11,821 million in
2004).
- Pre-tax profit up 0.6 per cent to HK$13,358 million (HK$13,283 million
in 2004).
- Attributable profit down 0.2 per cent to HK$11,342 million (HK$11,364
million in 2004).
- Return on average shareholders' funds of 27.5 per cent (28.5 per cent in
2004).
- Assets up 6.2 per cent to HK$580.8 billion (HK$546.9 billion at
31Dec04).
- Earnings per share down 0.2 per cent to HK$5.93 (HK$5.94 per share in
2004).
- Fourth interim dividend of HK$1.90 per share; total dividends of HK$5.20
per share for 2005 (HK$5.20 per share in 2004).
- Total capital ratio of 12.8 per cent (12.0 per cent at 31Dec04);
tier 1 capital ratio of 10.4 per cent (10.8 per cent at 31Dec04).
- Cost efficiency ratio of 28.0 per cent (26.4 per cent in 2004).
Note: 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.
Within this document, the Hong Kong Special Administrative Region of the
People's Republic of China has been referred to as 'Hong Kong'.
Comment by Michael Smith, Chairman
"In 2005, Hang Seng's operating profit excluding loan impairment charges and
other credit risk provisions was HK$11,686 million, a decrease of 1.1 per cent.
"Attributable profit decreased 0.2 per cent to HK$11,342 million. The 2005
figure benefited from a HK$1.2 billion revaluation surplus on group investment
properties. The 2004 figure included a HK$812 million release of general
provisions.
"At the customer group level, Personal Financial Services recorded an operating
profit excluding loan impairment charges of HK$7,436 million, an increase of
10.7 per cent, reflecting an 18 per cent rise in net interest income and a 17.9
per cent expansion of our insurance business as well as increases in cards,
residential mortgages (excluding Government Home Ownership Scheme mortgages),
and other consumer lending. Commercial Banking recorded an operating profit
excluding loan impairment charges of HK$1,647 million, an increase of 11.3 per
cent, due primarily to growth in net interest income, supported by an increase
in advances to customers. Corporate and Institutional Banking saw operating
profit excluding loan impairment charges decline by 19.1 per cent to HK$554
million. High levels of liquidity together with limited corporate demand for
loans put pressure on corporate lending margins. Treasury recorded a 50.3 per
cent decline in operating profit excluding loan impairment charges to HK$1,183
million, marked by a sustained rise in funding costs and a flattening of yield
curves for all major currencies.
"Investment in future business growth saw operating expenses increase 7.4 per
cent to HK$4,546 million. Staff numbers increased to support the growth of our
Personal Financial Services and Commercial Banking businesses.
"Our mainland China network reached 12 outlets, with new openings in Shenzhen,
Shanghai and Dongguan. The Bank's 15.98 per cent investment in Industrial Bank
contributed HK$358 million to profits.
"The Hong Kong economy is expected to continue on an upward trend in 2006,
albeit at a slower pace. The anticipated upbeat trade growth on the Mainland
will help drive merchandise and service export activity. The improving labour
market will boost consumer purchasing power. However, risks and uncertainties
such as higher oil prices and US interest rate trends may create new challenges.
"Against this backdrop, we will focus on further expansion on the Mainland and
continue to develop areas such as wealth management and consumer and trade
finance, in which we have competitive strengths."
Results summary
Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('the
group') reported an audited profit attributable to shareholders of HK$11,342
million for 2005, representing a marginal decline of 0.2 per cent compared with
2004. Earnings per share was HK$5.93 (HK$5.94 in 2004).
Operating income
Total operating income rose by HK$3,421 million, or 17.3 per cent, to HK$23,246
million, underpinned by the strong growth in net interest income and net
premiums earned on life insurance business.
- Net interest income increased by HK$1,063 million, or 10.6 per cent, compared
with 2004, with an increase of 5.2 per cent in average interest-earning assets.
Net interest margin improved by 11 basis points to 2.19 per cent, benefiting
from widening of deposit spreads, contribution made by net free funds, and the
growth in customer advances, particularly higher yielding cards and personal and
SME loans, outweighing the compression of spreads on treasury investment and
money market portfolios, and the fall in mortgage portfolio yields.
- Net fee income fell by HK$551 million, or 16.1 per cent, due mainly to lower
sales of longer-term capital-guaranteed funds. Private banking investment and
advisory income, card services income, and insurance agency commissions,
however, recorded encouraging growth.
- Net trading income was down HK$534 million, or 48.0 per cent, compared with
2004. This was mainly due to certain changes in accounting presentation in the
inclusion of net interest expense of HK$306 million and revaluation losses of
HK$145 million on forward foreign exchange contracts linked to money market
transactions.
- Net earned insurance premiums rose by HK$3,445 million, or 77.9 per cent, over
2004, reflecting the strong growth of 66.4 per cent in life insurance annualised
premiums. Net insurance claims incurred and movement in policyholder liabilities
rose by HK$3,242 million, or 85.9 per cent, over 2004, in line with the growth
in the portfolios of life insurance policies in force.
- Net operating income before loan impairment charges and other credit risk
provisions rose by HK$179 million, or 1.1 per cent, to HK$16,232 million.
Operating profit
Operating profit excluding loan impairment charges and other credit risk
provisions declined by HK$135 million, or 1.1 per cent, compared with 2004.
Operating profit fell by HK$1,530 million, or 12.1 per cent.
Loan impairment charges and other credit risk provisions amounted to HK$618
million, compared with a total net release of HK$777 million for 2004, which
included a release in general provisions of HK$812 million in 2004.
Operating expenses rose by HK$314 million, or 7.4 per cent, compared with 2004.
Staff costs increased by 2.1 per cent, reflecting an increase in staff number of
303, primarily to strengthen the customer relationship teams of wealth
management and commercial banking, and to support the expansion of the group's
mainland China network. The group continued to invest in information technology
development to support business growth, and increased its marketing expenditure
to promote card and insurance products.
Attributable profit
At HK$13,358 million, pre-tax profit was HK$75 million, or 0.6 per cent, higher
than the previous year after accounting for the increase in profit from the
disposal of fixed assets and long-term investments, the surplus on property
revaluation and the share of profits from associates, primarily the group's
mainland associate, Industrial Bank Co., Ltd. ('Industrial Bank'). Attributable
profit after taxation and minority interests fell marginally by HK$22 million,
or 0.2 per cent.
Balance sheet and key ratios
At 31Dec05, total assets were HK$580.8 billion, an increase of HK$33.9 billion,
or 6.2 per cent. Advances to customers grew by 3.6 per cent, mainly reflecting
the rise in cards and personal advances, and growing demand from the property
and manufacturing sectors. Loan portfolios of the mainland branches also grew
significantly. Customer deposits and certificates of deposit and other debt
securities in issue increased by 3.4 per cent. At 31Dec05, the
advances-to-deposits ratio was 54.4 per cent, compared with 54.3 per cent a year
earlier.
Shareholders' funds (excluding proposed dividends) rose by HK$1,642 million, or
4.4 per cent, to HK$38,938 million at 31Dec05, attributable mainly to the
increase in retained profits.
The return on average total assets was 2.0 per cent (2.2 per cent in 2004). The
return on average shareholders' funds was 27.5 per cent (28.5 per cent in 2004).
The group maintained a strong capital position. Total and tier 1 capital ratios
at 31Dec05 were 12.8 per cent and 10.4 per cent respectively, compared with 12.0
per cent and 10.8 per cent at the same time in 2004. During the year,
subordinated debts qualifying as tier 2 capital were raised to improve the
composition of the capital base and enhance capital efficiency.
The cost efficiency ratio, calculated as total operating expenses to net
operating income before loan impairment (charges)/releases and other credit risk
provisions, was maintained at a low level of 28.0 per cent, reflecting the
group's operating efficiency. The cost efficiency ratio for 2004 was 26.4 per
cent.
Dividends
The Directors have declared a fourth interim dividend of HK$1.90 per share,
which will be payable on 31 March 2006 to shareholders on the register of
shareholders as of 21 March 2006. Together with the interim dividends for the
first three quarters, the total distribution for 2005 will amount to HK$5.20 per
share, the same as in 2004.
Customer group performance
Personal Corporate & Inter-
Financial Commercial Institutional segment
Figures in HK$m Services Banking Banking Treasury Other elimination Total
Year ended 31Dec05
Net interest income 7,100 1,587 612 858 514 397 11,068
Net fee income 2,101 666 79 (21) 49 - 2,874
Net trading income 367 134 6 503 - (431) 579
Net income/(loss)from
financial instruments
designated at fair value (33) - - 5 (4) 34 2
Dividend income 5 5 - - 50 - 60
Net earned
insurance premiums 7,642 223 - - - - 7,865
Other operating income 562 25 4 - 207 - 798
Inter-segment income - - - - 308 (308) -
Total operating income 17,744 2,640 701 1,345 1,124 (308) 23,246
Net insurance claims
incurred and movement
in policyholder
liabilities (6,964) (50) - - - - (7,014)
Net operating income before
loan impairment(charges)/
releases and other credit
risk provisions 10,780 2,590 701 1,345 1,124 (308) 16,232
Loan impairment(charges)/
releases and other credit
risk provisions 232 (803) (47) - - - (618)
Net operating income 11,012 1,787 654 1,345 1,124 (308) 15,614
Total operating expenses^ (3,086) (903) (142) (157) (258) - (4,546)
Inter-segment expenses (258) (40) (5) (5) - 308 -
Operating profit 7,668 844 507 1,183 866 - 11,068
Profit on disposal of
fixed assets and financial
investments - - - (217) 694 - 477
Net surplus on property
revaluation - - - - 1,313 - 1,313
Share of profits from
associates 18 234 - 106 142 - 500
Profit before tax 7,686 1,078 507 1,072 3,015 - 13,358
Share of pre-tax profit 57.5% 8.1% 3.8% 8.0% 22.6% - 100.0%
Operating profit excluding
inter-segment transactions 7,926 884 512 1,188 558 - 11,068
Operating profit excluding
loan impairment (charges)/
releases and other credit
risk provisions 7,436 1,647 554 1,183 866 - 11,686
^Depreciation/amortisation
included in operating
expenses (103) (13) (3) (2) (168) - (289)
At 31Dec05
Total assets 152,086 54,319 77,514 266,645 30,256 - 580,820
Total liabilities 372,941 77,249 31,672 33,541 21,687 - 537,090
Investments in associates 116 1,454 - 657 702 - 2,929
Capital expenditure
incurred during the year 107 20 7 2 95 - 231
Personal Corporate & Inter-
Financial Commercial Institutional segment Total
Figures in HK$m Services Banking Banking Treasury Other elimination restated
Year ended 31Dec04
Net interest income 6,016 1,332 596 1,854 207 - 10,005
Net fee income 2,465 731 208 (19) 40 - 3,425
Net trading income 276 125 7 706 (1) - 1,113
Dividend income 28 6 - - 55 - 89
Net earned insurance premiums 4,177 243 - - - - 4,420
Other operating income 531 27 2 1 212 - 773
Inter-segment income - - - - 320 (320) -
Total operating income 13,493 2,464 813 2,542 833 (320) 19,825
Net insurance claims
incurred and movement
in policyholder liabilities (3,691) (81) - - - - (3,772)
Net operating income before
loan impairment releases and
other credit risk provisions 9,802 2,383 813 2,542 833 (320) 16,053
Loan impairment releases
and other credit risk
provisions 51 596 130 - - - 777
Net operating income 9,853 2,979 943 2,542 833 (320) 16,830
Total operating expenses^ (2,826) (850) (122) (158) (276) - (4,232)
Inter-segment expenses (256) (53) (6) (5) - 320 -
Operating profit 6,771 2,076 815 2,379 557 - 12,598
Profit on disposal
of fixed assets and
financial investments - - - (4) 446 - 442
Net surplus on property
revaluation - - - - 146 - 146
Share of profits from
associates 4 45 - 20 28 - 97
Profit before tax 6,775 2,121 815 2,395 1,177 - 13,283
Share of pre-tax profit 51.0% 16.0% 6.1% 18.0% 8.9% - 100.0%
Operating profit excluding
inter-segment transactions 7,027 2,129 821 2,384 237 - 12,598
Operating profit excluding
loan impairment releases
and other credit risk
provisions 6,720 1,480 685 2,379 557 - 11,821
^Depreciation/amortisation
included in operating
expenses (104) (18) (2) (2) (138) - (264)
At 31Dec04
Total assets 142,579 46,684 77,353 256,368 23,963 - 546,947
Total liabilities 353,062 77,680 25,150 21,553 27,721 - 505,166
Investments in associates 94 1,123 - 491 591 - 2,299
Capital expenditure incurred
during the year 104 17 2 2 23 - 148
Personal Financial Services ('PFS') reported a pre-tax profit of HK$7,686
million, representing growth of 13.4 per cent over 2004, and 57.5 per cent of
total pre-tax profit. This strong performance was underpinned by the buoyant
economy and active property market, which boosted card spending, mortgages and
consumer loan demand. Net interest income rose significantly by 18.0 per cent,
as deposit spreads improved with the steady rise in interest rates and the
expansion of the card and consumer lending portfolios. Mortgage business, other
than that under the suspended GHOS Scheme, grew in an active but intensely
competitive market. The mortgage portfolio yield stabilised in the second half
of the year as mortgage pricing levels gradually moved up. Substantial releases
of mortgage and personal lending loan impairment charges under a benign credit
environment also contributed to the improved performance of PFS.
PFS continued to focus on wealth management business. The slowdown in sales of
capital-guaranteed funds under a rising interest rate environment was
compensated by increased sales of market-linked instruments. Private banking
business recorded encouraging growth in both customer numbers and asset
management portfolios. Life insurance achieved an increase of 66.4 per cent in
annualised premiums and increased its market share. The growth momentum
accelerated in the second half of 2005 with the launch of new products such as
the 'Three Year Express Wealth' life insurance plan, which provides
comprehensive life cover and good potential investment returns, with the added
benefit of a short payment term. Hang Seng Life Limited was among the market
front-runners in the launch of annuity products designed to tap the large
retirement planning market.
PFS business of the mainland branches reported good progress in the expansion of
customer base, deposits and mortgage loan growth.
Commercial Banking ('CMB') achieved a growth of 11.3 per cent in operating
profit excluding loan impairment charges, due primarily to encouraging growth of
19.1 per cent in net interest income, driven by the increase of 15.5 per cent in
customer advances. Pre-tax profit of HK$1,078 million was down by 49.2 per cent
compared with 2004, representing 8.1 per cent of group pre-tax profit. The fall
was attributable mainly to a small number of large loan impairment charges
compared with a net release in 2004.
In 2005, CMB further refined its segmentation strategy. The management of
relationships with middle-market enterprises ('MME') became even more focused by
appointing major customer relationship managers to serve the customers'
sophisticated financing needs. Business banking centres and sales management
teams were further strengthened to deepen relationships with small and
medium-sized enterprises ('SME') and increase product penetration.
The development of CMB business was also driven by the expansion of our mainland
branch network and loan portfolios. The results of CMB include the share of
profit of HK$234 million from Industrial Bank, which has a large and growing
commercial banking business.
Corporate and Institutional Banking ('CIB') recorded a pre-tax profit of HK$507
million, 37.8 per cent lower than 2004, accounting for 3.8 per cent of total
pre-tax profit. Operating profit excluding loan impairment charges was down 19.1
per cent, as the high levels of liquidity in the market, together with limited
corporate demand for loans, put pressure on corporate lending margins. CIB has
been diversifying its resources away from mainly corporate lending to more
comprehensive corporate financing and the provision of treasury services in
collaboration with Treasury's corporate services unit. It is also in the process
of rationalising its loan portfolio towards business with higher margins.
Treasury experienced a very tough operating environment in 2005 with the
sustained rise in funding costs and flattening of yield curves for all major
currencies. The decline in net trading income was also attributable to the
revaluation loss of certain financial instruments which failed to satisfy the
hedging criteria of the new accounting standards. Pre-tax profit fell by 55.2
per cent to HK$1,072 million, contributing 8.0 per cent to total pre-tax profit.
On the mainland side, Treasury has made good progress in providing treasury
services to corporate customers and structured deposits products for personal
customers.
Other showed a significant increase of 156.2 per cent in pre-tax profit. This
was mainly attributable to the surplus on revaluation of properties, and the
improved return on shareholders' funds following the rise in market interest
rates.
Contents
The financial information in this news release is based on the audited
consolidated accounts of Hang Seng Bank Limited ('the bank') and its
subsidiaries and associates ('the group') for the year ended 31Dec05.
......Highlights of Results and Chairman's Comment
......Contents
......Consolidated Income Statement
......Consolidated Balance Sheet
......Consolidated Statement of Changes in Equity
......Economic Profit
......Consolidated Cash Flow Statement
......Financial Review
...........Net interest income
...........Net fee income
...........Net trading income
...........Net income from financial instruments designated at fair value
...........Other operating income
...........Analysis of income from wealth management businesses
...........Loan impairment (charges)/releases and other credit risk provisions
...........Operating expenses
...........Profit on disposal of fixed assets and financial investments
...........Tax expenses
...........Earnings per share
...........Dividends per share
...........Segmental analysis
...........Analysis of financial assets and liabilities by accounting classification
...........Analysis of assets and liabilities by remaining maturity
...........Cash and balances with banks and other financial institutions
...........Placings with and advances to banks and other financial institutions
...........Trading assets
...........Financial assets designated at fair value
...........Advances to customers
...........Loan impairment allowances against advances to customers
...........Impaired advances/non-performing advances and allowances
...........Overdue advances
...........Rescheduled advances
...........Segmental analysis of advances to customers by geographical area
...........Gross advances to customers by industry sector
...........Financial investments
...........Amount due from/to immediate holding company and fellow subsidiary companies
...........Investments in associates
...........Intangible assets
...........Other assets
...........Current, savings and other deposit accounts
...........Certificates of deposit and other debt securities in issue
...........Trading liabilities
...........Other liabilities
...........Subordinated liabilities
...........Shareholders' funds
...........Capital resources management
...........Liquidity ratio
...........Reconciliation of cash flow statement
...........Contingent liabilities, commitments and derivatives
...........Cross-border claims
...........Statutory accounts and accounting policies
...........Comparative figures
...........Property revaluation
...........Market risk
...........Foreign currency positions
...........Ultimate holding company
...........Register of shareholders
...........Proposed timetable for 2006 quarterly dividends
...........News release
Appendix
Consolidated Income Statement
Year ended
31Dec05 31Dec04
Figures in HK$m restated
Interest income 19,029 12,782
Interest expense (7,961) (2,777)
Net interest income 11,068 10,005
Fee income 3,394 3,841
Fee expense (520) (416)
Net fee income 2,874 3,425
Net trading income 579 1,113
Net income from financial instruments
designated at fair value 2 -
Dividend income 60 89
Net earned insurance premiums 7,865 4,420
Other operating income 798 773
Total operating income 23,246 19,825
Net insurance claims incurred and
movement in policyholder liabilities (7,014) (3,772)
Net operating income before loan
impairment (charges)/releases
and other credit risk provisions 16,232 16,053
Loan impairment (charges)/releases
and other credit risk provisions (618) 777
Net operating income 15,614 16,830
Employee compensation and benefits (2,281) (2,234)
General and administrative expenses (1,976) (1,734)
Depreciation of premises, plant and equipment (280) (256)
Amortisation of intangible assets (9) (8)
Total operating expenses (4,546) (4,232)
Operating profit 11,068 12,598
Profit on disposal of fixed assets
and financial investments 477 442
Net surplus on property revaluation 1,313 146
Share of profits from associates 500 97
Profit before tax 13,358 13,283
Tax expenses (1,795) (1,711)
Profit for the year 11,563 11,572
Profit attributable to minority interests (221) (208)
Profit attributable to shareholders 11,342 11,364
Dividends 9,942 9,942
Figures in HK$
Earnings per share 5.93 5.94
Dividends per share 5.20 5.20
Consolidated Balance Sheet At
31Dec04
Figures in HK$m At 31Dec05 restated
Assets
Cash and balances with banks and
other financial institutions 9,201 7,248
Placings with and advances to banks and
other financial institutions 69,286 75,079
Trading assets 12,600 4,232
Financial assets designated at fair value 6,027 -
Derivative financial instruments 1,715 1,684
Advances to customers 260,680 251,553
Financial investments 189,904 184,706
Investments in associates 2,929 2,299
Investment properties 4,273 3,383
Premises, plant and equipment 6,750 5,558
Interest in leasehold land held for own
use under operating lease 594 609
Intangible assets 1,636 1,266
Other assets 15,225 9,330
580,820 546,947
Liabilities
Current, savings and other deposit
accounts 430,995 447,460
Deposits from banks 12,043 11,934
Trading liabilities 45,804 5,840
Financial liabilities designated at fair
value 967 -
Derivative financial instruments 1,792 1,273
Certificates of deposit and other
debt securities in issue 10,023 16,055
Other liabilities 14,138 11,740
Liabilities to customers under
investment contracts 561 540
Liabilities to customers under
insurance contracts 15,335 8,656
Deferred tax and current tax liabilities 1,921 1,668
Subordinated liabilities 3,511 -
537,090 505,166
Capital resources
Minority interests 1,159 852
Share capital 9,559 9,559
Retained profits 26,052 23,856
Other reserves 3,327 3,881
Proposed dividends 3,633 3,633
Shareholders' funds 42,571 40,929
43,730 41,781
580,820 546,947
Figures in HK$
Net asset value per share 22.87 21.85
Consolidated Statement of Changes in Equity
Attributable to shareholders
Total
Share Other Retained Proposed Minority equity
Figures in HK$m capital reserves profits dividends Total interests restated
Balance at 01Jan05
- As above 9,559 3,881 23,856 3,633 40,929 852 41,781
- Opening adjustment
for the adoption of
HKAS 39 - 532 533 - 1,065 (14) 1,051
- As restated 9,559 4,413 24,389 3,633 41,994 838 42,832
Property revaluation
reserve, net of tax - 765 107 - 872 - 872
- Unrealised surplus on
revaluation - 863 - - 863 - 863
- Depreciation charge on
revaluation - (58) 58 - - - -
- Realisation of revaluation
surplus on disposal of
premises - (40) 49 - 9 - 9
Available-for-sale
investments, net of tax - (1,475) - - (1,475) - (1,475)
- Revaluation losses taken
to equity - (988) - - (988) - (988)
- Transferred to income
statement on disposal - (487) - - (487) - (487)
Cash flow hedges,
net of tax - (492) - - (492) - (492)
- Revaluation
losses taken to equity - (492) - - (492) - (492)
Exchange and other
adjustments - 52 (2) - 50 - 50
Actuarial gains on
defined benefit plans - - 158 - 158 - 158
Employees' options granted
cost-free by ultimate
holding company - 64 - - 64 - 64
Increase in subsidiary's
capital - - - - - 100 100
Profit for the year - - 11,342 - 11,342 221 11,563
Dividends proposed
during the year - - (9,942) 9,942 - - -
Dividends approved
and declared during the
year - - - (9,942) (9,942) - (9,942)
Balance at
31Dec05 9,559 3,327 26,052 3,633 42,571 1,159 43,730
Attributable to shareholders
Total
Share Other Retained Proposed Minority equity
Figures in HK$m capital reserves profits dividends Total interests restated
Balance at 01Jan04
- As previously
reported 9,559 6,921 19,720 3,441 39,641 644 40,285
- Arising on change in
accounting policies - (3,679) 2,255 - (1,424) - (1,424)
- As restated 9,559 3,242 21,975 3,441 38,217 644 38,861
Property revaluation
reserve, net of tax - 664 711 - 1,375 - 1,375
- Unrealised surplus on
revaluation - 712 637 - 1,349 - 1,349
- Depreciation
charge on revaluation - (46) 46 - - - -
- Realisation of
revaluation surplus on
disposal of premises - (2) 28 - 26 - 26
Long-term equity
investment revaluation
reserve, net of tax - (74) - - (74) - (74)
- Revaluation
gains taken to equity - 332 - - 332 - 332
- Transferred to
income statement
on disposal - (406) - - (406) - (406)
Exchange and
other adjustments - 3 6 - 9 - 9
Actuarial loss on
defined benefit plans - - (258) - (258) - (258)
Employees' options
granted cost-free
by ultimate
holding company - 46 - - 46 - 46
Profit for the year - - 11,364 - 11,364 208 11,572
Dividends proposed
during the year - - (9,942) 9,942 - - -
Dividends approved
and declared during
the year - - - (9,750) (9,750) - (9,750)
Balance at 31Dec04 9,559 3,881 23,856 3,633 40,929 852 41,781
Economic Profit
Economic profit is calculated from post-tax profit, adjusted for any surplus/
deficit arising from property revaluation and depreciation attributable to the
revaluation surplus, and takes into account the cost of capital invested by the
bank's shareholders. For the year 2005, economic profit was HK$6,084 million, a
decrease of HK$1,291 million, or 17.5 per cent, as compared with 2004. Post-tax
profit, adjusted for the property revaluation surplus net of deferred tax
(HK$1,083 million) and depreciation attributable to the revaluation surplus
(HK$44 million), fell by HK$1,023 million, due to a large release in general
provisions in the same period in 2004. The cost of capital rose by HK$277
million, in line with the growth in invested capital. The economic profit figure
indicates that the bank continues to create value for its shareholders.
Year ended
31Dec05 31Dec04
restated
HK$m % HK$m %
Average invested capital 36,000 34,084
Return on invested capital^ 10,303 28.6 11,317 33.2
Cost of capital (4,219) (11.7) (3,942) (11.6)
Economic profit 6,084 16.9 7,375 21.6
^Return on invested capital is based on post-tax profit excluding any surplus/
deficit arising from property revaluation and depreciation attributable to the
revaluation surplus.
Consolidated Cash Flow Statement
31Dec05 31Dec04
Figures in HK$m restated
Net cash inflow from operating activities 26,840 17,623
Cash flows from investing activities
Purchase of an interest in an associate - (1,634)
Dividends received from associates 75 21
Purchase of available-for-sale investments (48,780) -
Purchase of held-to-maturity debt securities (190) (61,039)
Proceeds from sale or redemption of
available-for-sale investments 21,888 -
Proceeds from sale or redemption of
held-to-maturity debt securities 33 39,337
Purchase of fixed assets (167) (139)
Proceeds from sale of fixed assets 186 181
Interest received from available-for-sale
investments 4,495 3,258
Dividends received from available-for-sale
investments 58 131
Net cash outflow from investing activities (22,402) (19,884)
Cash flows from financing activities
Dividends paid (9,942) (9,750)
Interest paid for subordinated liabilities (58) -
Proceeds from subordinated liabilities,
including financial liabilities designated
at fair value 4,478 -
Net cash outflow from financing activities (5,522) (9,750)
Decrease in cash and cash equivalents (1,084) (12,011)
Cash and cash equivalents at 1 January 67,051 77,575
Effect of foreign exchange rate changes (454) 1,487
Cash and cash equivalents at 31 December 65,513 67,051
Financial Review
Net interest income
2005 2004
Figures in HK$m restated
Net interest income^ 11,068 10,005
Average interest-earning assets 505,221 480,317
Net interest spread 1.94% 2.00%
Net interest margin 2.19% 2.08%
^ Included within net interest income is HK$20 million in respect of interest
income accrued on impaired advances.
Net interest income increased by HK$1,063 million, or 10.6 per cent, compared
with 2004, with an increase of HK$24.9 billion, or 5.2 per cent, in average
interest-earning assets. Net interest margin improved by 11 basis points to 2.19
per cent. Net interest spread fell 6 basis points to 1.94 per cent, while the
contribution from net free funds rose by 17 basis points to 0.25 per cent,
benefiting from the steady rise in market interest rates.
The gradual rise in market interest rates in 2005 led to a widening of deposit
spreads and boosted the contribution made by net free funds. The net interest
margin also benefited from the growth in customer advances, particularly higher
yielding cards and personal and SME loans, and the increase in interest earned
on the life insurance debt securities portfolio. The exclusion of HK$272 million
in net interest expense of the trading and fair value portfolio following the
change in accounting presentation in 2005 also contributed to the increase in
net interest income.
Treasury securities investment and money market portfolios were negatively
affected by the rise in funding costs and the flattening of yield curves.
Average mortgage portfolio yields were lower than in 2004, although new mortgage
pricing moved up gradually in the second half of 2005.
The impact of individual factors on net interest income and net interest margin
is analysed below:
HK$m Basis points
Net interest Net interest
income margin
Widening of deposit spreads 354 7
Increase in interest income from insurance
fund assets 148 3
Narrowing of spreads on treasury securities
investment and money market portfolios (758) (15)
Fall in mortgage portfolio yields (199) (4)
Contribution from net free funds 859 17
Loan growth and spread improvement 137 3
Growth in average interest-earning assets 522 -
1,063 11
The average yield on the residential mortgage portfolio (excluding GHOS
mortgages and staff loans) was 225 basis points below Best Lending Rate ('BLR')
for 2005, compared with 202 basis points below BLR in 2004. The average yield
was on a downward trend during the first half of 2005 but stabilised in the
second half, with BLR and mortgage pricing gradually moving up. Mortgage
incentive payments totaled HK$91 million, compared with HK$157 million in 2004.
With effect from 1 January 2005, and in accordance with HKAS 30, interest income
and expenses of financial instruments for trading and designated at fair value
are reported as net trading income and net income from financial instruments
designated at fair value respectively. The following table shows the total net
interest income from all sources for both years on a comparable basis.
2005 2004
Figures in HK$m restated
Net interest income as per income
statement 11,068 10,005
Interest income less expense from:
- trading financial instruments (306) -
- fair value financial instruments 34 -
Total net interest income 10,796 10,005
Net fee income
2005 2004
Figures in HK$m restated
- Stockbroking and related services 493 560
- Retail investment products and
funds under management 916 1,388
- Insurance 116 101
- Account services 225 214
- Private banking 174 111
- Remittances 141 125
- Cards 705 598
- Credit facilities 117 268
- Trade services 375 360
- Other 132 116
Fee income 3,394 3,841
Fee expense (520) (416)
2,874 3,425
Net fee income was HK$551 million, or 16.1 per cent, lower than in 2004. Sales
of capital-guaranteed funds slowed significantly under a rising interest rate
environment, leading to a fall of 34.0 per cent in fee income from retail
investment products and funds under management. This was partly compensated by
growth in the issue of market-linked instruments, which generate trading income
instead of fee income. Credit facilities fees fell by HK$151 million, due mainly
to the amortisation of fees as part of effective interest income under the new
accounting standards. Income from stockbroking and securities-related activities
fell by HK$67 million, or 12.0 per cent, affected by the fall in retail investor
activity. Private banking investment services and advisory income rose by 56.8
per cent to HK$174 million. Card services income rose by HK$107 million, or 17.9
per cent. There has been a growth of 19.7 per cent in cardholder spending, the
result of various cash dollar awards and merchant sponsored benefit campaigns,
improved consumer sentiment and an expansion of 10.2 per cent in the credit card
base following a series of successful acquisition programmes. Insurance agency
commission also recorded encouraging growth of 14.9 per cent, mainly from
commercial banking business.
Net trading income
2005 2004
Figures in HK$m restated
Dealing profits:
- Foreign exchange 785 975
- Securities, derivatives and other trading
activities 100 49
- Income from insurance fund assets - 89
885 1,113
Net interest expense on trading assets and
liabilities (306) -
579 1,113
Net trading income fell by HK$534 million, or 48.0 per cent, compared with the
previous year. Net trading income was maintained at the same level as that in
2004 excluding the impact of certain changes due to the application of new
accounting standards that came into effect on 1 January 2005. These changes are
the inclusion of net interest expense of HK$306 million on trading assets and
liabilities and revaluation losses of HK$145 million on forward foreign exchange
contracts linked to money market activities, and the reduction in the income of
HK$89 million from the trading portfolio of life insurance fund assets.
There was a significant rise in income earned on derivatives embedded in
currency and other market-linked deposits and instruments. This was offset by a
fall in foreign exchange income due to lower customer transaction volumes,
losses on securities and other trading in an adverse interest rate environment,
and revaluation losses on certain financial instruments that failed to satisfy
the hedging criteria of HKAS 39.
Net income from financial instruments designated at fair value
Net income from financial instruments designated at fair value amounted to HK$2
million, including net interest income and expense, investment income, and
revaluation gains and losses. On adoption of HKAS 39 with effect from 1 January
2005, certain financial assets, liabilities and derivatives are designated at
fair value, mainly to eliminate or significantly reduce accounting mismatch.
Certain long-term insurance fund assets are also designated at fair value to
meet policyholders' liabilities. Prior to the adoption of HKAS 39, these income
streams were reported under their respective income categories.
Other operating income
2005 2004
Figures in HK$m restated
Rental income from invested properties 207 202
Value of in-force long-term assurance
business 316 255
Other 275 316
798 773
Analysis of income from wealth management businesses
2005 2004
Figures in HK$m restated
Investment income:
- retail investment products and
funds under management^ 1,199 1,413
- private banking 188 123
- stockbroking and related services 493 560
- margin trading 63 66
1,943 2,162
Insurance income:
- life insurance
-- underwriting including embedded value 869 623
-- life investment income^^ 406 418
- general insurance and others 270 269
1,545 1,310
Total 3,488 3,472
^ Income from retail investment products and funds under management includes
income reported under net fee income on the sale of unit trust funds and third
party investment products. It also includes profits on the issue of structured
investment products, reported under net trading income.
^^ Investment income from insurance funds includes income reported as net
interest income, net trading income and net income from financial instruments
designated at fair value.
Wealth management income rose by HK$16 million, with the 17.9 per cent growth in
insurance income making up for the 10.1 per cent reduction in income from
investment services.
The life insurance business continued to gain momentum, achieving a 66.4 per
cent growth in annualised premiums and gaining market share, with an increase in
both the number of policies concluded and in the premium per policy. New
products, such as 'Three Year Express Wealth' which provides comprehensive life
cover and potential enhancement in investment return, have been very well
received.
The investment services business became more diversified in 2005. Under a rising
interest rate environment, focus was shifted from the sale of longer-term,
capital-guaranteed funds which generate higher upfront fee income, to the issue
of shorter-term, market-linked deposits and instruments which turn over more
quickly but with lower profit margins. Private banking business continued to
expand its customer base and funds under management, and reported growth of 52.8
per cent in investment services and advisory fees. Stockbroking and related
services, however, fell by 12.0 per cent, affected by the fall in retail
investor activity.
Total funds under management, including discretionary and advisory, grew by 18.1
per cent to HK$106.2 billion.
Loan impairment (charges)/releases and other credit risk provisions
2005 2004
Figures in HK$m restated
Loan impairment (charges)/releases
- individually assessed (309) 141
- collectively assessed
-- portfolio basis (122) (176)
-- individually unimpaired loans (187) 812
(618) 777
Of which:
- new and additional (1,070) (463)
- releases 351 1,131
- recoveries 101 109
(618) 777
Loan impairment charges and other credit risk provisions amounted to HK$618
million, compared with a net release of HK$777 million in 2004. Impairment
charges on individually assessed loans amounted to HK$309 million, with the
increase in charges on commercial banking accounts partially offset by net
releases from mortgages and personal loans, which benefited from rising property
prices, falling unemployment, and a reduction in bankruptcy cases. This compared
with a net release of HK$141 million, mainly from corporate and commercial
banking customer accounts, in 2004. Charges on collectively assessed portfolios
of small homogeneous loans amounted to HK$122 million, reflecting the
improvement in credit card charge-off rates under the favourable economic
environment. This compared favourably with the charge of HK$176 million on loans
collectively assessed on a portfolio basis in 2004. Collective assessment of the
loans not individually identified as impaired recorded a charge of HK$187
million, as loss rates were updated in the light of historic experience. This
compared with a release of HK$812 million in 2004.
Operating expenses
2005 2004
Figures in HK$m restated
Employee compensation and benefits:
- salaries and other costs 2,144 2,065
- retirement benefit costs 137 169
2,281 2,234
General and administrative expenses:
- rental expenses 207 193
- other premises and equipment 751 677
- other operating expenses 1,018 864
1,976 1,734
Depreciation of business premises
and equipment 280 256
Amortisation of intangible assets 9 8
4,546 4,232
Cost efficiency ratio 28.0% 26.4%
Staff numbers by region^
2005 2004
Hong Kong 7,425 7,228
Mainland and others 420 314
Total 7,845 7,542
^ Full-time equivalent
Operating expenses rose by HK$314 million, or 7.4 per cent. Staff costs
increased by 2.1 per cent, due to the salary increment at the beginning of the
year and the increase in staff numbers. The 10.9 per cent increase in other
premises and equipment expenses was mainly attributable to information
technology expenditure on the enhancement of the group's e-banking platform,
credit management systems and new product launches. Other operating expenses
rose by 17.8 per cent. The group stepped up its marketing expenditure to support
the launch of new investment and insurance products and credit card promotion
campaigns. Processing fees also increased with the further migration of
back-office functions to HSBC Group service centres in lower cost areas.
Depreciation of business premises and equipment rose by 9.4 per cent as a result
of the increase in fair value of group premises.
The number of full-time equivalent staff increased by 303. The increased staff
number in Hong Kong was mainly to further strengthen the Personal Financial
Services and Commercial Banking relationship management teams. The expansion of
the group's mainland network in 2005 (with the opening of a branch in Beijing
and two sub-branches in Shanghai, plus the expansion of the Fuzhou branch)
brought the mainland workforce to 377 full-time equivalent staff at 31 December
2005, an increase of 32.7 per cent over the previous year end.
The cost efficiency ratio for 2005 was 28.0 per cent, compared with 26.4 per
cent for 2004.
Profit on disposal of fixed assets and financial investments
2005 2004
Figures in HK$m restated
Profit on disposal of available-for-sale
securities
- realisation of amounts previously
recognised in reserves at 1 January 611 -
- net losses arising in current year (153) -
458 -
Profit on disposal of long-term financial
investments
- realisation of amounts previously
recognised in reserves at 1 January - 371
- net gains arising in current year - 41
- 412
Profit less loss on disposal of fixed
assets 19 30
477 442
The profit on disposal of financial investments comprises gains on sales of
equity securities less losses on disposals of available-for-sale debt
securities.
Tax expenses
Taxation in the consolidated income statement represents:
2005 2004
Figures in HK$m restated
Current tax - provision
for Hong Kong profits tax
Tax for the year 1,501 1,522
Current tax - taxation
outside Hong Kong
Tax for the year 12 7
Deferred tax
Origination and reversal of
temporary differences 282 182
Total tax expenses 1,795 1,711
The current tax provision is based on the estimated assessable profit for 2005,
and is determined for the bank and its subsidiaries operating in the Hong Kong
SAR by using the Hong Kong profits tax rate of 17.5 per cent (the same rate as
in 2004). For subsidiaries and branches operating in other jurisdictions, the
appropriate tax rates prevailing in the relevant countries are used.
Deferred tax is calculated at the tax rates that are expected to apply in the
year when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement except when it relates to items
charged or credited directly to reserves, in which case the deferred tax is also
recorded within reserves. The carrying amount of deferred tax assets/liabilities
is reviewed at each balance sheet date and is reduced to the extent that it is
no longer probable that sufficient taxable profit will be available to allow the
related tax benefit to be utilised.
Earnings per share
The calculation of earnings per share in 2005 is based on earnings of HK$11,342
million (HK$11,364 million in 2004) and on the weighted average number of
ordinary shares in issue of 1,911,842,736 shares (unchanged from 2004).
Dividends per share
2005 2004
HK$ HK$m HK$ HK$m
per share per share
First interim 1.10 2,103 1.10 2,103
Second interim 1.10 2,103 1.10 2,103
Third interim 1.10 2,103 1.10 2,103
Fourth interim 1.90 3,633 1.90 3,633
5.20 9,942 5.20 9,942
Segmental analysis
Segmental information is presented in respect of business and geographical
segments. Business by customer group information, which is more relevant to the
group in making operating and financial decisions, is chosen as the primary
reporting format.
For the purpose of segmental analysis, the allocation of revenue reflects the
benefits of capital and other funding resources allocated to the customer groups
or geographical segments by way of internal capital allocation and funds
transfer pricing mechanisms. Cost allocation is based on the direct cost
incurred by the respective customer groups and apportionment of management
overheads. Rental charges at market rate for usage of premises are reflected as
inter-segment income for the 'Other' customer group and inter-segment expenses
for the respective customer groups.
(a) By customer group
The group's business comprises five customer groups. Personal Financial Services
provides banking (including deposits, credit cards, mortgages and other retail
lending) and wealth management services (including private banking, investment
and insurance) to personal customers. Commercial Banking manages middle market
and smaller corporate relationships and specialises in trade-related financial
services. Corporate and Institutional Banking handles relationships with large
corporate and institutional customers. Treasury engages in interbank and capital
market activities and proprietary trading. Treasury also manages the funding and
liquidity positions of the group and other market risk positions arising from
banking activities. 'Other' mainly represents management of shareholders' funds
and investments in premises, investment properties and equity shares.
Pre-tax profit contributed by the customer groups in 2005 compared with 2004 is
set out in the table below. More customer group analysis and discussions are set
out the 'Customer group performance' section in page 5.
Personal Corporate & Inter-
Financial Commercial Institutional segment
Figures in HK$m Services Banking Banking Treasury Other elimination Total
Year ended 31Dec05
Profit before tax 7,686 1,078 507 1,072 3,015 - 13,358
Share of pre-tax profit 57.5% 8.1% 3.8% 8.0% 22.6% - 100.0%
Year ended 31Dec04
Profit before tax 6,775 2,121 815 2,395 1,177 - 13,283
Share of pre-tax profit 51.0% 16.0% 6.1% 18.0% 8.9% - 100.0%
(b) By geographical region
The geographical regions in this analysis are classified by the location of the
principal operations of the subsidiary companies or, in the case of the bank
itself, by the location of the branches responsible for reporting the results or
advancing the funds.
Mainland
Figures in HK$m Hong Kong Americas and other Total
Year ended 31Dec05
Income and expense
Total operating income 21,377 1,644 225 23,246
Profit before tax 11,253 1,614 491 13,358
At 31Dec05
Total assets 497,406 60,845 22,569 580,820
Total liabilities 520,260 9,395 7,435 537,090
Capital expenditure incurred
during year 206 - 25 231
Contingent liabilities and
commitments 137,536 - 3,973 141,509
Year ended 31Dec04 (restated)
Income and expense
Total operating income 18,105 1,594 126 19,825
Profit before tax 11,590 1,566 127 13,283
At 31Dec04
Total assets 460,612 69,675 16,660 546,947
Total liabilities 490,665 9,315 5,186 505,166
Capital expenditure incurred
during year 143 - 5 148
Contingent liabilities and
commitments 123,563 - 2,925 126,488
Analysis of financial assets and liabilities by accounting classification
The following matrix sets out the financial assets and liabilities by type and
by accounting classification on adoption of HKAS 39. The related changes in
accounting policies are set out in the appendix on page 65.
Designated Available Amortised
Figures in HK$m Trading at fair value for sale cost Total
At 31Dec05
Financial assets
Cash and balances with
banks and other
financial institutions - - - 9,201 9,201
Placings with and
advances to banks and
other financial
institutions - - - 69,286 69,286
Treasury bills 2,594 - 4,816 - 7,410
Certificates of
deposit 538 194 25,909 1,138 27,779
Investment securities 9,468 5,833 148,448 9,593 173,342
Derivative financial
instruments 1,245 16 454 - 1,715
Advances to customers - - - 260,680 260,680
Total financial assets 549,413
Other assets 31,407
Total assets 580,820
Financial liabilities
Deposits by banks - - - 12,043 12,043
Customer accounts 24,422 - - 430,995 455,417
Certificates of deposit
and other debt
securities in issue 13,616 - - 10,023 23,639
Securities net short
position 7,766 - - - 7,766
Derivative financial
instruments 1,307 28 457 - 1,792
Liabilities to customers
under investment
contracts - - - 561 561
Subordinated liabilities - 967 - 3,511 4,478
Total financial
liabilities 505,696
Liabilities to customers
under insurance contracts 15,335
Other liabilities 16,059
Total liabilities 537,090
Analysis of assets and liabilities by remaining maturity
The maturity analysis is based on the remaining period at the balance sheet date
to the contractual maturity date, with the exception of the trading portfolios
that may be sold before maturity and are accordingly recorded as 'Repayable on
demand'.
Three
months Three One
Repayable or less months year Over
on but not to to five
Figures in HK$m demand on demand one year five years years Undated Total
Assets
Cash and balances with
banks and other
financial institutions 9,201 - - - - - 9,201
Placings with and
advances to banks and
other financial institutions 11,824 52,661 4,597 204 - - 69,286
Trading assets 12,600 - - - - - 12,600
Financial assets designated
at fair value - 52 113 1,601 2,262 1,999 6,027
Derivative financial
instruments 1,246 106 105 233 25 - 1,715
Advances to customers 14,330 26,348 33,457 91,279 95,266 - 260,680
Financial investments - 14,214 35,010 126,831 12,528 1,321 189,904
Investments in associates - - - - - 2,929 2,929
Investment properties - - - - - 4,273 4,273
Premises, plant and
equipment - - - - - 6,750 6,750
Interest in leasehold land
held for own use under
operating lease - - - - - 594 594
Intangible assets - - - - - 1,636 1,636
Other assets 8,589 4,589 1,360 28 6 653 15,225
At 31Dec05 57,790 97,970 74,642 220,176 110,087 20,155 580,820
At 31Dec04 37,328 108,219 75,973 209,636 99,669 16,122 546,947
Liabilities
Current, savings and other
deposit accounts 233,907 190,206 5,916 966 - - 430,995
Deposits from banks 1,664 10,370 9 - - - 12,043
Trading liabilities 45,804 - - - - - 45,804
Financial liabilities
designated at fair value - - - - 994 (27) 967
Derivative financial
instruments 1,307 22 81 346 36 - 1,792
Certificates of deposit and
other debt securities in issue - 233 1,952 7,788 50 - 10,023
Other liabilities 6,706 6,661 442 48 99 182 14,138
Liabilities to customers under
investment contracts - - - - - 561 561
Liabilities to customers under
insurance contracts - - - - - 15,335 15,335
Deferred tax and current tax
liabilities 370 2 78 - - 1,471 1,921
Subordinated liabilities - - - - 3,511 - 3,511
At 31Dec05 289,758 207,494 8,478 9,148 4,690 17,522 537,090
At 31Dec04 319,208 144,903 16,059 12,738 1,677 10,581 505,166
Cash and balances with banks and other financial institutions
At 31Dec05 At 31Dec04
Figures in HK$m restated
Cash in hand 4,772 5,037
Balances with central banks 303 692
Balances with banks and other financial
institutions 4,126 1,519
9,201 7,248
Placings with and advances to banks and other financial institutions
At 31Dec05 At 31Dec04
Figures in HK$m restated
Placings with and advances to banks and other
financial institutions maturing within one
month 54,338 57,597
Placings with and advances to banks and
other financial institutions maturing after
one month 14,948 17,482
69,286 75,079
Trading assets
At 31Dec05 At 31Dec04
Figures in HK$m restated
Treasury bills 2,594 2,347
Certificates of deposit 538 19
Other debt securities 9,440 1,822
Debt securities 12,572 4,188
Equity shares 28 44
12,600 4,232
Debt securities:
- listed in Hong Kong 767 693
- listed outside Hong Kong - 7
767 700
- unlisted 11,805 3,488
12,572 4,188
Equity shares:
- listed in Hong Kong 17 10
- unlisted 11 34
28 44
12,600 4,232
Debt securities:
Issued by public bodies:
- central governments and central banks 5,625 4,027
- other public sector entities 1,489 2
7,114 4,029
Issued by other bodies:
- banks and other financial institutions 2,836 78
- corporate entities 2,622 81
5,458 159
Equity shares:
Issued by corporate entities 28 44
12,600 4,232
Trading assets increased by HK$8,368 million, or 197.7 per cent, due mainly to
the increase in other debt securities. On adoption of HKAS 39, certain debt
securities and the related interest rate swaps were transferred to the trading
book to better reflect the management of these instruments.
Financial assets designated at fair value
Figures in HK$m At 31Dec05 At 31Dec04
Certificates of deposit 194 -
Other debt securities 4,075 -
Debt securities 4,269 -
Equity shares 1,758 -
6,027 -
Debt securities:
- listed in Hong Kong 100 -
- listed outside Hong Kong 22 -
122 -
- unlisted 4,147 -
4,269 -
Equity shares:
- listed in Hong Kong 732 -
- listed outside Hong Kong 979 -
1,711 -
- unlisted 47 -
1,758 -
6,027 -
Debt securities:
Issued by public bodies:
- central governments and central banks 865 -
- other public sector entities 295 -
1,160 -
Issued by other bodies:
- banks and other financial institutions 2,937 -
- corporate entities 172 -
3,109 -
Equity shares:
Issued by corporate entities 1,758 -
6,027 -
Financial assets are designated at fair value, usually together with the related
liabilities or derivative financial instruments, primarily for the purpose of
eliminating or significantly reducing the accounting mismatch. The figures also
include those financial assets of the life insurance funds designated at fair
value for backing policyholder liabilities. The policy and criteria for
financial instruments designated at fair value are set out in the appendix.
Advances to customers
At 31Dec05 At 31Dec04
Figures in HK$m restated
Gross advances to customers 261,714 252,564
Loan impairment allowances:
- individually assessed (524) (692)
- collectively assessed (510) (319)
260,680 251,553
Included in advances to customers are:
- trade bills 3,024 3,053
- loan impairment allowances (14) (8)
3,010 3,045
Loan impairment allowances against advances to customers
Collectively assessed
Loans not
individually
Individually Portfolio identified as
Figures in HK$m assessed basis impaired Total
At 1 January 2005 (restated) 692 30 289 1,011
Amounts written off (510) (166) - (676)
Recoveries of advances written
off in previous years 53 48 - 101
New impairment allowances
charged to income statement 707 176 187 1,070
Impairment allowances released
to income statement (398) (54) - (452)
Unwind of discount of loan
impairment allowances (20) - - (20)
At 31 December 2005 524 34 476 1,034
Total loan impairment allowances as a percentage of gross advances to customers
are as follows:
At 31Dec05 At 31Dec04
% restated %
Loan impairment allowances
- individually assessed 0.20 0.27
- collectively assessed
-- portfolio basis 0.01 0.01
-- loans not individually identified as impaired 0.18 0.12
Total loan impairment allowances 0.39 0.40
Total loan impairment allowances as a percentage of gross advances to customers
stood at 0.39 per cent at 31 December 2005, compared with 0.40 per cent at the
previous year-end. Individually assessed allowances as a percentage of gross
advances fell to 0.20 per cent, reflecting the writing off of irrecoverable
balances against impairment allowances, and the release of impairment allowances
on mortgage and personal loans under the rising property market and stable
credit environment. Collectively assessed allowances were 0.19 per cent of gross
advances to customers.
Impaired advances/non-performing advances and allowances
At 31Dec05 At 31Dec04
Figures in HK$m restated
Gross impaired advances/non-performing advances 1,433 1,793
Loan impairment allowances (558) (722)
Net impaired advances/non-performing advances 875 1,071
Loan impairment allowances
as a percentage of gross impaired advances/
non-performing advances 38.9% 40.3%
Gross impaired advances/non-performing advances
as a percentage of gross advances to customers 0.5% 0.7%
Impaired advances are individually assessed advances with objective evidence of
impairment on an individual basis. Impairment allowances are made to write down
the carrying value of the advances to the discounted value of future recoverable
amounts, including the realisation of collateral.
Non-performing advances are advances on which interest has been placed in
suspense or on which interest accrual has ceased to accrue.
Gross impaired advances as a percentage of gross advances to customers stood at
0.5 per cent, compared with the ratio of gross non-performance advances to gross
advances to customers of 0.7 per cent in 2004. Gross impaired advances were
HK$1,433 million, which was lower than the non-performing advances of HK$1,793
million at last year-end, mainly due to the recovery and upgrading of
residential mortgages.
Overdue advances
Advances to customers that are more than three months overdue and their
expression as a percentage of gross advances to customers are as follows:
At 31Dec05 At 31Dec04
restated
HK$m % HK$m %
Gross advances to customers which
have been overdue with respect to
either principal or interest for
periods of:
- six months or less but over three
months 482 0.2 587 0.2
- one year or less but over six
months 211 0.1 304 0.1
- over one year 169 - 430 0.2
862 0.3 1,321 0.5
Advances with a specific repayment date are classified as overdue when the
principal or interest is overdue and remains unpaid at year-end. Advances
repayable by regular instalments are treated as overdue when an instalment
payment is overdue and remains unpaid at year-end. Advances repayable on demand
are classified as overdue either when a demand for repayment has been served on
the borrower but repayment has not been made in accordance with the demand
notice, or when the advances have remained continuously outside the approved
limit advised to the borrower for more than the overdue period in question.
Rescheduled advances
Rescheduled advances and their expression as a percentage of gross advances to
customers is as follows:
At 31Dec05 At 31Dec04
restated
HK$m % HK$m %
Rescheduled advances to customers 361 0.1 1,512 0.6
Rescheduled advances are those that have been rescheduled or renegotiated for
reasons related to the borrower's financial difficulties. This will normally
involve the granting of concessionary terms and resetting the overdue account to
non-overdue status. A rescheduled advance will continue to be disclosed as such
unless the debt has been performing in accordance with the rescheduled terms for
a period of six to 12 months. Rescheduled advances that have been overdue for
more than three months under the rescheduled terms are reported as overdue
advances to customers (page 37).
Rescheduled advances fell by HK$1,151 million, or 76.1 per cent, to HK$361
million at 31 December 2005, representing only 0.1 per cent of gross advances to
customers. The reduction was mainly the result of the repayment and upgrade of
certain corporate customer and personal loans.
Segmental analysis of advances to customers by geographical area
Advances to customers by geographical area are classified according to the
location of the counterparties after taking into account the transfer of risk.
In general, risk transfer applies when an advance is guaranteed by a party
located in an area which is different from that of the counterparty. At 31
December 2005, over 90 per cent of the group's advances to customers, including
related impaired advances and overdue advances, were classified under Hong Kong
(position unchanged from that at 31 December 2004).
Gross advances to customers by industry sector
The analysis of gross advances to customers by industry sector based on
categories and definitions used by the Hong Kong Monetary Authority ('HKMA') is
as follows:
At 31Dec05 At 31Dec04
Figures in HK$m restated
Gross advances to customers for use in
Hong Kong
Industrial, commercial and financial sectors
Property development 16,446 12,818
Property investment 45,964 44,732
Financial concerns 968 3,996
Stockbrokers 221 314
Wholesale and retail trade 5,562 5,460
Manufacturing 7,761 4,384
Transport and transport equipment 11,919 11,173
Other 21,628 22,010
110,469 104,887
Individuals
Advances for the purchase of flats under the
Government Home Ownership Scheme, Private
Sector Participation Scheme and Tenants
Purchase Scheme 22,879 26,386
Advances for the purchase of other
residential properties 81,318 79,987
Credit card advances 7,735 6,534
Other 7,563 7,122
119,495 120,029
Total gross advances for use in Hong Kong 229,964 224,916
Trade finance 15,874 15,539
Gross advances for use outside Hong Kong 15,876 12,109
Gross advances to customers 261,714 252,564
Lending to the industrial, commercial and financial sectors rose by 5.3 per cent
during 2005. Property development and investment grew by 8.4 per cent,
reflecting the active property market. Wholesale, retail and manufacturing
together were up by 35.3 per cent, driven by the continued expansion of the
economy and growth in external trade. Lending to the transport and transport
equipment sector, including taxi and other motor vehicle loans, recorded growth
of 6.7 per cent. Financial concerns lending fell by 75.8 per cent, due mainly to
the repayment of a money market loan from a public sector entity.
Lending to individuals fell by 0.4 per cent compared with the end of 2004.
Excluding mortgages under the GHOS Scheme, which remained suspended during 2005,
lending to individuals grew by 3.2 per cent. Residential mortgages went up by
1.7 per cent in an active and competitive market. Card advances rose by 18.4 per
cent, reflecting increases in card spending and in the card base of 19.7 per
cent and 10.2 per cent respectively. Personal advances, grouped under the
'Other' sector, grew by 51.8 per cent, reflecting the success of the group in
expanding its consumer finance business.
Trade finance advances rose by 2.2 per cent. The growth in trade finance to CMB
customers, who benefited from the strong regional trade flows, was partly offset
by repayments made by certain CIB trading corporations.
Gross advances for use outside Hong Kong recorded growth of 31.1 per cent. The
loan portfolio of the mainland branches expanded by 41.9 per cent in 2005 to
HK$10.5 billion, with encouraging growth recorded in commercial and residential
mortgage lending.
Financial investments
At 31Dec05 At 31Dec04
Figures in HK$m restated
Available-for-sale at fair value
- debt securities 177,813 -
- equity shares 1,360 -
Long-term equity shares at fair value - 1,838
Other financial investments attributable to
policyholders
- debt securities at fair value - 676
- equity shares at fair value - 1,092
Held-to-maturity debt securities at amortised
cost 10,731 181,100
189,904 184,706
Fair value of held-to-maturity debt securities 10,778 182,577
Treasury bills 4,816 4,280
Certificates of deposit 27,048 35,424
Other debt securities 156,680 142,072
Debt securities 188,544 181,776
Equity shares 1,360 2,930
189,904 184,706
Debt securities:
- listed in Hong Kong 3,008 5,757
- listed outside Hong Kong 1,947 28,497
4,955 34,254
- unlisted 183,589 147,522
188,544 181,776
Equity shares:
- listed in Hong Kong 1,049 2,040
- listed outside Hong Kong 186 503
1,235 2,543
- unlisted 125 387
1,360 2,930
189,904 184,706
Fair value of listed financial investments 6,209 36,927
Debt securities:
Issued by public bodies:
- central governments and central banks 15,981 20,134
- other public sector entities 8,667 13,932
24,648 34,066
Issued by other bodies:
- banks and other financial institutions 149,557 128,051
- corporate entities 14,339 19,659
163,896 147,710
Equity shares:
Issued by corporate entities 1,360 2,930
189,904 184,706
Available-for-sale investments include treasury bills, certificates of deposit,
other debt securities and equity shares intended to be held for an indefinite
period of time, but which may be sold in response to needs for liquidity or
changes in the market environment. Available-for-sale investments are carried at
fair value with the gains and losses from change in fair value recognised
through equity reserves.
Held-to-maturity debt securities are stated at amortised cost. Where debt
securities have been purchased at a premium or discount, the carrying value of
the security is adjusted to reflect the effective interest rate of the debt
security taking into account such premium or discount.
On adoption of HKAS 39 on 1 January 2005, with the exception of the portfolio of
debt securities for life insurance funds, the group has re-designated all
held-to-maturity debt securities as available-for-sale securities, trading
assets and financial assets designated at fair value. There was no such
re-designation in 2004, as retrospective application of HKAS 39 is not
permitted.
Amounts due from/to immediate holding company and fellow subsidiary companies
At balance sheet dates, the amounts due from/to immediate holding company and
fellow subsidiary companies included in the assets and liabilities balances of
the consolidated balance sheet are analysed as follows:
At 31Dec05 At 31Dec04
Figures in HK$m restated
Amounts due from:
Cash and balances with banks and other
financial institutions 718 1,227
Placings with and advances to banks and
other financial institutions 3,495 2,416
Trading assets 50 -
Derivative financial instruments 145 177
Financial assets designated at fair value 2,299 -
Financial investments 1,135 1,728
Other assets 29 47
7,871 5,595
At 31Dec05 At 31Dec04
Figures in HK$m restated
Amounts due to:
Customer accounts 167 165
Deposits from banks 5,136 3,301
Derivative financial instruments 488 308
Subordinated liabilities 2,016 -
Other liabilities 361 157
8,168 3,931
Investments in associates
At 31Dec05 At 31Dec04
Figures in HK$m restated
Share of net assets 2,611 1,988
Goodwill 318 311
2,929 2,299
Investments in associates rose by 27.4 per cent, mainly reflecting the increase
in share of profits from associates.
Intangible assets
At 31Dec05 At 31Dec04
Figures in HK$m restated
Value of in-force long-term assurance
business 1,565 1,249
Internal developed software 56 -
Other intangible assets 15 17
1,636 1,266
Other assets
At 31Dec05 At 31Dec04
Figures in HK$m restated
Items in the course of collection from
other banks 8,068 4,456
Prepayments and accrued income 3,016 2,420
Deferred tax assets 9 11
Non current assets held for sale 216 320
Acceptances and endorsements 2,371 -
Other accounts 1,545 2,123
15,225 9,330
On adoption of HKFRS 5, repossessed collateral assets have been reclassified
from 'Advances to customers' to 'Non current assets held for sale' under 'Other
assets'.
Current, savings and other deposit accounts
At 31Dec05 At 31Dec04
Figures in HK$m restated
Current, savings and other deposit
accounts:
- as per consolidated balance sheet 430,995 447,460
- structured deposits reported as
trading liabilities 24,422 -
455,417 447,460
By type:
- demand and current accounts 27,248 36,148
- savings accounts 188,839 251,192
- time and other deposits 239,330 160,120
455,417 447,460
Certificates of deposit and other debt securities in issue
At 31Dec05 At 31Dec04
Figures in HK$m restated
Certificates of deposit and other debt
securities in issue:
- as per consolidated balance sheet 10,023 16,055
- structured certificates of deposit and
other debt securities in issue reported
as trading liabilities 13,616 -
23,639 16,055
By type:
- Certificates of deposit in issue 22,525 15,409
- Other debt securities in issue 1,114 646
23,639 16,055
Customer deposits, including certificates and other debt securities in issue,
rose 3.4 per cent to HK$479.1 billion.
Current, savings and other deposit accounts (including structured deposits
reported as trading liabilities) rose by HK$8.0 billion, or 1.8 per cent, to
HK$455.4 billion at 31 December 2005. Certificates of deposit and other debt
securities in issue (including those reported as trading liabilities) recorded
encouraging growth of HK$7.6 billion, or 47.2 per cent, to HK$23.6 billion at 31
December 2005. In the rising interest rate environment, customer deposits have
shifted from current and savings accounts to time deposits. Certificates of
deposit and structured deposit instruments with yield enhancement features also
gained in popularity.
Trading liabilities
At 31Dec05 At 31Dec04
Figures in HK$m restated
Certificates of deposit and other debt
securities in issue 13,616 -
Structured deposits 24,422 -
Short positions in securities 7,766 5,840
45,804 5,840
Trading liabilities includes customer deposits and certificates of deposit with
embedded options or other derivatives, the market risk of which was managed in
the trading book.
Other liabilities
At 31Dec05 At 31Dec04
Figures in HK$m restated
Items in the course of
transmission
to other banks 6,517 6,136
Accruals 1,653 2,303
Acceptances and endorsements 2,371 -
Other 3,597 3,301
14,138 11,740
Subordinated liabilities
During the year, the group issued subordinated notes amounting to HK$2,500
million and obtained a subordinated loan of US$260 million from its immediate
holding company. Details of the transactions are as follows:
Figures in HK$m At 31Dec05 At 31Dec04
Nominal value Description
Amount owed to third parties
HK$1,500 million Callable floating rate
subordinated notes
due June 2015 1,495 -
HK$1,000 million 4.125 per cent callable
fixed rate
subordinated notes
due June 2015 967 -
Amount owed to HSBC Group undertakings
US$260 million Callable floating rate
subordinated loan debt
due December 2015 2,016 -
4,478 -
Representing:
- measured at amortised cost 3,511 -
- designated at fair value 967 -
4,478 -
The above subordinated notes and loan each carries a one-time call option
exercisable by the group on a day falling five years plus one day after the
relevant date of issue/drawdown.
The floating rate notes of HK$1,500 million bear interest at the rate of
three-month HIBOR plus 0.35 per cent, payable quarterly from the issue date to
the call option date. Thereafter, if the notes are not redeemed on the call
option date, the interest rate will be reset to three-month HIBOR plus
0.85 per cent, payable quarterly.
The fixed rate notes of HK$1,000 million bear interest at the rate of
4.125 per cent per annum, payable semi-annually from the issue date to the
call option date. The notes, if not redeemed on the call option date, will
become floating rate notes bearing interest at the rate of three-month
HIBOR plus 0.825 per cent payable quarterly.
The fixed rate notes are reported as financial liabilities designated at fair
value together with the interest rate swap transacted to manage the interest
rate risk.
The floating rate subordinated loan debt of US$260 million bears interest at the
rate of three-month LIBOR plus 0.31 per cent, payable quarterly from the issue
date to the call option date. Thereafter, if the loan is not repaid on the call
option date, the interest rate will be reset to three-month LIBOR plus
0.81 per cent, payable quarterly.
Shareholders' funds
At 31Dec05 At 31Dec04
Figures in HK$m restated
Share capital 9,559 9,559
Retained profits 26,052 23,856
Property revaluation reserve 3,543 2,778
Long-term equity investment
revaluation reserve - 935
Cash flow hedges reserve (483) -
Available-for-sale investment reserve (17) -
Capital redemption reserve 99 99
Other reserves 185 69
Total reserves 29,379 27,737
38,938 37,296
Proposed dividends 3,633 3,633
Shareholders' funds 42,571 40,929
Return on average shareholders' funds 27.5% 28.5%
Save for the issuance of subordinated notes in June 2005, there was no purchase,
sale or redemption of the group's listed securities by the bank or any of its
subsidiaries during 2005.
Shareholders' funds (excluding proposed dividends) rose by HK$1,642 million, or
4.4 per cent, to HK$38,938 million at 31 December 2005. Retained profits
increased by HK$2,196 million, and the property revaluation reserve rose by
HK$765 million reflecting the improved property market. These were partially
offset by the HK$500 million revaluation loss on available-for-sale investment
securities, and on interest rate swaps designated as cash flow hedges.
The return on average shareholders' funds was 27.5 per cent, compared with 28.5
per cent in 2004.
Capital resources management
Analysis of capital base and risk-weighted assets
Figures in HK$m At 31Dec05 At 31Dec04
Capital base
Tier 1 capital
- Share capital 9,559 9,559
- Retained profits 21,439 20,560
- Classified as regulatory reserve (510) -
- Capital redemption reserve 99 99
- Less: goodwill (318) (302)
- Total 30,269 29,916
Tier 2 capital
- Property revaluation reserve 5,114 5,322
- Available-for-sale investment
and equity revaluation reserve (5) 625
- Collective impairment allowances 510 289
- Regulatory reserve 510 -
- Term subordinated debt 4,479 -
- Total 10,608 6,236
Unconsolidated investments and
other deductions (3,444) (2,829)
Total capital base after deductions 37,433 33,323
Risk-weighted assets
On-balance sheet 277,617 259,429
Off-balance sheet 14,739 16,577
Total risk-weighted assets 292,356 276,006
Total risk-weighted assets adjusted
for market risk 291,570 277,029
At 31Dec05 At 31Dec04
Capital adequacy ratios
After adjusting for market risk
- Tier 1^ 10.4% 10.8%
- Total^ 12.8% 12.0%
Before adjusting for market risk
- Tier 1 10.4% 10.8%
- Total 12.8% 12.1%
^ The capital ratios take into account market risks in accordance with the
relevant HKMA guideline under the Supervisory Policy Manual.
In accordance with the HKMA guideline Impact of the New Hong Kong Accounting
Standards on Authorised Institutions' Capital Base and Regulatory Reporting,
the Group has earmarked a 'regulatory reserve' from retained profits. This
regulatory reserve is included as tier 2 capital together with the group's
collective impairment allowances.
The total capital ratio rose by 0.8 percentage points over 2004 to reach 12.8
per cent at 31 December 2005. The capital base increased by HK$4,110 million to
HK$37,433 million. During the year, the group issued HK$2,500 million in
subordinated notes and obtained a subordinated loan of US$260 million, both
qualified as tier 2 capital, to achieve a more balanced capital structure and to
support business growth. Risk-weighted assets adjusted for market risk grew by
5.2 per cent, attributable mainly to the increase in advances to customers and
financial investments.
Liquidity ratio
The average liquidity ratio for the year, calculated in accordance with the
Fourth Schedule of the Hong Kong Banking Ordinance, is as follows:
2005 2004
The bank and its major banking subsidiaries 45.1% 47.2%
Reconciliation of cash flow statement
(a)Reconciliation of operating profit to net cash flow from
operating activities
2005 2004
Figures in HK$m restated
Operating profit 11,068 12,598
Net interest income (11,068) (10,005)
Dividend income (60) (89)
Loan impairment charges/(releases)
and other credit risk provisions 618 (777)
Depreciation 280 256
Amortisation of intangible assets 9 8
Amortisation of available-for-
sale investments 12 -
Amortisation of held-to-maturity
debt securities - 426
Advances written off net of
recoveries (575) (577)
Interest received 13,578 9,369
Interest paid (7,443) (2,646)
Operating profit before changes
in working capital 6,419 8,563
Change in placings with and
advances to banks
maturing after one month 2,534 2,658
Change in trading assets 3,983 (2,541)
Change in financial assets
designated at fair value 1,060 -
Change in derivative financial
instruments (395) (88)
Change in advances to customers (8,857) (21,244)
Change in available-for-sale
investments 8,113 -
Change in held-to-maturity
debt securities - (1,590)
Change in other assets (11,929) (4,000)
Change in current, savings and
other deposit accounts (9,189) 15,307
Change in deposits from banks 110 8,938
Change in trading liabilities 29,263 4,326
Change in certificates of deposit
and other debt securities in issue (2,589) 8,168
Change in other liabilities 9,423 4,955
Elimination of exchange differences
and other non-cash items 315 (4,904)
Cash generated from operating activities 28,261 18,548
Taxation paid (1,421) (925)
Net cash inflow from operating activities 26,840 17,623
(b) Analysis of the balances of cash and cash equivalents
At 31Dec05 At 31Dec04
Figures in HK$m restated
Cash and balances with banks and
other financial institutions 9,201 7,248
Placings with and advances
to banks and other
financial institutions maturing
within one month 53,294 57,071
Treasury bills 3,018 47
Certificates of deposit - 2,685
65,513 67,051
Credit Risk-
Contract equivalent weighted
Figures in HK$m amount amount amount
At 31Dec05
Contingent liabilities:
Guarantees 4,133 3,907 3,131
Commitments:
Documentary credits and short-term
trade-related transactions 7,402 1,480 1,480
Undrawn formal standby facilities,
credit lines and
other commitments to lend:
- under one year 109,369 - -
- one year and over 20,385 10,193 9,158
Other 220 220 220
137,376 11,893 10,858
Exchange rate contracts:
Spot and forward foreign exchange 188,088 1,426 333
Other exchange rate contracts 15,176 193 48
203,264 1,619 381
Interest rate contracts:
Interest rate swaps 161,083 1,472 308
Other interest rate contracts 4,255 20 4
165,338 1,492 312
Other derivative contracts 1,194 86 17
Credit Risk-
Contract equivalent weighted
Figures in HK$m amount amount amount
At 31Dec04
Contingent liabilities:
Guarantees 7,039 6,764 3,429
Commitments:
Documentary credits and
short-term
trade-related transactions 9,020 1,844 1,805
Undrawn formal standby
facilities, credit lines
and other commitments to lend:
- under one year 86,714 - -
- one year and over 23,677 11,839 10,460
Other 38 38 38
119,449 13,721 12,303
Exchange rate contracts:
Spot and forward foreign exchange 138,269 1,066 298
Other exchange rate contracts 23,158 323 106
161,427 1,389 404
Interest rate contracts:
Interest rate swaps 120,603 1,421 347
Other interest rate contracts 5,067 15 6
125,670 1,436 353
Other derivative contracts 1,373 46 23
The tables above give the nominal contract, credit equivalent 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 derivatives contracts.
Contingent liabilities and commitments are credit-related instruments which
include acceptances, letters of credit, guarantees and commitments to extend
credit. The risk involved is essentially the same as the credit risk involved in
extending loan facilities to customers. These transactions are, therefore,
subject to the same credit origination, portfolio maintenance and collateral
requirements as for customers applying for loans. As the facilities may expire
without being drawn upon, the total of the contract amounts is not
representative of future liquidity requirements.
Off-balance sheet financial instruments arise from futures, forward, swap and
option transactions undertaken 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 and do not represent amounts at risk. The
credit equivalent amount of these instruments is measured as the sum of positive
marked-to-market values and the potential future credit exposure in accordance
with the Third Schedule of the Hong Kong Banking Ordinance.
Derivative financial instruments are held for trading, as financial instruments
designated at fair value, or designated as either fair value hedge or cash flow
hedges. The accounting policies for each class of derivatives on adoption of
HKAS 39 are set out in the appendix. The following table shows the nominal value
and marked-to-market value of assets and liabilities of each class of
derivatives.
At31Dec05 At31Dec04
Trading/
designated
at fair Non-
Figures in HK$m value Hedging Trading trading
Contract amounts:
Interest rate
contracts 102,233 63,105 54,755 70,915
Exchange rate
contracts 203,264 - 161,117 310
Other derivative
contracts 1,194 - 1,373 -
306,691 63,105 217,245 71,225
Derivative assets:
Interest rate
contracts 481 454 519 -
Exchange rate
contracts 776 - 1,160 -
Other derivative
contracts 4 - 5 -
1,261 454 1,684 -
Derivative liabilities:
Interest rate
contracts 998 457 477 -
Exchange rate
contracts 310 - 796 -
Other derivative
contracts 27 - - -
1,335 457 1,273 -
The above derivative assets and liabilities, being the positive or negative
marked-to-market value of the respective derivative contracts, represent gross
replacement costs, as none of these contracts are subject to any bilateral
netting arrangements.
Cross-border claims
Cross-border claims include receivables and loans and advances, and balances due
from banks and holdings of certificates of deposit, bills, promissory notes,
commercial paper and other negotiable debt instruments, as well as accrued
interest and overdue interest on these assets. Claims are classified according
to the location of the counterparties after taking into account the transfer of
risk. For a claim guaranteed by a party situated in a country different from the
counterparty, the risk will be transferred to the country of the guarantor. For
a claim on the branch of a bank or other financial institution, the risk will be
transferred to the country where its head office is situated. Claims on
individual countries or areas, after risk transfer, amounting to 10 per cent or
more of the aggregate cross-border claims are shown as follows:
Banks Sovereign
& other & public
financial sector
Figures in HK$m institutions entities Other Total
At31Dec05
Asia-Pacific excluding
Hong Kong:
- Australia 23,961 144 712 24,817
- other 38,140 1,447 6,882 46,469
62,101 1,591 7,594 71,286
The Americas:
- Canada 16,229 3,976 1,677 21,882
- other 13,182 2,460 10,712 26,354
29,411 6,436 12,389 48,236
Western Europe:
- United Kingdom 23,008 - 7,842 30,850
- other 81,089 1,430 6,207 88,726
104,097 1,430 14,049 119,576
At31Dec04
Asia-Pacific excluding Hong
Kong:
- Australia 21,429 62 1,223 22,714
- other 26,222 1,530 5,432 33,184
47,651 1,592 6,655 55,898
The Americas:
- Canada 19,748 4,957 1,556 26,261
- other 11,320 2,744 10,252 24,316
31,068 7,701 11,808 50,577
Western Europe:
- United Kingdom 23,794 16 5,945 29,755
- other 76,926 2,063 5,711 84,700
100,720 2,079 11,656 114,455
Additional information
1. Statutory accounts and accounting policies
The information in this news release does not constitute statutory accounts.
Certain financial information in this news release is extracted from the
statutory accounts for the year ended 31 December 2005 ('2005 accounts'), which
will be delivered to the Registrar of Companies and the HKMA. The statutory
accounts comply with the module on 'Financial Disclosure by Locally Incorporated
Authorised Institutions' under the Supervisory Policy Manual issued by the HKMA.
The auditors expressed an unqualified opinion on those statutory accounts in
their report dated 6 March 2006.
The 2005 accounts and this news release have been prepared on a basis consistent
with the accounting policies adopted in the 2004 accounts except for the changes
in accounting policies following the adoption of the new and revised Hong Kong
Financial Reporting Standards and Hong Kong Accounting Standards ('HKFRSs')
issued by The Hong Kong Institute of Certified Public Accountants, which became
effective for accounting periods beginning on or after 1 January 2005.
The significant changes in accounting policies on adoption of the new HKFRSs and
the financial impacts on the current and prior accounting periods are set out in
the appendix to this news release.
Comparative figures have been restated to conform with the new accounting
policies except for those applying to financial instruments under HKAS 39
'Financial instruments: recognition and measurement'.
2. Comparative figures
Certain comparative figures have been reclassified to conform with the current
year's presentation.
3. Property revaluation
On 30 September 2005, the group's premises and investment properties were
revalued by DTZ Debenham Tie Leung Limited who confirmed that there had been no
material change in valuation at 31 December 2005. The valuation was carried out
by qualified persons who are members of the Hong Kong Institute of Surveyors.
The basis of the valuation of premises was open market for existing use and the
basis of valuation for investment properties was open market value. The
revaluation surplus for group premises amounted to HK$1,199 million of which
HK$153 million was a reversal of revaluation deficits previously charged to the
income statement. The balance of HK$1,046 million was credited to the property
revaluation reserve. Revaluation gains on investment properties of HK$1,160
million were recognised through the income statement on adoption of HKAS 40. The
related deferred tax provisions for group premises and investment properties
were HK$210 million and HK$203 million respectively.
Market risk is the risk that foreign exchange rates, interest rates or equity
and commodity prices will move and result in profits or losses for the group.
The group's market risk arises from customer-related business and from position
taking.
Market risk is managed within risk limits approved by the Board of Directors.
Risk limits are set by product and risk type with market liquidity being a
principal factor in determining the level of limits set. Limits are set using a
combination of risk measurement techniques, including position limits,
sensitivity limits, as well as value at risk ('VAR') limits at a portfolio
level.
The group adopts the risk management policies and risk measurement techniques
developed by the HSBC Group. The daily risk monitoring process measures actual
risk exposures against approved limits and triggers specific action to ensure
the overall market risk is managed within an acceptable level.
VAR is a technique which estimates the potential losses that could occur on risk
positions taken due to movements in market rates and prices over a specified
time horizon and to a given level of confidence. In line with the HSBC Group,
Hang Seng refined its basis of calculating VAR from one predominantly based on
variance/co-variance ('VCV') to one predominantly based on historical simulation
('HS'), effective 3 May 2005. This latter calculation was introduced because it
better captures the non-linear characteristics of certain market risk positions.
HS uses scenarios derived from historical market rates, and takes account of the
relationships between different markets and rates, for example, interest rates
and foreign exchange rates. Movements in market prices are calculated by
reference to market data from the last two years. The group has changed the
assumed holding period from a 10-day period to a one-day period as this reflects
the way the risk positions are managed. Comparative VAR numbers have been
re-stated to reflect this change. Aggregation of VAR from different risk types
is based upon the assumption of independence between risk types. In recognition
of the inherent limitations of VAR methodology, stress testing is performed to
assess the impact of extreme events on market risk exposures.
The group has obtained approval from the HKMA to change the VAR model from VCV
to HS for calculating market risk in capital adequacy reporting and the HKMA has
expressed itself satisfied with the group's market risk management process.
The group's VAR for all interest rate risk and foreign exchange risk positions
and on individual risk portfolios during 2005 and 2004 are shown in the tables
below. The VAR figures for 2005 are based on four months' VCV and eight months'
HS.
VAR
Minimum Maximum Average
during during for
the the the
Figures in HK$m At31Dec05 year year year
VAR for all interest rate
risk and foreign
exchange risk 113 111 264 181
VAR for foreign
exchange risk
(trading) 3 - 6 2
VAR for interest rate risk
- trading 3 1 21 4
- non-trading 118 117 260 180
Minimum Maximum Average
during during for
At31Dec04 the the the
Figures in HK$m (restated) year year year
VAR for all interest rate
risk
and foreign exchange risk 125 79 191 118
VAR for foreign
exchange risk
(trading) 1 - 18 11
VAR for interest rate risk
- trading 1 - 5 1
- non-trading 125 77 191 117
The average daily revenue earned from market risk-related treasury activities in
2005, including non-trading book net interest income and funding related to
dealing positions, was HK$5 million (HK$10 million for 2004). The standard
deviation of these daily revenues was HK$8 million (HK$5 million for 2004). An
analysis of the frequency distribution of daily revenues shows that out of 247
trading days in 2005, losses were recorded on 15 days and the maximum daily loss
was HK$84 million. The most frequent result was a daily revenue of between HK$2
million and HK$6 million, with 127 occurrences. The highest daily revenue was
HK$23 million.
Interest rate risk arises in both the treasury dealing portfolio and accrual
books, which are managed by Treasury under limits approved by the Board of
Directors. The average daily revenue earned from treasury-related interest rate
activities for 2005 was HK$3 million (HK$6 million for 2004).
The group's foreign exchange exposures mainly comprise foreign exchange dealing
by Treasury and currency exposures originated by its banking business. The
latter are transferred to Treasury where they are centrally managed within
foreign exchange position limits approved by the Board of Directors. The average
one-day foreign exchange profit for 2005 was HK$2 million (HK$4 million for
2004).
Structural foreign exchange positions arising from capital investment in
subsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi as
set out in Note 5, are managed by the Asset and Liability Management Committee.
5. Foreign currency positions
Foreign currency exposures include those arising from dealing, non-dealing and
structural positions. At 31 December 2005, the US dollar (US$) was the only
currency in which the group had a non-structural foreign currency position which
exceeded 10 per cent of the total net position in all foreign currencies.
Figures in HK$m At31Dec05 At31Dec04
US$ RMB US$ RMB
Non-structural position
Spot assets 193,149 5,955 173,071 2,664
Spot liabilities (168,513) (6,008) (171,698) (2,400)
Forward purchases 84,026 439 68,726 207
Forward sales (104,960) (300) (69,795) (192)
Net options position (77) - (37) -
Net long non-structural
position 3,625 86 267 279
At 31 December 2005, the group's major structural foreign currency positions
were US dollar and renminbi.
At31Dec05 At31Dec04
% of % of
total net total net
structural structural
HK$m position HK$m position
Structural positions
US dollar 1,035 32.5 850 28.8
Renminbi 2,043 64.1 1,998 67.6
6. Ultimate holding company
Hang Seng Bank is an indirectly held, 62.14 per cent-owned subsidiary of HSBC
Holdings plc.
7. Register of shareholders
The register of shareholders of Hang Seng Bank will be closed on Tuesday,
21 March 2006, during which no transfer of shares can be registered. In order to
qualify for the fourth interim dividend, all transfers, accompanied by the
relevant share certificates, must be lodged with the bank's registrars,
Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor,
Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration not
later than 4:00 pm on Thursday, 16 March 2006. The fourth interim dividend will
be payable on 31 March 2006 to shareholders on the register of shareholders of
the bank on 21 March 2006.
8. Proposed timetable for 2006 quarterly dividends
First Second Third Fourth
interim interim interim interim
dividend dividend dividend dividend
Announcement 2 May 2006 31 July 2006 6 November 2006 5 March 2007
Book close date 26 May 2006 23 August 2006 20 December 2006 20 March 2007
Payment date 6 June 2006 31 August 2006 3 January 2007 30 March 2007
9. News release
Copies of this news release may be obtained from Legal and Company Secretarial
Services Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or from
Hang Seng's website http://www.hangseng.com.
The 2005 Annual Report and Accounts will be available from the same website on
Monday, 6 March 2006 and will also be published on the website of The Stock
Exchange of Hong Kong Limited in due course. Printed copies of the 2005 Annual
Report will be sent to shareholders in late March 2006.
Appendix
Significant change in 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 ('HKFRSs'), which is a
collective term that includes all applicable individual Hong Kong Financial
Reporting Standards, Hong Kong Accounting Standards and Interpretations. These
are effective for accounting periods beginning on or after 1 January 2005.
Hang Seng Bank Limited ('the bank') and its subsidiaries ('the group') have
adopted these new HKFRSs in the financial statements in 2005 resulting in
various changes in accounting policies.
Comparative figures have been restated to conform with the new accounting
policies except for those that apply to financial instruments in accordance with
HKAS 39. The policies applied to financial instruments for 2004 and 2005 are
disclosed separately below.
The tables attached disclose the adjustments that have been made, in accordance
with the transitional provisions of the respective HKFRSs, to each of the line
items in the consolidated income statement for the year ended 31 December 2004
(Table A) and in the consolidated balance sheet at 31 December 2004 and the
opening balances at 1 January 2005 (Table B).
Significant changes in principal accounting policies are listed as follows:
HKFRS 2: Share-based payment ('HKFRS 2')
The group made awards of, and granted options in respect of, shares of HSBC
Holdings plc, as part of employees' compensation.
In prior years, no compensation cost was recognised for share options granted at
fair value or not more than 20 per cent discount to fair value. For share awards
made to employees as part of their annual bonus, the cost for acquisition of
shares for the conditional award was charged to 'staff cost' over the period in
respect of which the performance condition applied.
With effect from 1 January 2005, and in accordance with HKFRS 2, the group has
adopted a new policy for share-based payment. Under the new policy, where shares
are awarded to an employee of the group 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 had not yet been vested at 1 January
2005.
The change in accounting policy has been applied retrospectively by way of prior
year adjustment and restatement of comparative figures for 2004. The unamortised
cost of share compensation of HK$66 million at 31 December 2004 was adjusted to
retained profits. Staff costs for 2004 have been restated to recognise share
compensation cost of HK$47 million. Share compensation cost amounting to HK$64
million has been recognised in the current year's income statement.
HKFRS 3: Business combinations ('HKFRS 3')
Goodwill
In prior years, positive goodwill arising from the acquisition of subsidiary and
associated companies was amortised over its estimated life, usually taken as 20
years, on a straight-line basis in the income statement.
With effect from 1 January 2005, and in accordance with HKFRS 3, the group has
adopted a new policy for goodwill. Under the new policy, positive goodwill is
not amortised but is tested for impairment at each balance sheet date at the
cash-generating unit level by applying a fair-value-based test in accordance
with HKAS 36 'Impairment of Assets'.
The accounting policy on goodwill has been applied retrospectively by way of
prior year adjustment and restatement of comparative figures for 2004. The
positive goodwill at 31 December 2004 has been restated to reverse all
amortisation made prior to that date (HK$9 million) with a corresponding
adjustment through retained profit at 31 December 2004. No impairment loss has
been recognised in the current year.
HKFRS 4: Insurance contracts ('HKFRS 4')
In prior years, all policies issued by insurance subsidiaries on long-term
assurance contracts were accounted for as insurance contracts.
With effect from 1 January 2005, and in accordance with HKFRS 4, a contract
under which the group accepts significant insurance risk from another party, by
agreeing to compensate that party on the occurrence of a specified uncertain
future event, is classified as an insurance contract. Such an insurance
contract, which may also transfer financial risk, is accounted for as an
insurance contract in accordance with HKFRS 4.
Income generated from assets backing insurance contracts is reported in the
income statement on a line-by-line basis according to the classification of
assets. Claims incurred and movement in policyholder liabilities for insurance
contracts are reported as such in the income statement.
A contract issued by the group that transfers financial risk, without
significant insurance risk, is classified as an investment contract, and
accounted for as a financial instrument in accordance with HKAS 39. Customer
liabilities under unit-linked investment contracts and the linked financial
assets are measured at fair value, and the movements in fair value are
recognised in the income statement in 'Net income from financial instruments
designated at fair value'.
The change in accounting policy on insurance contracts has been applied
retrospectively by way of prior year adjustment and restatement of comparative
figures for 2004.
Net increases/(decreases) in the outstanding balances on restatement of the
balance sheet are as follows:
Figures in HK$m At 31Dec04
Liabilities and reserves
Other liabilities (905)
Liabilities to customers under insurance contracts 8,656
Liabilities to policyholders under long-term assurance business (8,291)
Liabilities to customers under investment contracts 540
Retained profits 2
Other reserves 3
HKFRS 5: Non-current assets held for sale and discontinued operations
('HKFRS 5')
In prior years, collateral assets repossessed for recovery of non-performing
advances were reported as advances. The carrying value was adjusted to the net
realisable value of the repossessed assets and classified as non-performing
advances.
With effect from 1 January 2005, and in accordance with HKFRS 5, non-current
assets acquired in exchange for advances in order to achieve an orderly
realisation are reported in 'Other assets'. 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 impairment allowances, 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 in the income statement. Any subsequent increase in fair value less
costs to sell not in excess of any cumulative impairment loss, is recognised as
a gain 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.
The change in accounting policy has been applied retrospectively, with
restatement of comparative figures for 2004. At 31 December 2004, repossessed
assets of HK$320 million were reclassified from 'Customer advances' to
'Non-current assets held for sale'. Gains on disposal of HK$37 million in 2004
were re-classified from 'Net charge for bad and doubtful debts' to 'Other
operating income'. Gains on disposal of HK$1 million were recorded under 'Other
operating income' for the current year income statement.
HKAS 17: Leases ('HKAS 17')
Leasehold land for own use
In prior years, leasehold premises were stated at fair market value, as valued
by professionally qualified valuers. The apportionment of the value between the
land and building elements was made by estimating the net replacement cost of
the building as the value of the building element, and taking the residual
figures as the value of the land element.
With effect from 1 January 2005, and in accordance with HKAS 17, the group has
adopted a new policy for leasehold land and buildings held for own use. Under
the new policy, the leasehold interest in the land held for own use is accounted
for as being held under an operating lease. The fair value of the interest in
any buildings situated on the leasehold land could be measured separately from
the fair value of the leasehold interest in the land at the time the lease was
first entered into by the group, or taken over from the previous lessee, or at
the date of construction of those buildings. Lease premiums on operating leases
are accounted for as prepaid rentals, reported under 'Interest in leasehold land
held for own use under operating lease', and are amortised to the income
statement on a straight-line basis over the remaining lease term. The property
revaluation reserve has been restated to exclude prior years' revaluations on
such leases. Where the original cost of leasehold land and buildings cannot be
reliably split, both land and buildings are treated as being under finance
leases and are accounted for at fair value less subsequent depreciation.
The change in accounting policy is adopted retrospectively and reflected by way
of prior year adjustment and restatement of comparative figures.
Net increases/(decreases) in the outstanding balances on restatement of the
balance sheet are as follows:
Figures in HK$m At 31Dec04
Assets
Premises (2,511)
Interest in leasehold land held for own use under operating lease 609
Liabilities and reserves
Property revaluation reserve (1,502)
Retained profits (66)
Deferred tax liabilities (334)
Increases/(decreases) in the following items on restatement of the income statement
Year ended
Figures in HK$m 31Dec04
Depreciation (52)
Rental expense 14
Net deficit of revaluation of properties (net of deferred tax) 2
Rental expense on leasehold land for the year of 2005 amounted to HK$15 million.
HKAS 19: Employee benefits ('HKAS 19')
In prior years, the group implemented HK SSAP 34 (which is materially equivalent
to HKAS 19) in relation to the accounting for pensions, and adopted the corridor
approach for the recognition of actuarial gains and losses.
With effect from 1 January 2005, and in accordance with HKAS 19, the group has
changed its policy to fully recognise actuarial gains and losses in the
statement of changes in equity.
To reflect the change in accounting policy, the balance of actuarial loss
amounting to HK$82 million has been adjusted through 'Retained profits' as at 31
December 2004. An actuarial gain of HK$158 million for the year of 2005 has been
recognised through retained profits.
HKAS 21: The effects of changes in foreign exchange rates ('HKAS 21')
In prior years, 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 were accounted for as exchange difference under retained profits.
With effect from 1 January 2005, and in accordance with HKAS 21, exchange
differences arising from the re-translation of opening foreign currency net
investments and the related cost of hedging, if any, 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 in equity. 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.
To reflect the change in accounting policy, an amount of HK$50 million has been
reclassified from 'Retained profits' to 'Other reserves' in 2005.
HKAS 27: Consolidated and separate financial statements ('HKAS 27')
HK(SIC) interpretation 12 'Consolidation - special purpose entities'
('HK(SIC)-Int 12')
Life insurance subsidiary
In prior years, on consolidation of the life insurance subsidiary, long-term
assurance assets and liabilities attributable to policyholders were recognised
in aggregate under 'Other assets' and 'Other liabilities' respectively. Income
from long-term assurance assets was reported together with net earned insurance
premiums, less net insurance claims and movement in policyholder liabilities, as
'Other operating income' in the income statement.
With effect from 1 January 2005, and in accordance with HKAS 27, life insurance
subsidiary accounts are consolidated line-by-line. Assets of the life insurance
subsidiary, including long-term assurance assets, are reported according to
asset type as presented in the group's consolidated balance sheet. Net earned
insurance premiums and net insurance claims are separately shown in the income
statement, with income on assets reported under the same income categories as in
the group's consolidated income statement.
The change in accounting policy has been adopted retrospectively and the
comparative figures of 2004 have been restated to reflect the aforesaid
reclassifications, except for the treatment of financial assets and the related
income, in accordance with the requirement of HKAS 39 as described below.
HKAS 38: Intangible assets ('HKAS 38')
In prior years, costs incurred for development of IT software for internal use
were expensed as incurred.
With effect from 1 January 2005, and in accordance with HKAS 38, the value of
in-force long-term assurance business ('embedded value') and computer software
are reported as 'Intangible assets'. Embedded value is stated at valuation
determined annually in consultation with independent actuaries. Computer
software is stated at cost less amortisation and is amortised over its useful
life. Costs incurred in the development phase of a project to produce
application software for internal use are capitalised and amortised over the
software's estimated useful life, usually five years. A periodic review is
performed on intangible assets to confirm that there has been no impairment such
that the carrying value of the asset needs to be reduced.
The change in accounting policy came into effect on 1 January 2005 and the
amount of costs capitalised for the year of 2005 amounted to HK$56 million. No
restatement of the 2004 income statement was made as the amount of software
development cost qualifying for capitalisation in 2004 was immaterial.
HKAS 39: Financial instruments - recognition and measurement ('HKAS 39')
(a) Interest income and expense
In prior years, interest income and expense for all interest-bearing financial
instruments were recognised in the income statement as they accrued, except in
the case of impaired advances. Interest on impaired advances was credited to an
interest suspense account in the balance sheet which was netted against the
relevant loan.
With effect from 1 January 2005, and in accordance with HKAS 39, 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.
(b) Loans and advances to banks and customers
In prior years, loans and advances to banks and customers were recognised when
cash was advanced to borrowers and were measured at amortised cost less
provisions for impairment.
With effect from 1 January 2005, and in accordance with HKAS 39, loans and
advances to banks and customers include all 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.
(c) Impairment of loans and advances
In prior years, there were two basic types of provisions, specific and general.
Specific provisions represented the quantification of actual and inherent losses
from individually identified accounts and homogeneous portfolios of assets.
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.
With effect from 1 January 2005, and in accordance with HKAS 39, the group
provides allowances for impaired advances when objective evidence of impairment
exists and on a consistent basis, in accordance with established guidelines.
Impairment allowances, representing the quantification of incurred losses, can
be made on a collective portfolio basis or an individually assessed basis.
Impairment allowances are deducted from loans and advances in the balance sheet.
The methodologies used for the individual and collective assessment under HKAS
39 are in principle consistent with the approach used for loan provisioning in
the previous year.
(d) Financial instruments
In prior years, the group classified its financial instruments into 'Securities
held for dealing purposes' and 'Long-term investments'. All financial
instruments were carried at cost or amortised cost, net of impairment provisions
for diminution in value, except for securities held for trading purposes and
long-term equity investments which were carried at fair value. Gains and losses
from changes in fair value were recognised in the income statement in respect of
securities held for trading, and in the long-term equity investment revaluation
reserve in respect of long-term equity investments.
With effect from 1 January 2005 and in accordance with HKAS 39, financial
instruments are classified into the categories of: trading assets and
liabilities, financial instruments designated at fair value, available-for-sale
and held-to-maturity securities.
(i) Trading assets and trading liabilities
Financial instruments and short positions thereof, which have been acquired or
incurred principally for the purpose of selling or repurchasing in the near
term, or are part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent actual pattern of
short-term profit-taking, are classified as held-for-trading. Trading assets and
liabilities are recognised initially at fair value, with transaction costs taken
to the income statement, and are subsequently re-measured at fair value. All
subsequent gains and losses from changes in the fair value of these assets and
liabilities, together with related interest income and expense and dividends,
are recognised in the income statement within 'Net trading income' as they
arise. Upon disposal or repurchase, the difference between the net sale proceeds
or the net payment and the carrying value is included in the income statement.
(ii) Financial instruments designated at fair value
A financial instrument, other than one held for trading, is classified in this
category if it meets the criteria set out below, and is so designated by
management. The group may designate financial instruments at fair value where
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 a documented risk management or investment strategy, and where
information about that group of financial instruments is provided internally
on that basis to key management personnel; or
- relates to financial instruments containing one or more embedded derivatives
that significantly modify the cash flows resulting from those financial
instruments.
Financial assets and financial liabilities so designated are recognised
initially at fair value, with transaction costs taken directly to the income
statement, and are subsequently remeasured at fair value. This designation, once
made, is irrevocable in respect of the financial instruments to which it is
made.
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 related
interest income and expense and dividends, within 'Net income from financial
instruments designated at fair value'.
Gains and losses arising from the changes in fair value of derivatives that are
managed in conjunction with financial assets or financial liabilities designated
at fair value are also included in 'Net income from financial instruments
designated at fair value'.
(iii) Available-for-sale and held-to-maturity securities
Financial instruments intended to be held on a continuing basis are classified
as available-for-sale securities, unless designated at fair value, or classified
as held-to-maturity.
Available-for-sale securities are initially measured at fair value plus direct
and incremental transaction costs. They are subsequently re-measured at fair
value. Changes in fair value are recognised in equity until the securities are
either sold or impaired. On the sale of available-for-sale securities,
cumulative gains or losses previously recognised in equity are recognised
through the income statement and classified as 'Profit and loss on disposal of
fixed assets and financial investments'. Impairment allowances recognised in the
income statement on equity instrument are not reversed through the income
statement.
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 directly attributable transaction
costs, and are subsequently measured at amortised cost using the effective
interest rate method, less any impairment allowances.
(e) Derivative financial instruments and hedge accounting
In prior years, 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 'Net
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 net positions, and were accounted for on an equivalent
basis to the underlying assets, liabilities or net positions. The income and
expense of non-trading interest rate derivatives was recognised on an accrual
basis in 'Net interest income'.
With effect from 1 January 2005, and in accordance with HKAS 39, 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). Hedge accounting is applied for derivatives designated as fair
value or cash flow 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 'Net 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 hedges
The effective portion of changes in the fair value of derivatives (net of
interest accrual) that are designated and qualified as cash flow hedges is
recognised in shareholders' equity. The gain or loss relating to the ineffective
portion is recognised immediately in the income statement within 'Net 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.
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.
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 'Net 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'.
Embedded derivatives
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 clearly and closely
related to those of host contract, the terms of the embedded derivative are the
same as those of stand-alone derivative, and the combined 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.
(f) Debt securities in issue and subordinated liabilities
In prior years, debt securities in issue were measured at cost adjusted for
amortised premiums and discounts, and were reported under 'Debt securities in
issue'.
With effect from 1 January 2005, and in accordance with HKAS 39, debt securities
issued 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', except for those issued for trading or
designated at fair value, which are carried at fair value and reported under the
respective balance sheet captions of 'Trading liabilities' and 'Financial
liabilities designated at fair value'.
(g) Offsetting financial instruments
In prior years, netting was applied where a legal right of set-off existed.
With effect from 1 January 2005, and in accordance with HKAS 39, 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.
The change in accounting policies on adoption of HKAS 39 is applied with effect
from 1 January 2005. The opening balance sheet has been restated and the
relevant financial assets and liabilities re-classified to suit the new
definitions and requirements of the accounting standard and disclosure
requirements.
HKAS 40: Investment property ('HKAS 40')
HKAS 12: Income taxes - HK(SIC) interpretation 21 'Income taxes - recovery of
revalued non-depreciable assets' ('HK(SIC)-Int 21')
In prior years, investment properties were carried at valuation assessed by
professional valuers on the basis of open market value. Surpluses arising on
revaluation on a portfolio basis were credited to the investment property
revaluation reserve. Deficits arising on revaluation on a portfolio basis were
firstly set off against any previous revaluation surplus and thereafter taken to
the income statement.
With effect from 1 January 2005, and in accordance with HKAS 40, investment
properties are carried at fair value with the changes in fair value reported
directly in the income statement 'Net surplus on property revaluation'. Deferred
tax is provided on revaluation surplus of investment properties in accordance
with HK(SIC)-Int 21 on HKAS 12.
The change in accounting policy has been reflected by way of prior year
adjustment and as permitted by HKAS 40, no restatement of comparative figures of
2004 has been made. At 31 December 2004, the balance of investment revaluation
surplus reserves of HK$3,283 million, after deducting deferred tax of HK$574
million, was transferred to retained profit. The revaluation gain for the year
of 2005 was HK$1,296 million and the related deferred tax amounted to HK$227
million.
Change in presentation (HKAS 1, Presentation of financial statement ('HKAS 1')
and HKAS 30, Disclosure in financial statements of banks and similar financial
institutions ('HKAS 30'))
In prior years, there were no specific accounting standards governing the
presentation of the financial statements of banks. Management, having regard to
the overall clarity and the disclosure requirements of the Hong Kong Monetary
Authority, exercised its judgement in deciding on the relative prominence given
to each item presented on the face of the income statement and balance sheets.
With effect from 1 January 2005, and in accordance with HKAS 1 and HKAS 30, the
group has changed its presentation of certain items on the face of the income
statement and the balance sheets:
- share of profit of associates is stated net of tax to arrive at the group's
profit and loss before tax.
- treasury bills (including exchange fund bills) and certificates of deposit
held are included in the respective categories of financial instruments under
HKAS 39.
- placements with banks and other financial institutions maturing within one
month are included in placements with banks and other financial institutions.
- interest income, interest expense, and dividend income arising from trading
assets and trading liabilities are reclassified from 'Interest income',
'Interest expense', 'Other operating income' and 'Fee and commission'
respectively to 'Net trading income'. Similar income and expenses arising from
financial instruments designated at fair value are reclassified from the
relevant captions to 'Net income from financial instruments designated at fair
value'.
These changes in presentation have been applied retrospectively except for those
under HKAS 39.
Table A
Hang Seng Bank and its subsidiaries
Consolidated income statement for the year ended 31 December 2004
Effect of changes in accounting policies for 2004
Figures in As HKFRS2 HKAS17 HKAS38 Others^ Change in Restated
HK$m reported presentation
HKAS27/
HKAS30
Interest income 12,471 - - - 5 306 12,782
Interest expense (2,781) - - - - 4 (2,777)
Net interest income 9,690 - - - 5 310 10,005
Fee income 3,749 - - - (19) 111 3,841
Fee expense (409) - - - (1) (6) (416)
Net fee income 3,340 - - - (20) 105 3,425
Dealing profits 1,025 - - - - (1,025) -
Net trading income - - - - (16) 1,129 1,113
Insurance underwriting
profits 1,310 - - - - (1,310) -
Dividend income 96 - - - (22) 15 89
Net earned insurance
premiums - - - - (52) 4,472 4,420
Other operating income 592 - - - 37 144 773
Total operating income 16,053 - - - (68) 3,840 19,825
Net insurance claims
incurred and movement
in policyholder
liabilities - - - - 68 (3,840) (3,772)
Net operating income
before loan
impairment
(charges)/releases
and other credit
risk provisions 16,053 - - - - - 16,053
Loan impairment
(charges)/releases
and other credit
risk provisions 814 - - - (37) - 777
Net operating income 16,867 - - - (37) - 16,830
Employee compensation
and benefits (2,187) (47) - - - - (2,234)
General and
administrative
expenses - - (15) - - (1,719) (1,734)
Depreciation of
premises, plant
and equipment (317) - 53 8 - - (256)
Amortisation of
intangible assets - - - (8) - - (8)
Operating expenses (1,719) - - - - 1,719 -
Total operating
expenses (4,223) (47) 38 - - - (4,232)
Operating profit 12,644 (47) 38 - (37) - 12,598
Profit on disposal
of fixed assets
and financial
investments 432 - - - 10 - 442
Net surplus on
property revaluation 148 - (2) - - - 146
Share of profits from
associates 143 - - - 9 (55) 97
Profit before tax 13,367 (47) 36 - (18) (55) 13,283
Tax expenses (1,764) - (5) - 3 55 (1,711)
Profit for the year 11,603 (47) 31 - (15) - 11,572
Profit attributable
to minority
interests (208) - - - - - (208)
Profit attributable
to shareholders 11,395 (47) 31 - (15) - 11,364
^Others includes HKFRS 3, HKFRS 4, HKFRS 5, HKAS 19 and others.
Table B
Hang Seng Bank and its subsidiaries
Consolidated balance sheet as at 31 December 2004
Effect of changes in accounting policies for the balances at 31 December 2004
Figures in As HKFRS2 HKAS17 HKAS38 HKAS40/ Others^ Change in Restated HKAS39 Opening
HK$m reported HKAS-Int21 presentation balance
HKAS27/ at 1
HKAS30 January
2005
Assets
Cash and
short-term
funds 68,198 - - - - - (68,198) - - -
Cash and
balances
with banks
and other
financial
institutions - - - - - - 7,248 7,248 - 7,248
Placings with
banks
maturing
after one
month 16,231 - - - - - (16,231) - - -
Placings with
and advances
to banks and
other
financial
institutions - - - - - - 75,079 75,079 - 75,079
Certificates
of deposit 33,590 - - - - - (33,590) - - -
Securities
held for
dealing
purposes 1,866 - - - - - (1,866) - - -
Trading assets - - - - - - 4,232 4,232 12,505 16,737
Financial
assets
designated at
fair value - - - - - - - - 4,292 4,292
Derivative
financial
instruments - - - - - - 1,684 1,684 94 1,778
Advances to
customers 251,873 - - - - (320) - 251,553 293 251,846
Amounts due
from
immediate
holding
company and
fellow
subsidiaries 4,598 - - - - - (4,598) - - -
Long-term
investments 138,025 - - - - - (138,025) - - -
Financial
investments - - - - - (36) 184,742 184,706 (15,791) 168,915
Investments in
associates 2,397 - - - (107) 9 - 2,299 - 2,299
Tangible fixed
assets 11,469 - - - - - (11,469) - - -
Investment
properties - - - - - - 3,383 3,383 - 3,383
Premises,
plant and
equipment - - (2,511) (17) - - 8,086 5,558 - 5,558
Interest in
leasehold
land held
for own use
under
operating
lease - - 609 - - - - 609 - 609
Intangible
assets - - - 17 - - 1,249 1,266 - 1,266
Others assets 20,378 - - - - 174 (11,222) 9,330 (256) 9,074
548,625 - (1,902) - (107) (173) 504 546,947 1,137 548,084
Liabilities
Current,
savings and
other
deposit
accounts 463,416 - - - - - (15,956) 447,460 (7,276) 440,184
Deposits from
banks 8,631 - - - - - 3,303 11,934 - 11,934
Trading
liabilities - - - - - - 5,840 5,840 10,701 16,541
Derivative
financial
instruments - - - - - - 1,273 1,273 977 2,250
Certificates
of deposit
and other
debt
securities in
issue - - - - - - 16,055 16,055 (3,443) 12,612
Amounts due
to immediate
holding
company and
fellow
subsidiaries 3,928 - - - - - (3,928) - - -
Other
liabilities 28,613 - - - - (9,235) (7,638) 11,740 (1,075) 10,665
Liabilities
to customers
under
investment
contracts - - - - - 540 - 540 - 540
Liabilities
to customers
under
insurance
contracts - - - - - 8,656 - 8,656 - 8,656
Deferred tax
and current
tax
liabilities - - (333) - 467 (21) 1,555 1,668 202 1,870
504,588 - (333) - 467 (60) 504 505,166 86 505,252
Capital
resources
Minority
interests 852 - - - - - - 852 (14) 838
Share capital 9,559 - - - - - - 9,559 - 9,559
Retained
profits 21,395 (66) (66) - 2,709 (116) - 23,856 533 24,389
Other reserves 8,598 66 (1,503) - (3,283) 3 - 3,881 532 4,413
Proposed
dividends 3,633 - - - - - - 3,633 - 3,633
Shareholders'
funds 43,185 - (1,569) - (574) (113) - 40,929 1,065 41,994
44,037 - (1,569) - (574) (113) - 41,781 1,051 42,832
548,625 - (1,902) - (107) (173) 504 546,947 1,137 548,084
^Others includes HKFRS 3, HKFRS 4, HKFRS 5, HKAS 19 and others.
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: 06 March 2006