hangseng_6k.htm

 
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
 
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- ..............).

 
 
1 March 2010

HANG SENG BANK LIMITED
2009 RESULTS - HIGHLIGHTS
 
 

·
Operating profit down 2.9 per cent to HK$13,324 million (HK$13,725 million in 2008).

·
Operating profit excluding loan impairment charges and other credit risk provisions down 14.3 per cent to HK$14,136 million (HK$16,501 million in 2008).

·
Profit before tax down 2.5 per cent to HK$15,477 million (HK$15,878 million in 2008).

·
Attributable profit down 6.2 per cent to HK$13,221 million (HK$14,099 million in 2008).

·
Return on average shareholders’ funds of 24.6 per cent (26.0 per cent in 2008).

·
Assets up 8.4 per cent to HK$826.0 billion (HK$762.2 billion at 31 December 2008).

·
Earnings per share down 6.1 per cent to HK$6.92 per share (HK$7.37 per share in 2008).

·
Fourth interim dividend of HK$1.90 per share; total dividends of HK$5.20 per share for 2009 (HK$6.30 per share in 2008).

·
Capital adequacy ratio of 15.8 per cent (12.5 per cent at 31 December 2008); core capital ratio of 12.8 per cent (9.5 per cent at 31 December 2008).

·
Cost efficiency ratio of 32.1 per cent (29.2 per cent in 2008).

Within this document, the Hong Kong Special Administrative Region of the People’s Republic of China has been referred to as ‘Hong Kong’.
 

 
1

Contents

The financial information in this news release is based on the audited consolidated financial statements of Hang Seng Bank Limited (‘the bank’) and its subsidiaries and associates (‘the group’) for the year ended 31 December 2009.

Highlights of 2009 Results
Contents
Chairman’s Comment
Chief Executive’s Review
Results Summary
Customer Group Performance
Mainland Business
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
Financial Review
Net interest income
Net fee income
Trading income
Net loss from financial instruments designated at fair value
Other operating income
Analysis of income from wealth management business
Loan impairment charges and other credit risk provisions
Operating expenses
Gains less losses from financial investments and fixed assets
Tax expense
Earnings per share
Dividends per share
Segmental analysis
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 and allowances
Overdue advances
Rescheduled advances
Segmental analysis of advances to customers by geographical area
Gross advances to customers by industry sector
Financial investments
Amounts 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
 
2
 
Shareholders’ funds
Capital resources management
Liquidity ratio
Reconciliation of cash flow statement
Contingent liabilities, commitments and derivatives
Statutory accounts and accounting policies
Comparative figures
Property revaluation
Foreign currency positions
Ultimate holding company
Register of shareholders
Proposed timetable for 2010 quarterly dividends
Code on corporate governance practices
Board of Directors
News release


3

Comment by Raymond Ch’ien, Chairman

The effects of the global financial crisis continued to dominate operating conditions in 2009.

In the unstable economic environment, we remained focused on our long-term growth objectives, taking steps to support both personal and commercial customers while better aligning our business for future expansion.

We helped promote economic recovery through active involvement in Hong Kong Government-led lending schemes for small and medium-sized enterprises and by facilitating trade with a wide range of cross-border renminbi services.

Capitalising on our strong wealth management capabilities, we developed investment and insurance solutions that provided greater financial peace of mind in uncertain markets.

We leveraged our trusted brand and time-to-market advantage to maintain momentum in core areas of business, serve the diverse needs and interests of investors, and lay the groundwork for future development in new markets.

Our efforts have earned us the continuing loyalty of existing customers and are helping us build bridges to new ones, which will prove important business drivers as the economy returns to a firmer footing.

We remain committed to enhancing shareholder value through careful risk management and cost control while investing in our operations to promote sustainable growth over the long term.

Financial Performance

Operating profit excluding loan impairment charges and other credit risk provisions was down 14.3 per cent at HK$14,136 million. Operating profit declined by 2.9 per cent to HK$13,324 million, with good credit risk management and improving economic conditions in the second half leading to a significant drop in loan impairment charges and other credit risk provisions.

Profit before tax fell by 2.5 per cent to HK$15,477 million.

Profit attributable to shareholders was down 6.2 per cent at HK$13,221 million. Earnings per share were HK$6.92 – a drop of 6.1 per cent compared with a year earlier.

Lower staff-related expenses and further emphasis on cost containment resulted in a 1.8 per cent reduction in operating expenses to HK$6,676 million. However, net operating income before loan impairment charges and other credit risk provisions was down 10.7 per cent at HK$20,812 million, due mainly to the adverse impact of low interest rates on deposit spreads and mortgage portfolio pricing. With the reduction in operating expenses outpaced by the drop in income, our cost efficiency ratio rose to 32.1 per cent.

Return on average shareholders’ funds was 24.6 per cent, compared with 26.0 per cent in 2008. Return on average total assets was down 0.2 percentage points at 1.7 per cent.

On 31 December 2009, our capital adequacy and core capital ratios were 15.8 per cent and 12.8 per cent respectively, as calculated using the ‘advanced internal ratings-based approach’ under Basel II, compared with 12.5 per cent and 9.5 per cent respectively as calculated using the ‘foundation internal ratings-based approach’ under Basel II at the end of 2008.
 
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After careful consideration of our capital needs for future business opportunities, particularly in mainland China, as well as additional capital requirements under potential changes in the regulatory environment, the Directors have declared a fourth interim dividend of HK$1.90 per share, payable on 31 March 2010. This brings the total distribution for 2009 to HK$5.20 per share.

Outlook

Following the implementation of unprecedented monetary and fiscal stimulus programmes by many of the world’s leading economies, we are starting to see tentative signs of broad-based recovery.

Hong Kong’s key economic indicators have begun to improve, with the domestic sector taking the lead. Exports registered a year-on-year increase in November 2009 after 12 consecutive months of contraction. However, the pace of expansion in many major economies will be modest at best in 2010 with external demand remaining subdued. A sustained upturn in external sector activity will be crucial in getting Hong Kong’s outward-facing economy back on a solid growth track.

Supported by the Central Government’s RMB4 trillion package of economic stimulus initiatives, domestic demand has driven continued growth on the Mainland – albeit at a more moderate pace than pre-crisis levels. The relatively loose monetary and fiscal policies in place during 2009 have led to surging asset prices and concerns about overheating. But with economic recovery still in its infancy, the government will likely continue to fine-tune current policies rather than make dramatic changes that may undermine growth.

Against this backdrop, we are cautiously optimistic for 2010. The global recovery will bring new and renewed business opportunities. At the same time, challenges remain. The low interest rates that are likely to persist until at least the second half of this year and keen competition in the financial sector will continue to put pressure on margins.

We will use our competitive strengths – including our widely respected brand, customer service excellence and efficient business model – to deepen customer relationships, reinforce our strong market position and take advantage of new avenues of business growth.
 
5

 
Review by Margaret Leung, Vice-Chairman and Chief Executive

The economic environment in 2009 created both challenges and opportunities for Hang Seng.

Despite difficult operating conditions, our long-term goals continued to guide our strategy. We made good use of our competitive strengths to serve the different financial needs of our customers, maintain momentum in core areas of business and strengthen our platform for future growth.

Competitive pressures grew during the year as banks sought to capture business flows in recovering market segments. New rules on the physical segregation of investment and banking services in Hong Kong necessitated the reorganisation of wealth management services during the second half of the year. Assisted by our strong brand, we emphasised service excellence in differentiating ourselves from our peers.

With continued financial market uncertainty in the first half of the year, we provided enhanced insurance protection offerings and defensive investment opportunities. As the outlook of investors improved during the second half, we capitalised on our time-to-market advantage to launch products in line with changing trends and to tap new areas of business with good growth potential.

Leveraging our strong balance sheet and good credit risk management capabilities, we assisted customers through the prudent expansion of our lending portfolios. Deposits also increased but low interest rates put significant downward pressure on spreads.

Our early actions to tackle the challenges created by the global financial crisis as well as the improving economic conditions resulted in better performances by our core revenue drivers in the second half of 2009 compared with the first half.

We also worked to provide greater choice over when and where customers manage their finances, particularly by enhancing our online and mobile phone platforms. The number of Personal e-Banking and Business e-Banking customers grew by 12.8 per cent and 19.0 per cent respectively.

In mainland China, our subsidiary bank, Hang Seng Bank (China) Limited, extended its service reach by adding outlets and building new business alliances. Close collaboration between colleagues on the Mainland and in Hong Kong led to new wealth management products and the strengthening of cross-border capabilities – supporting good growth in the mainland customer base.

Customer Groups

Personal Financial Services recorded an 11.9 per cent decline in operating profit excluding loan impairment charges to HK$7,457 million and a 13.7 per cent fall in profit before tax to HK$7,258 million.

Operating profit excluding loan impairment charges and profit before tax for the second half of 2009 were up 8.4 per cent and 9.3 per cent respectively compared with the first half.

Although customer deposits and advances to individuals both increased, interest margins on deposits and the mortgage portfolio fell, resulting in a 5.8 per cent reduction in Personal Financial Services’ net interest income to HK$8,195 million.

Despite subdued investment sentiment, we kept wealth management income broadly steady at HK$4,672 million – down 2.4 per cent compared with 2008. Revenue from wealth management in the second half of 2009 increased by 14.7 per cent compared with the first half.
 
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With continuing economic uncertainty in the first half of the year, we emphasised financial security, shifting our sales focus to personal insurance protection and lower-risk investment products.

As market conditions began to stabilise, we used our new Securities Select Customer Trading Centre and attractive IPO investment services to capitalise on renewed interest in securities trading, increasing our market share and the number of securities accounts. We launched new Hang Seng-branded funds with China themes that were well received by customers. These actions helped drive a 36.8 per cent rise in investment income in the second half of the year compared with the first half, with increases across all major revenue streams.

In August, we became the first Hong Kong financial institution to achieve a dual listing of exchange-traded funds (ETFs) in Taiwan, increasing our profile and opening up a new avenue of future business.

Overall, investment income dropped by 23.2 per cent for 2009. The 15.2 per cent growth in revenue from stockbroking and related services was outweighed by declines in income from investment funds and structured investment products, which fell by 49.1 per cent and 57.1 per cent respectively. Private Banking service fee income dropped by 38.9 per cent, reflecting the reduced level of investment activity.

New and enhanced insurance products offered protection strategies for a diverse range of life stages. Total policies in-force increased by 10.1 per cent and annualised premiums rose by 14.7 per cent to HK$13.7 billion.

Life insurance income rose by 46.8 per cent, due mainly to our proactive management of the life insurance funds investment portfolio - which resulted in a HK$17 million investment gain for 2009 compared with a HK$1,063 million loss in 2008 - as well as the increase in net interest income arising from the growth in the portfolio and asset re-allocation.

Effective promotional campaigns drove good all-round growth in our credit card business. The card base increased by 6.5 per cent to 1.85 million cards in use and we increased our market share. Card receivables and spending rose by 7.6 per cent and 9.1 per cent respectively.

A wide range of mortgage loan offers and our convenient e-Mortgage channel helped us retain a strong position in the highly competitive residential mortgage sector.

Commercial Banking’s profit before tax was up 6.8 per cent at HK$2,637 million. Operating profit excluding loan impairment charges fell by 15.5 per cent, due mainly to the 16.6 per cent drop in net interest income. Operating profit increased by 14.0 per cent, with effective management of credit risk and improvements in the economic environment supporting a 67.4 per cent reduction in loan impairment charges.

Operating profit excluding loan impairment charges and profit before tax for the second half of 2009 rose by 9.1 per cent and 44.2 per cent respectively compared with the first half.

We continued to assist small and medium-sized enterprises in Hong Kong through our participation in government-guaranteed lending schemes, under which we have now approved over 5,000 applications with loans totalling more than HK$14.2 billion. Advances to customers rose by 12.1 per cent. Along with improved loan spreads, this supported a 15.4 per cent increase in net interest income from lending.
 
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The establishment of a dedicated deposit service team drove a 26.0 per cent increase in deposits, but this only partly offset the effects of narrowing deposit spreads, with net interest income from deposits down by 47.7 per cent.

Income from our strengthened portfolio of corporate life insurance products rose by 103.1 per cent, sustaining corporate wealth management revenue – which fell by just 1.8 per cent despite the less favourable environment for investment business.

Good business synergy between commercial banking teams in Hong Kong and on the Mainland, the launch of renminbi trade settlement services and new business relationships with strategic mainland partners have enhanced our ability to capture an increasing share of  cross-border business flows.

Corporate Banking achieved a 20.1 per cent increase in operating profit excluding loan impairment charges to HK$979 million.

A significant improvement in loan impairment charges saw operating profit grow by 46.7 per cent to HK$901 million. Profit before tax was HK$915 million – an increase of 41.9 per cent.

Total operating income grew by 15.4 per cent, supported mainly by the 17.2 per cent growth in net interest income.

Advances to customers declined by 5.6 per cent, reflecting weaker investment appetite and stronger financial discipline by corporate customers during the international financial crisis. We capitalised on our balance sheet strength and good understanding of local markets to assist corporate customers with new and renewed facilities while adjusting pricing in line with the credit environment, resulting in a 41.5 per cent rise in net interest income from customer advances.

The low interest rate environment drove a marked customer preference for greater liquidity, with the increase in current account and savings account deposits more than offset by the drop in time deposits. Net interest income from deposits fell by 36.4 per cent.

Treasury’s operating profit excluding credit risk provisions declined by 3.9 per cent to HK$2,918 million.

We continued with our prudent risk management strategy, enhancing the portfolio mix through investment in high-quality debt securities and selectively disposing of negotiable instruments as market conditions changed.

Low interest rates kept the cost of funds down but also limited yields on new deployments of funds and balance sheet management investments. Net interest income fell by 19.4 per cent.

Net trading income grew by 64.4 per cent to HK$1,054 million, due mainly to a net increase in funding swap income.

We enhanced the infrastructure for customer-driven business, strengthening Treasury’s product development capabilities and sales synergy with other customer groups. With weak investor demand for equity and interest rate-linked products, we successfully maintained business momentum by enhancing the features of our foreign exchange-linked investment offerings.

Treasury’s profit before tax increased by 48.9 per cent, due mainly to the non-recurrence of the HK$1,375 million credit risk provisions booked in 2008.
 
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Mainland Business

Including a cross-location sub-branch that opened in Guangdong province under CEPA VI in January 2010, Hang Seng China now has 37 outlets across 12 cities.

Hang Seng China’s profit before tax achieved steady growth, underpinned by an increase in total operating income as well as reductions in both operating expenses and loan impairment charges.

Total operating income grew by 3.9 per cent, supported by a 1.3 per cent rise in net interest income.

We contained costs through effective deployment of resources to record a 0.9 per cent reduction in operating expenses despite expanding our network during the year.

Our attractive range of products and enhancements to service delivery across a variety of channels helped drive an 18.3 per cent year-on-year rise in the mainland customer base. Deposits grew by 35.9 per cent compared with a year earlier, supporting further improvement in our balance sheet strength.

Government policies to promote economic recovery increased opportunities for banks to expand lending, creating downward pressure on pricing. We maintained a prudent approach to credit risk control – focusing on the quality rather than the size of our loans portfolio. Advances to customers rose by 5.2 per cent.

Leveraging in part on our wealth management experience in Hong Kong, we offered new investment products aimed at affluent customers, achieving a 25.2 per cent expansion in the number of mainland Prestige Banking accounts.

Our growing range of cross-border services helped drive a 10.9 per cent increase in the number of commercial customers.

We built new alliances with external partners such as China Export and Credit Insurance Corporation and China UnionPay to good business effect.

Collaborative initiatives with strategic partners Industrial Bank and Yantai Bank continued to provide synergy in key areas of business and extend our reach in regions with strong economic growth potential.

Including the share of profits from mainland associates, our mainland business contributed 13.3 per cent to total profit before tax, compared with 11.9 per cent a year earlier.

Moving Ahead

In a year marked by economic uncertainty, Hang Seng remained committed to a forward-looking strategy that focuses on the long term. We have continued to support customers, sustain the momentum of growth drivers and establish new avenues of revenue generation.

Investors are placing greater emphasis on personalised financial services and the timely provision of information. Businesses facing difficult operating conditions are demanding one-stop financial assistance with fast and efficient delivery channels that can give them an edge over their competitors.

Hang Seng’s strengths – including service excellence, time-to-market capabilities and a strong distribution network – will continue to serve us well in meeting these needs, helping us deepen existing customer relationships and acquire new ones.
 
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Our diverse portfolio of investment and insurance products enables us to provide tailored wealth management solutions for a wide range of market conditions and financial needs. Our wealth management business – particularly sales of investment funds – has gained strong momentum during the first two months of 2010 and we will build on this with new products and services.

With deep roots in our communities, our local knowledge allows us to identify emerging trends ahead of the curve to the mutual benefit of our customers and our business. Following on from our ground-breaking dual listing of ETFs in Taiwan last year, we will work to develop additional new revenue streams that support our core business lines.

Commercial Banking’s growing range of cross-border services and corporate wealth management offerings will help us strengthen ties with customers and attract new business. We will further enhance cross-selling and leverage our multi-channel platforms and payment and cash management capabilities in Hong Kong and on the Mainland as part of our new customer acquisition strategy.

Our support of Corporate Banking clients in challenging economic times puts us in a good position to deepen these partnerships as market conditions improve.

We will take advantage of opportunities to expand our renminbi services for commercial and corporate customers in Hong Kong following new measures announced by the Hong Kong Monetary Authority last month that widen the scope of renminbi business.

Treasury will continue to prudently manage its investment portfolio to strike a good balance between risk and return. We will further enhance Treasury’s service infrastructure and product development capabilities to strengthen fee-earning potential.

We will upgrade and expand our service delivery channels to provide customers with greater efficiency and convenience in managing their financial needs.

Hang Seng China will further grow its brand on the Mainland, make good use of its strategic alliances and extend its business reach in high-potential locations – including Guangdong under the favourable policies of CEPA VI.

Supported by Hang Seng’s strong capabilities in Hong Kong, we will expand our mainland wealth management offerings to attract more customers in target segments. We will promote our comprehensive cross-border services to increase the mainland commercial customer base. These initiatives will help drive deposits growth, providing important support for business expansion.

On top of our investments in Industrial Bank and Yantai Bank, we are actively looking for strategic partners in wealth management industries on the Mainland.

We will continue to invest in staff capabilities, technology and initiatives that enhance our reputation as a leading provider of Greater China financial expertise.

The past year has been a challenging one but we are looking ahead – to identify new opportunities and ensure our strategic decisions best serve our long-term goals.

Supported by our trusted brand and solid financial fundamentals, we will reinforce our leadership in traditional lines, build momentum in areas with good potential for further business expansion, and explore new markets and customer segments in order to deliver sustainable growth.
 
10

 
Results summary

Hang Seng Bank Limited (‘the bank’) and its subsidiaries and associates (‘the group’) reported an audited profit attributable to shareholders of HK$13,221 million for 2009, down by 6.2 per cent compared with 2008. Earnings per share were HK$6.92, down HK$0.45 from 2008. Attributable profit to shareholders for the second half of 2009 rose by HK$319 million, or 4.9 per cent, when compared with the first half.

Operating profit excluding loan impairment charges and other credit risk provisions fell by HK$2,365 million, or 14.3 per cent, to HK$14,136 million. Although the economic environment in Hong Kong began to show signs of gradual recovery and market sentiment improved during the second half of the year, operating conditions in 2009 were challenging. The continuing low interest rate environment had a significant adverse impact on net interest income. Non-interest income also fell although there was notable growth in the second half of the year compared with the first half. Operating expenses were contained at a lower level than in 2008.
 
 Net interest income decreased by HK$2,209 million, or 13.6 per cent. Net interest margin for 2009 was 1.90 per cent – down 46 basis points compared with 2008. Net interest spread dropped by 31 basis points to 1.84 per cent and the contribution from net free funds declined by 15 basis points to 0.06 per cent. Although average interest-earning assets increased by 7.1 per cent, there was a shift towards more liquid assets with a lower yield. Markedly reduced deposit spreads and the reduction in contribution from net free funds in the near-zero interest rate environment outweighed the benefits of improved loan spreads.

Net fees and commissions dropped by HK$648 million, or 13.0 per cent, to HK$4,321 million, as demand for wealth management products was lower than in 2008, reflecting weak investor sentiment. The more buoyant stock market, improving economic conditions and the improvement in investor outlook towards the end of the year helped support the 24.4 per cent growth in net fees and commissions in the second half compared with the first half. Income from sales of retail investment funds and third-party structured investment products fell by 44.3 per cent and 91.8 per cent respectively. There was a reduction in private banking service fee income, reflecting diminished customer appetite for trading and structured products. Fee income from stockbroking and related services rose by 15.2 per cent, driven by the 25.7 per cent increase in turnover, which significantly outperformed the 12.1 per cent drop in Hong Kong market turnover. In the uncertain economic conditions, the group’s comprehensive range of health and wealth insurance solutions offered good personal coverage to customers at all life stages. This drove a significant 93.9 per cent rise in insurance fee income, mainly contributed by strong sales of the HSBC Jade Global Universal Life product. Credit card business continued to gain market share in terms of cards in issue, spending and receivables, and achieved a strong 8.4 per cent growth in fee income.

Trading income improved by HK$468 million, or 32.2 per cent, to HK$1,923 million. Foreign exchange income registered significant growth of HK$408 million, or 29.5 per cent, attributable partly to increased net interest income from funding swaps and the continued strong customer demand for foreign exchange-linked structured products. The rise was also driven by reduced losses on the revaluation of certain US dollar capital funds – maintained in the bank’s mainland subsidiary bank and subject to regulatory controls – against the renminbi.

Income from insurance business (included within ‘net interest income’, ‘net fee income’, ‘net income from financial instruments designated at fair value’, ‘net earned insurance premiums’, ‘movement in present value of in-force insurance business’ within ‘other operating income’, and after deducting ‘net insurance claims incurred and movement in policyholders’ liabilities’) grew by HK$710 million, or 41.8 per cent, to HK$2,407 million. To cater for the increase in customer concerns about health issues, more emphasis was placed on products offering greater protection and medical coverage. Net interest income and fee income from life insurance business grew by 43.7 per cent, attributable mainly to the increase in the size and asset reallocation of the life insurance funds investment portfolio. The investment return on the life insurance funds investment portfolio also improved significantly from a loss of HK$1,065 million in 2008 to a gain of HK$17 million in 2009.
 
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Net operating income before loan impairment charges and other credit risk provisions decreased by HK$2,484 million, or 10.7 per cent, to HK$20,812 million.

Operating expenses dropped by HK$119 million, or 1.8 per cent, to HK$6,676 million, with costs at the bank’s Hong Kong operations and mainland operations falling by 2.0 per cent and 0.3 per cent respectively. The total drop was largely attributable to decreased headcount through natural attrition, reduced performance-related expenses and good cost containment in areas such as marketing expenditure.

Loan impairment charges and other credit risk provisions improved significantly, falling by HK$1,964 million, or 70.7 per cent, to HK$812 million. Individually assessed impairment charges dropped by HK$615 million, or 66.5 per cent, primarily due to lower new and additional impairment charges and a higher net release on the accounts of certain corporate and commercial banking customers. Collectively assessed allowances rose slightly by HK$26 million owing to higher charges on the credit card and personal loans portfolios. There were no impairment losses or provisions against available-for-sale debt securities in 2009, compared with an impairment charge of HK$1,375 million in 2008 when the bank wrote down the carrying value of certain available-for-sale debt securities following the outbreak of the global financial crisis. Compared with the first half of 2009, loan impairment charges and other credit risk provisions fell significantly by HK$430 million, or 69.2 per cent, in the second half as a result of improved economic conditions and the bank’s good credit risk management.

Operating profit was down HK$401 million, or 2.9 per cent, at HK$13,324 million.

Profit before tax dropped by 2.5 per cent to HK$15,477 million after taking the following items into account:

·  
HK$140 million increase in net surplus on property revaluation;
·  
HK$81 million fall in gains less losses from financial investments and fixed assets; and
·  
HK$59 million drop in share of profits from associates, mainly from Industrial Bank.


Consolidated financial position and key ratios

Total assets increased by HK$63.8 billion, or 8.4 per cent, to HK$826.0 billion. In light of the weak global economy and the fact that financial markets were still recovering from the credit crisis, Treasury continued to take a highly prudent approach in managing its balance sheet management investments. Surplus funds arising from trading assets that matured in 2009 were redeployed to interbank placements and appropriate available-for-sale debt securities to attain yield enhancement. As a result, financial investments – primarily high-quality debt securities which included government-guaranteed debt securities – rose by 33.3 per cent. Customer advances recorded encouraging growth of 4.7 per cent. Despite intense market competition, the group was able to sustain a leading position and maintained its growth momentum in residential mortgage lending and other personal lending. Mainland lending grew moderately with Hang Seng China continuing to emphasise lending quality over business expansion. Customer deposits and certificates of deposit and other debt securities in issue rose by HK$59.2 billion, or 9.8 per cent, to HK$663.7 billion, reflecting customers’ lukewarm attitude towards investment and preference for liquidity in the uncertain market conditions. At 31 December 2009, the advances-to-deposits ratio was 51.9 per cent, compared with 54.4 per cent at the end of 2008.
 
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At 31 December 2009, shareholders’ funds (excluding proposed dividends) were HK$54,591 million, an increase of HK$8,701 million, or 19.0 per cent. Retained profits rose by HK$5,201 million, mainly reflecting the growth in 2009 profit after the appropriation of interim dividends and the increase in actuarial gains under the defined benefit scheme. The available-for-sale investments reserve showed a deficit of HK$257 million compared with a deficit of HK$3,823 million in 2008, due mainly to the narrowing of credit spreads as a result of the stabilisation in credit markets.

The return on average total assets was 1.7 per cent (1.9 per cent for 2008). The return on average shareholders’ funds was 24.6 per cent (26.0 per cent for 2008).

At 31 December 2009, the capital adequacy ratio was 15.8 per cent, up from 12.5 per cent at the end of 2008. The core capital ratio was 12.8 per cent, up from 9.5 per cent. The ratios were calculated in accordance with the internal ratings-based approach under the Banking (Capital) Rules issued by the Hong Kong Monetary Authority for the implementation of Basel II. Effective 1 January 2009, the bank migrated to the ‘advanced internal ratings-based approach’ under the Basel II framework to calculate its capital ratios. The capital adequacy ratio and core capital ratio at 31 December 2008 were calculated using the ‘foundation internal ratings-based approach’. The strengthening of these ratios largely reflects profit growth after accounting for dividends in the year, the improvement in the available-for-sale debt securities reserve due to the narrowing of credit spreads and the change in calculation methodology.

The bank maintained a strong liquidity position. The average liquidity ratio for 2009 was 48.1 per cent (calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance), compared with 46.4 per cent for 2008.

The cost efficiency ratio for 2009 was 32.1 per cent, compared with 29.2 per cent in 2008.

Dividends

The Directors have declared a fourth interim dividend of HK$1.90 per share, which will be payable on 31 March 2010 to shareholders on the register of shareholders as of 16 March 2010. Together with the interim dividends for the first three quarters, the total distribution for 2009 will be HK$5.20 per share.
 
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Customer group performance
 
Figures in HK$m
  
Personal
Financial
Services
    
Commercial Banking
    
Corporate
Banking
    
Treasury
    
Other
    
Total
reportable
segments
    
Inter-
segment
elimination
    
Total
  
                                                 
Year ended
                                                
31 December 2009
                                                
                                                 
Net interest income
     8,195       2,011       1,158       2,162       497       14,023    
—
       14,023  
Net fee income/(expense)
     3,000       1,114       145       (35 )     97       4,321    
—
       4,321  
Trading income/(loss)
     662       245       8       1,054       (46 )     1,923    
—
       1,923  
Net (loss)/income from
                                                              
  financial instruments
                                                              
  designated at fair value
     (54 )  
—
    
—
       5       (26 )     (75 )  
—
       (75 )
Dividend income
     2       6    
—
    
—
       8       16    
—
       16  
Net earned insurance premiums
     11,293       225       1    
—
    
—
       11,519    
–
       11,519  
Other operating income
     898       29       1    
—
       632       1,560       (471 )     1,089  
Total operating income
     23,996       3,630       1,313       3,186       1,162       33,287       (471 )     32,816  
Net insurance claims
                                                                
  incurred and movement
                                                                
  in policyholders’ liabilities
     (11,868 )     (134 )     (2 )  
—
    
—
       (12,004 )  
—
       (12,004 )
Net operating income before
                                                                
  loan impairment charges
                                                                
  and other credit risk
                                                                
  provisions
     12,128       3,496       1,311       3,186       1,162       21,283       (471 )     20,812  
Loan impairment charges
                                                                
  and other credit risk
                                                                
  provisions
     (454 )     (278 )     (78 )     (2 )  
—
       (812 )  
—
       (812 )
Net operating income
     11,674       3,218       1,233       3,184       1,162       20,471       (471 )     20,000  
Total operating expenses W
     (4,671 )     (1,507 )     (332 )     (268 )     (369 )     (7,147 )     471       (6,676 )
Operating profit
     7,003       1,711       901       2,916       793       13,324    
—
       13,324  
Gains less losses from financial
                                                                
  investments and fixed assets
     96       53       14       (152 )     175       186    
—
       186  
Net surplus on property
                                                                
  revaluation
  
—
    
—
    
—
    
—
       219       219    
—
       219  
Share of profits from associates
     159       873    
—
       629       87       1,748    
—
       1,748  
Profit before tax
     7,258       2,637       915       3,393       1,274       15,477    
—
       15,477  
Share of profit before tax
     46.9 %      17.0 %      5.9 %      21.9 %      8.3 %      100.0 %   
–
       100.0 % 
                                                                 
                                                                 
Operating profit excluding loan
                                                                
  impairment charges
                                                                
  and other credit risk
                                                                
  provisions
     7,457       1,989       979       2,918       793       14,136    
—
       14,136  
                                                                 
WDepreciation/amortisation
                                                                
    included in total operating
                                                                
    expenses
     (173 )     (31 )     (7 )     (4 )     (335 )     (550 )  
–
       (550 )
                                                                 
                                                                 
At 31 December 2009
                                                                
                                                                 
Total assets
     234,723       96,490       88,135       377,561       29,059       825,968    
—
       825,968  
Total liabilities
     554,357       123,996       37,477       21,503       30,411       767,744    
—
       767,744  
Investments in associates
     847       4,284    
—
       2,707       2,388       10,226    
—
       10,226  
Capital expenditure incurred
                                                                
  during the year
     181       34       5    
—
       92       312    
—
       312  



14


Figures in HK$m
  
Personal
Financial
Services
    
Commercial
Banking
    
Corporate
Banking
    
Treasury
    
Other
    
Total
reportable
segments
    
Inter-
segment
elimination
    
Total
  
                                                 
Year ended
                                                
31 December 2008
                                                
                                                 
Net interest income
     8,700       2,411       988       2,682       1,451       16,232    
—
       16,232  
Net fee income/(expense)
     3,696       1,066       127       (33 )     113       4,969    
—
       4,969  
Trading income/(loss)
     743       245       18       641       (192 )     1,455    
—
       1,455  
Net (loss)/income from financial instruments designated at fair value
     (1,043 )     (2 )  
—
       (10 )     24       (1,031 )  
—
       (1,031 )
Dividend income
     25       10    
—
    
—
       47       82    
—
       82  
Net earned insurance premiums
     12,135       213       3    
—
    
—
       12,351    
—
       12,351  
Other operating income
     439       54       2       4       671       1,170       (469 )     701  
Total operating income
     24,695       3,997       1,138       3,284       2,114       35,228       (469 )     34,759  
Net insurance claims incurred and movement in policyholders’ liabilities
     (11,349 )     (113 )     (1 )  
—
    
—
       (11,463 )  
—
       (11,463 )
Net operating income before loan impairment charges and other credit risk provisions
     13,346       3,884       1,137       3,284       2,114       23,765       (469 )     23,296  
Loan impairment charges and other credit risk provisions
     (347 )     (853 )     (201 )     (1,375 )  
—
       (2,776 )  
—
       (2,776 )
Net operating income
     12,999       3,031       936       1,909       2,114       20,989       (469 )     20,520  
Total operating expenses W
     (4,879 )     (1,530 )     (322 )     (247 )     (286 )     (7,264 )     469       (6,795 )
Operating profit
     8,120       1,501       614       1,662       1,828       13,725    
—
       13,725  
Gains less losses from financial investments and fixed assets
     156       85       31       (84 )     79       267    
—
       267  
Net surplus on property revaluation
  
—
    
—
    
—
    
__
       79       79    
—
       79  
Share of profits from associates
     134       884    
—
       701       88       1,807    
—
       1,807  
Profit before tax
     8,410       2,470       645       2,279       2,074       15,878    
—
       15,878  
Share of profit before tax
     52.9 %     15.6 %     4.1 %     14.4 %     13.0 %     100.0 %  
—  
      100.0 %
                                                                 
                                                                 
Operating profit excluding loan impairment charges and other credit risk provisions
     8,467       2,354       815       3,037       1,828       16,501    
—
       16,501  
                                                                 
WDepreciation/amortisation included in total operating  expenses
     (140 )     (24 )     (7 )     (3 )     (318 )     (492 )  
—
       (492 )
                                                                 
                                                                 
At 31 December 2008
                                                                
                                                                 
Total assets
     211,092       85,791       93,570       345,920       25,795       762,168    
—
       762,168  
Total liabilities
     508,596       96,905       41,981       34,575       28,485       710,542    
—
       710,542  
Investments in associates
     501       3,194    
—
       2,784       2,391       8,870    
—
       8,870  
Capital expenditure incurred during the year
     374       52       14       3       223       666    
—
       666  

 
 
15
 

Personal Financial Services (‘PFS’) reported a profit before tax of HK$7,258 million for 2009, 13.7 per cent lower than in 2008. Operating profit excluding loan impairment charges was down 11.9 per cent at HK$7,457 million. In the second half of 2009, the business experienced a moderate rebound amid steadying economic conditions and improving market sentiment. Profit before tax and operating profit excluding loan impairment charges for the second half of 2009 were up 9.3 per cent and 8.4 per cent respectively compared with the first half.

Despite the excessive liquidity driving down market interest rates, PFS managed to partly offset the effect of compressed deposit spreads and the repricing of the mortgage portfolio by successfully deploying the commercial surplus to achieve growth in the secured and unsecured lending portfolios. Net interest income for the year declined by 5.8 per cent, but increased by 4.1 per cent in the second half compared with the first half.

Total operating income from unsecured lending business recorded year-on-year growth of 16.0 per cent, underpinned by the increase in the number of credit cards in force as well as card spending and receivables. Effective marketing campaigns helped the bank gain market share and the card base grew by 6.5 per cent to 1.85 million cards in use. Card receivables rose by 7.6 per cent compared with a year earlier to HK$13.8 billion, outperforming market peers. Personal lending was up 9.3 per cent, with a total loan balance of HK$3.6 billion.

The bank’s residential mortgage business sustained its market leadership in the active property sector and gained market share despite intense competition. The bank ranked second for the provision of equitable mortgages in Hong Kong throughout 2009 and, at 31 December 2009, its market share in terms of total mortgage loans stood at 15.1 per cent.

PFS’ prudent credit strategy and improvements in unemployment and bankruptcy trends beginning in mid-2009 saw loan impairment charges drop by 34.3 per cent in the second half of the year compared with the first half.

Against the backdrop of new rules governing the physical segregation of banking and investment services, the improving market sentiment in the second half of the year helped support investment business momentum. Securities brokerage business and investment funds business registered a 29.3 per cent and 236.1 per cent increase in turnover in the second half of 2009 compared with the first half of 2009. Although non-interest income fell by 15.4 per cent compared with 2008, growth of 13.5 per cent and 52.7 per cent was achieved in the second half of 2009 compared with the first half of 2009 and the second half of 2008 respectively.

Wealth management income was broadly in line with 2008 at HK$4,672 million, representing a slight drop of 2.4 per cent.

Sales of wealth management products improved as the effects of financial stimulus policies introduced in Hong Kong started to take effect and help stabilise market conditions. In the very low interest rate environment, the bank capitalised on growing investor appetite for lower-risk yield-enhancement opportunities. Turnover of our foreign exchange-linked investment deposits in 2009 exceeded HK$130 billion – more than triple that recorded in 2008.

Income from life insurance business grew by 46.8 per cent. Diversification of the product range with the launch of new plans that offer improved protection propositions proved effective in driving sales. Total policies in-force and total annualised premiums rose by 10.1 per cent and 14.7 per cent respectively.
 
16

 
Personal e-Banking continued to grow steadily with over 980,000 registered customers at 31 December 2009 – a 12.8 per cent increase compared with the end of 2008. Customers continued to support the bank’s environmental protection efforts with a 54.5 per cent increase in the number of accounts switching to the e-statement service during the year to reach more than 330,000. Hang Seng was among the first banks in Hong Kong to launch a mobile phone-based travel insurance application service and introduce touch screen technology in its network of self-service terminals.

Commercial Banking (‘CMB’) reported a 6.8 per cent increase in profit before tax to reach HK$2,637 million in the face of challenging market conditions. CMB’s contribution to the bank’s total profit before tax increased to 17.0 per cent, up 1.4 percentage points from a year earlier. Operating profit excluding loan impairment charges was down 15.5 per cent at HK$1,989 million, due mainly to falling deposit spreads in the low interest rate environment. On the back of improving market conditions and a continuing emphasis on vigilant risk management, loan impairment charges fell significantly by 67.4 per cent.

With upturns in economic activity and the property market during the second half of 2009, customer advances rose by 12.1 per cent. Assisted by the establishment of a dedicated deposit service team and the influx of liquidity into the market, customer deposits recorded notable growth of 26.0 per cent. However, the positive impact of this growth in advances and deposits was more than offset by continuing pressure on deposit margins, resulting in a year-on-year decline of 16.6 per cent in net interest income.

CMB continued to develop its corporate wealth management business, enjoying particular success with corporate life insurance products which offered customers diversified insurance solutions, comprehensive protection, customised benefits and flexible payment options. An Executive Retention Insurance Plan for business owners who want to retain key executives with additional benefits was launched towards the end of the year. Income from corporate life insurance recorded impressive growth of 103.1 per cent. Business momentum was sustained in investment services with more defensive investment instruments and treasury hedging solutions that served customers’ business needs in the prevailing economic conditions. These initiatives helped mitigate the unfavourable impact of the overall fall in investment activity, with corporate wealth management income recording a small decline of 1.8 per cent. Corporate wealth management income contributed 13.2 per cent to CMB’s total operating income in 2009.

In response to the announcement of the pilot Renminbi Trade Settlement Scheme by the Central Government on the Mainland, CMB launched a series of renminbi trade settlement services in July to support the cross-border renminbi trade between Hong Kong companies and designated mainland enterprises in the five pilot cities (Shanghai, Shenzhen, Guangzhou, Dongguan and Zhuhai). This enhanced product suite was further supported by an agreement signed with China Export and Credit Insurance Corporation (SINOSURE) in December, which reinforces CMB’s capability to offer one-stop buyer credit protection and accounts receivable financial solutions. Close collaboration with Hang Seng China and the bank’s strategic partners on the Mainland also put CMB in a stronger position to capture a growing share of cross-border business flows.

With strong roots in its local communities, the bank continued to be an active player in government-backed schemes to support small and medium-sized enterprises facing tough economic times. Since the launch of the SME Loan Guarantee Scheme and Special Loan Guarantee Scheme in late 2008, the bank has approved over 5,000 applications with a total loan amount of more than HK$14.2 billion and with market shares in the SME Loan and Special Loan schemes of 33.3 per cent and 15.2 per cent respectively.

CMB customers continued to switch to online and automated banking channels. In December, CMB enhanced its Business e-Banking proposition with the launch of online investment fund trading services. At 31 December 2009, over 77,000 customers had registered for the bank’s Business e-Banking service, up 19.0 per cent compared with a year earlier. The number of online business transactions grew by 13.3 per cent. Branch counter transactions fell by 14.6 per cent compared with 2008.
 
 
17

 
Corporate Banking (‘CIB’) capitalised on its in-depth understanding of the market and its customers to support funding needs in a tight credit market, particularly in early 2009. As the economic environment stabilised, more lenders returned to the market, leading to keener competition for loans business. Despite this, CIB managed to maintain good loan asset portfolios – priced in line with conditions in the credit market – both in Hong Kong and on the Mainland, resulting in a 41.5 per cent increase in loan interest income compared with 2008 despite a 5.6 per cent decline in the total loan balance.

Competition for deposits business remained intense throughout the year. In the low interest rate environment, CIB recorded a 40.8 per cent drop in its time deposits balance. However, due to strong customer service relationships and CIB’s customer profile, current and savings account deposits increased. The total deposit balance at end of 2009 was down 9.4 per cent compared with a year earlier. Deposit net interest income declined by 36.4 per cent.

Net operating income before loan impairment charges was HK$1,311 million – a year-on-year increase of 15.3 per cent. With the improved loan assets portfolio, loan impairment charges for both Hong Kong and mainland loan books were lower than in 2008. Net operating income after loan impairment charges was up 31.7 per cent at HK$1,233 million.

Treasury (‘TRY’) reported relatively stable operating income in 2009, recording a drop of 3.0 per cent. The favourable interest rate environment and ample liquidity in the market enabled TRY to maintain the cost of funds at a relatively low level during the year. However, the low interest rates also limited the yields that could be generated from fund deployment and balance sheet management investments. Net interest income was HK$2,162 million, down 19.4 per cent compared to 2008.

Net trading income increased substantially by HK$413 million, or 64.4 per cent, to reach HK$1,054 million, mainly attributable to a HK$462 million net increase in funding swapW income (described below). For income from sales and trading other than from funding swaps, TRY maintained business momentum by strengthening sales of foreign exchange-linked products to offset weak customer appetite for more sophisticated equity-linked and interest rate-linked structured products.

TRY maintained a prudent risk management strategy, with investment focused mainly on high-quality debt securities, particularly government-guaranteed papers and high-quality corporate securities. The credit quality of the balance sheet management portfolio improved significantly during the year, resulting in a HK$1,373 million reduction in credit risk provisions compared with 2008. This underpinned the increase of 66.8 per cent, or HK$1,275 million, in net operating income after credit risk provisions.

TRY captured opportunities in the market during the year to dispose of selected securities to achieve an improved mix of investments in the balance sheet management portfolio. While this action was in line with the bank’s prudent risk management strategy, the accompanying disposal loss of HK$152 million partly offset growth in net operating income. Profit before tax was up 48.9 per cent at HK$3,393 million, representing 21.9 per cent of the bank’s total profit before tax.

W Treasury from time to time employs foreign exchange swaps for its funding activities, which in essence involves swapping a currency (‘original currency’) into another currency (‘swap currency’) at the spot exchange rate for short-term placement and simultaneously entering into a forward exchange contract to convert the funds back to the original currency on maturity of the placement. In accordance with HKAS39, the exchange difference of the spot and forward contracts is required to be recognised as a foreign exchange gain/loss, while the corresponding interest differential between the original and swap funding is reflected in net interest income.
 
18

 
Mainland business

Hang Seng Bank (China) Limited (‘Hang Seng China’) opened three new outlets on the Mainland in 2009. Including a cross-city sub-branch that opened in Guangdong province under CEPA VI in January 2010, Hang Seng China now operates a network of 37 outlets in Beijing, Shanghai, Guangzhou, Dongguan, Shenzhen, Fuzhou, Nanjing, Hangzhou, Ningbo, Tianjin, Kunming, and Foshan. The bank has a branch in Shenzhen for foreign currency wholesale business and a representative office in Xiamen.

Despite the mainland economy displaying good resilience against the effects of the global financial crisis, the economic outlook – particularly in the first half of the year – remained uncertain. Against the backdrop of a large-scale stimulus package implemented in 2009, Hang Seng China recorded notable loan growth in the second half of the year. At 31 December 2009, lending was up 5.2 per cent compared with a year earlier. With the further development of wealth management business and Commercial Banking’s growing service capabilities, Hang Seng China’s customer base recorded solid growth of 18.3 per cent when compared with the end of 2008, including a 25.2 per cent increase in the total number of Prestige Banking customers. These increases helped underpin a 35.9 per cent rise in the deposit base. Total operating income increased by 3.9 per cent, benefiting from the 1.3 per cent growth in net interest income. Reduced exchange losses from the revaluation of US dollar capital funds against the renminbi were partly offset by the reduction in other operating income during the year.

Hang Seng China continued to further enrich and diversify its product offerings to cater for different market conditions and to promote wealth management awareness among target customer segments. Hang Seng China has also signed an agreement with China Export and Credit Insurance Corporation (SINOSURE) that will enhance its cross-border service proposition for commercial customers.

Hang Seng China is striving to improve its network and business development efficiency by increasing its penetration in four key cities: Shanghai, Shenzhen, Guangzhou and Beijing. Resources are also being redeployed to achieve greater management and operational efficiency. Management of credit risk and operational risk continues to be strengthened through proactive risk management practices.

The bank remains firmly committed to developing its mainland business, through both Hang Seng China and long-term relationships with mainland partners. The bank’s strategic alliance with Industrial Bank Co., Ltd. (‘Industrial Bank’) reached its fifth anniversary in April 2009 and continues to yield good results. Including the bank’s share of profit from Industrial Bank and Yantai Bank Co., Ltd. (‘Yantai Bank’), mainland business contributed 13.3 per cent of total profit before tax, compared with 11.9 per cent in 2008.
 
19
 
Consolidated Income Statement
     
 

   
Year ended 31 December
  
Figures in HK$m
  
2009
    
2008
  
             
Interest income
     16,390       26,172  
Interest expense
     (2,367 )     (9,940 )
Net interest income
     14,023       16,232  
Fee income
     5,190       5,704  
Fee expense
     (869 )     (735 )
Net fee income
     4,321       4,969  
Trading income
     1,923       1,455  
Net loss from financial instruments
                
  designated at fair value
     (75 )     (1,031 )
Dividend income
     16       82  
Net earned insurance premiums
     11,519       12,351  
Other operating income
     1,089       701  
Total operating income
     32,816       34,759  
Net insurance claims incurred and
                
  movement in policyholders’ liabilities
     (12,004 )     (11,463 )
Net operating income before loan impairment
                
  charges and other credit risk provisions
     20,812       23,296  
Loan impairment charges and other credit risk provisions
     (812 )     (2,776 )
Net operating income
     20,000       20,520  
Employee compensation and benefits
     (3,378 )     (3,452 )
General and administrative expenses
     (2,748 )     (2,851 )
Depreciation of premises, plant and equipment
     (466 )     (432 )
Amortisation of intangible assets
     (84 )     (60 )
Total operating expenses
     (6,676 )     (6,795 )
Operating profit
     13,324       13,725  
Gains less losses from financial investments and fixed assets
     186       267  
Net surplus on property revaluation
     219       79  
Share of profits from associates
     1,748       1,807  
Profit before tax
     15,477       15,878  
Tax expense
     (2,256 )     (1,779 )
Profit for the year
     13,221       14,099  
                 
                 
Profit attributable to shareholders
     13,221       14,099  
                 
                 
Earnings per share (in HK$)
     6.92       7.37  
 
Details of dividends payable to shareholders of the bank attributable to the profit for the year are set out on page 38.
 
The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as ‘Net trading income’ and arising from financial instruments designated at fair value through profit and loss as ‘Net income from financial instruments designated at fair value’ (other than for debt securities in issue and subordinated liabilities, together with derivatives managed in conjunction with them).
 
The table below presents the interest income and interest expense of Hang Seng, as included within the HSBC Group accounts:
 
 
Figures in HK$m
  
2009
    
2008
    
                 
 
Interest income
     15,950       25,599    
 
Interest expense
     (1,813 )     (8,366 )  
 
Net interest income
     14,137       17,233    
 
Net interest income and expense reported as ‘Net trading income’
     (234 )     (1,211 )  
 
Net interest income and expense reported as ‘Net income from
                  
 
  financial instruments designated at fair value’
     120       210    
                     
 
 
20
 
Consolidated Statement of Comprehensive Income
     
 

   
Year ended 31 December
  
Figures in HK$m
  
2009
    
2008
  
             
Profit for the year
     13,221       14,099  
                 
Other comprehensive income
                
Premises:
                
- unrealised surplus on
                
  revaluation of premises
     700       171  
- deferred taxes
     (72 )     (24 )
Available-for-sale investments reserve:
                
- fair value changes taken to/(from) equity:
                
  -- on debt securities
     3,908       (3,627 )
  -- on equity shares
     80       (1,937 )
- fair value changes transferred
                
  from/(to) income statement:
                
  -- on impairment
     4       555  
  -- on hedged items
     81       (496 )
  -- on disposal
     (9 )     (563 )
- share of changes in equity of associates
                
  -- fair value changes
     (26 )     (63 )
- deferred taxes
     (472 )     417  
Cash flow hedging reserve:
                
- fair value changes taken to equity
     407       870  
- fair value changes transferred to
                
  income statement
     (864 )     (376 )
- deferred taxes
     69       (76 )
Defined benefit plans:
                
- actuarial gains/(losses) on defined
                
  benefit plans
     1,877       (3,016 )
- deferred taxes
     (309 )     497  
Exchange differences on translation of:
                
- financial statements of overseas
                
  branches, subsidiaries and associates
     3       622  
- others
     10       5  
Effect of decrease in tax rate on
                
  deferred tax balance at 1 January 2008
  
—
       30  
Other comprehensive income for the
                
  year, net of tax
     5,387       (7,011 )
Total comprehensive income
                
  for the year
     18,608       7,088  
                 
                 
Total comprehensive income
                
  for the year attributable to
                
  shareholders
     18,608       7,088  


21

Consolidated Statement of Financial Position
     
 

   
At 31 December
  
At 31 December
  
Figures in HK$m
  
2009
    
2008
  
             
Assets
            
Cash and balances with banks and
            
  other financial institutions
  
22,086
    
24,822
  
Placings with and advances to banks and
            
  other financial institutions
  
104,551
    
  69,579
  
Trading assets
  
66,597
    
108,389
  
Financial assets designated at fair value
  
5,450
    
7,798
  
Derivative financial instruments
  
5,050
    
7,104
  
Advances to customers
  
344,621
    
329,121
  
Financial investments
  
241,502
    
181,159
  
Investments in associates
  
10,226
    
8,870
  
Investment properties
  
2,872
    
2,593
  
Premises, plant and equipment
  
7,178
    
7,090
  
Interest in leasehold land held for own use
            
  under operating lease
  
536
    
551
  
Intangible assets
  
4,214
    
3,385
  
Other assets
  
11,069
    
11,506
  
Deferred tax assets
  
16
    
201
  
Total assets
  
825,968
    
762,168
  
             
LIABILITIES AND EQUITY
            
             
Liabilities
            
Current, savings and other deposit accounts
  
636,369
    
562,183
  
Deposits from banks
  
4,870
    
11,556
  
Trading liabilities
  
38,391
    
48,282
  
Financial liabilities designated at fair value
  
1,456
    
1,407
  
Derivative financial instruments
  
4,251
    
14,945
  
Certificates of deposit and other
            
  debt securities in issue
  
1,826
    
2,772
  
Other liabilities
  
15,285
    
15,448
  
Liabilities to customers under insurance contracts
  
54,240
    
43,835
  
Current tax liabilities
  
52
    
94
  
Deferred tax liabilities
  
1,684
    
711
  
Subordinated liabilities
  
9,320
    
9,309
  
Total liabilities
  
767,744
    
710,542
  
             
Equity
            
Share capital
  
9,559
    
9,559
  
Retained profits
  
37,719
    
32,518
  
Other reserves
  
7,313
    
3,813
  
Proposed dividends
  
3,633
    
5,736
  
Shareholders’ funds
  
58,224
    
51,626
  
Total equity and liabilities
  
825,968
    
762,168
  


22

Consolidated Statement of Changes in Equity
     
 

   
Year ended 31 December
  
   
2009
    
2008
  
Figures in HK$m
            
             
Share capital
            
  At beginning and end of year
     9,559       9,559  
                 
Retained profits (including
  proposed dividends)
                
  At beginning of year
     38,254       38,609  
  Dividends to shareholders
                
  - Dividends approved in respect of the previous year
     (5,736 )     (5,736 )
  - Dividends declared in respect of the current year
     (6,309 )     (6,309 )
  Transfer
     345       121  
  Total comprehensive income for the year
     14,798       11,569  
      41,352       38,254  
                 
Other reserves
                
Premises revaluation reserve
                
  At beginning of year
     3,711       3,639  
  Transfer
     (345 )     (121 )
  Total comprehensive income for the year
     628       193  
      3,994       3,711  
                 
Available­for­sale investment reserve
                
  At beginning of year
     (3,823 )     1,892  
  Total comprehensive income for the year
     3,566       (5,715 )
      (257 )     (3,823 )
                 
Cash flow hedging reserve
                
  At beginning of year
     562       144  
  Total comprehensive income for the year
     (388 )     418  
      174       562  
                 
Foreign exchange reserve
                
  At beginning of year
     1,379       757  
  Total comprehensive income for the year
     3       622  
      1,382       1,379  
 
 
23

 

   
Year ended 31 December
  
   
2009
    
2008
  
Figures in HK$m
            
             
Other reserve
            
  At beginning of year
     1,984       1,856  
  Cost of share-based payment arrangements
     35       127  
  Total comprehensive income for the year
     1       1  
      2,020       1,984  
                 
                 
                 
Total equity
                
  At beginning of year
     51,626       56,456  
  Dividends to shareholders
     (12,045 )     (12,045 )
  Cost of share-based payment arrangements
     35       127  
  Total comprehensive income for the year
     18,608       7,088  
      58,224       51,626  
 
24
 
 

 
Consolidated Cash Flow Statement
     
 

   
Year ended 31 December
  
Figures in HK$m    
2009
       2008  
                 
Net cash inflow/(outflow) from operating activities
     65,815       (86,830 )
                 
Cash flows from investing activities
                
                 
Dividends received from associates
     380       287  
Purchase of an interest in an associate
     (3 )     (909 )
Purchase of available-for-sale investments
     (49,642 )     (79,103 )
Purchase of held-to-maturity debt securities
     (513 )     (198 )
Proceeds from sale or redemption of
                
  available-for-sale investments
     48,615       136,534  
Proceeds from redemption of
                
  held-to-maturity debt securities
     182       123  
Purchase of fixed assets and intangible assets
     (312 )     (666 )
Proceeds from sale of fixed assets and assets held for sale
     443       272  
Interest received from available-for-sale investments
     4,429       8,188  
Dividends received from available-for-sale investments
     13       80  
Net cash inflow from investing activities
     3,592       64,608  
                 
Cash flows from financing activities
                
                 
Dividends paid
     (12,045 )     (12,045 )
Interest paid for subordinated liabilities
     (126 )     (396 )
Net cash outflow from financing activities
     (12,171 )     (12,441 )
Increase/(decrease) in cash and cash equivalents
     57,236       (34,663 )
                 
Cash and cash equivalents at 1 January
     76,116       113,474  
Effect of foreign exchange rate changes
     3,407       (2,695 )
Cash and cash equivalents at 31 December
     136,759       76,116  
 
 
25

 
Financial Review

 
Net interest income

Figures in HK$m
  
2009
    
2008
  
             
Net interest income/(expense) arising from:
            
- financial assets and liabilities that are not at fair value
            
  through profit and loss
     14,151       17,277  
- trading assets and liabilities
     (234 )     (1,211 )
- financial instruments designated at fair value
     106       166  
      14,023       16,232  
                 
Average interest-earning assets
     736,953       688,252  
                 
Net interest spread
     1.84 %     2.15 %
Net interest margin
     1.90 %     2.36 %

Net interest income fell by HK$2,209 million, or 13.6 per cent, due mainly to the adverse impact of the low interest rate environment. While average interest-earning assets increased by HK$48.7 billion, or 7.1 per cent, funds were deployed into high quality but low yield liquid assets to reduce risk. Net interest income was also affected by the repricing of assets due to the decline in interest rates.

Net interest margin decreased by 46 basis points to 1.90 per cent compared with 2008. Net interest spread declined by 31 basis points to 1.84 per cent, attributable mainly to compressed deposit margins in the low interest rate environment which offered little room for the reduction of interest rates paid to customers. Treasury balance sheet management income was also affected by the repricing of assets as interest rates fell. Volume growth was noted in the average balance of mortgage lending, offsetting the effect of tighter spreads on mortgages in an intensely competitive market. The increase in the higher-yielding credit card business also helped support net interest income revenue streams. The group has grown its life insurance business and changed the mix of the assets held in the life insurance funds investment portfolio to held-to-maturity securities, increasing its contribution to interest income by 38.1 per cent compared with 2008.

The contribution from net free funds dropped by 15 basis points to 0.06 per cent as a consequence of the low interest rate environment.

The HSBC Group reports interest income and interest expense arising from financial assets and financial liabilities held for trading as ‘Net trading income’. Income arising from financial instruments designated at fair value through profit and loss is reported as ‘Net income from financial instruments designated at fair value’ (other than for debt securities in issue and subordinated liabilities, together with derivatives managed in conjunction with them).
 
26

 
The table below presents the net interest income of Hang Seng, as included within the HSBC Group accounts:
 
 
Figures in HK$m
  
2009
    
2008
  
             
Net interest income
     14,137       17,233  
Average interest-earning assets
     670,321       664,750  
                 
Net interest spread
     2.06 %     2.34 %
Net interest margin
     2.11 %     2.59 %


Net fee income

Figures in HK$m
  
2009
      
2008
  
               
- Stockbroking and related services
  
1,566
      
1,359
  
- Retail investment funds
  
604
      
1,084
  
- Structured investment products
  
28
      
341
  
- Insurance
  
190
      
98
  
- Account services
  
291
      
282
  
- Private banking service fee
  
129
      
234
  
- Remittances
  
217
      
212
  
- Cards
  
1,413
      
1,304
  
- Credit facilities
  
135
      
132
  
- Trade services
  
379
      
409
  
- Other
  
238
      
249
  
Fee income
  
5,190
      
5,704
  
Fee expense
  
(869
)
    
(735
)
   
4,321
      
4,969
  

Net fee income fell by HK$648 million, or 13.0 per cent, to HK$4,321 million, compared with 2008.

Although the economic environment began to improve in the second half of 2009, investor demand for retail investment funds and structured investment products remained weak, resulting in declines in income of 44.3 per cent and 91.8 per cent respectively. Income from stockbroking and related services registered encouraging growth of 15.2 per cent on the back of the 25.7 per cent increase in stock trading turnover – a significant outperformance of the Hong Kong stock market. Private banking services fee income fell, reflecting reduced customer appetite for trading and structured investment products.

Card services income was 8.4 per cent higher than in 2008 and was broadly in line with the growth in average card balances. The bank’s effective customer loyalty scheme and card utilisation promotions helped drive up Hang Seng card spending in 2009 to outperform the shrinking market. The increase in card income was also supported by year-on-year increases of 6.5 per cent in the number of cards in circulation and 9.1 per cent in cardholder spending.

Insurance fee income rose by 93.9 per cent, mainly contributed by strong sales of the HSBC Jade Global Universal Life product.

Compared with the first half of 2009, net fee income grew by HK$469 million, or 24.4 per cent, in the second half, partly reflecting increased demand for wealth management products coupled with renewed activity in the stock market. Higher income was recorded from retail investment funds with the timely launch of a China Index-linked fund and a global high-yield bond fund. Income from stockbroking and related services benefitted from the rebound in the stock market and increased IPO activity. Income from card services, private banking and trade services also registered solid growth in the second half of 2009 as compared to the first half.
 
27

 
Trading income

Figures in HK$m
  
2009
      
2008
  
               
Trading income:
              
- foreign exchange
  
1,792
      
1,384
  
- securities, derivatives and other trading activities
  
131
      
71
  
   
1,923
      
1,455
  

Trading income rose significantly by HK$468 million, or 32.2 per cent, to HK$1,923 million. Foreign exchange income increased by 29.5 per cent, mainly due to the combined effect of the favourable increase in net interest income from funding swapsW and the reduction in exchange losses on Hang Seng China’s US dollar capital funds upon revaluation against the renminbi. Normal foreign exchange trading, however, fell by 14.2 per cent.

Income from securities, derivatives and other trading activities increased by HK$60 million, or 84.5 per cent. This was the net result of the improvement in securities trading activities and the decreased customer appetite for equity-linked structured products.



WTreasury from time to time employs foreign exchange swaps for its funding activities, which in essence involve swapping a currency (‘original currency’) into another currency (‘swap currency’) at the spot exchange rate for short-term placement and simultaneously entering into a forward exchange contract to convert the funds back to the original currency on maturity of the placement. In accordance with HKAS39, the exchange difference of the spot and forward contracts is required to be recognised as foreign exchange gain/loss, while the corresponding interest differential between the original and swap funding is reflected in net interest income.

Net loss from financial instruments designated at fair value

Figures in HK$m
  
2009
    
2008
  
             
Net loss on assets designated at fair value
            
   which back insurance and investment contracts
     (54 )     (1,045 )
                 
Net change in fair value of other financial instruments
                
   designated at fair value
     (21 )     14  
      (75 )     (1,031 )

Net loss from financial instruments designated at fair value improved by HK$956 million, or 92.7 per cent, to HK$75 million, when compared with 2008, reflecting the improved financial markets in 2009 and the switching of the equity component of the investment assets of the life insurance funds investment portfolio for high-quality debt securities in the second half of 2008.

28

Other operating income

Figures in HK$m
  
2009
      
2008
  
               
Rental income from investment properties
  
149
      
138
  
Movement in present value of in-force long-term
              
  insurance business
  
760
      
382
  
Other
  
180
      
181
  
   
1,089
      
701
  


Analysis of income from wealth management business

Figures in HK$m
  
2009
      
2008
  
               
Investment income:
              
- retail investment funds
  
604
      
1,084
  
- structured investment productsW
  
473
      
882
  
- private banking service feeWW
  
158
      
248
  
- stockbroking and related services
  
1,566
      
1,359
  
- margin trading and others
  
141
      
119
  
   
2,942
      
3,692
  
Insurance income:
              
- life insurance
  
2,070
      
1,383
  
- general insurance and others
  
337
      
314
  
   
2,407
      
1,697
  
Total
  
5,349
      
5,389
  

W  Income from structured investment products includes income reported under net fee income on the sales of third-party structured investment products. It also includes profit generated from the selling of structured investment products in issue, reported under trading income.

WWIncome from private banking includes income reported under net fee income on investment services and profit generated from selling of structured investment products in issue, reported under trading income.
 
 
Wealth management business income was broadly in line with 2008, falling by HK$40 million, or 0.7 per cent. The investment climate in 2009 remained weak, although there was an upturn in demand for wealth management products during the second half of the year. To cater for changing customer demands in uncertain financial markets, the group rapidly shifted its focus to personal insurance protection and lower-risk investment products. This resulted in an encouraging growth of 41.8 per cent in insurance income which partly offset the 20.3 per cent decline in investment income.

Income from retail investment funds and structured products was adversely affected by the unfavourable investment climate and equity markets volatility that took hold in the second half of 2008. However, as economic conditions stabilised during 2009, effective actions to support improving investor sentiment led to a solid increase in investment income in the second half of the year compared with the first half. The bank capitalised on opportunities to promote yield-enhancing investment products in the context of the low interest rate environment. The launch of the Hang Seng China Index Linked Fund and Hang Seng Global Financial Sector Bond Fund boosted investment funds sales during the second half but this only partly offset the overall decline in demand for investment funds, with investment funds turnover and income 41.0 per cent and 44.3 per cent respectively for the year. Structured investment products income declined by 46.4 per cent.
 
29

 
Income from stockbroking and related services rose by 15.2 per cent on the back of the bank’s efforts to grow its market share to capitalise on the stock market rebound in the second half of 2009. The bank captured additional sales opportunities by offering professional and convenient trading services to customers via its new Securities Select Customer Trading Centre. These efforts helped increase year-on-year securities turnover by 25.7 per cent.

Private Banking service fee income was lower than in 2008, affected by the weak investment sentiment and lower volume of customer transactions. The bank expanded its business by strengthening its relationship management team, enhancing investment services support and implementing a variety of wealth management initiatives that will ensure it can take better advantage of medium and long-term business opportunities.

To meet customers’ increased focus on wealth preservation in the changing economic conditions, the group diversified its insurance product range and introduced new plans with improved protection propositions. In the intensely competitive operating environment, the group recorded an increase in renewal business but new business declined, with net earned life insurance premiums down by 6.9 per cent. With the bank having shifted the portfolio mix away from equities to debt securities in the second half of 2008, the investment returns improved from an investment loss of HK$1,065 million in 2008 to an investment gain of HK$17 million in 2009. Net interest income and fee income from the life insurance funds investment portfolio rose by 43.7 per cent, contributed by the growth in the life insurance funds investment portfolio and asset reallocation. The increase more than offset the rise in net insurance claims incurred and movement in policyholders’ liabilities.

General insurance income increased by 7.3 per cent to HK$337 million.
             
Figures in HK$m
  
2009
      
2008
  
               
Life insurance:
              
- net interest income and fee income
  
2,012
      
1,400
  
- investment returns on life insurance
              
  funds
  
17
      
(1,065
)
- net earned insurance premiums
  
11,193
      
12,023
  
- net insurance claims incurred and movement
              
  in policyholders’ liabilitiesW
  
(11,912
)
    
(11,357
)
- movement in present value of in-force
              
  long-term insurance business
  
760
      
382
  
   
2,070
      
1,383
  
General insurance and others
  
337
      
314
  
Total
  
2,407
      
1,697
  

W Including premium and investment reserves

30

Loan impairment charges and other credit risk provisions

Figures in HK$m
  
2009
    
2008
  
             
Loan impairment charges:
            
- individually assessed
     (310 )     (925 )
- collectively assessed
     (502 )     (476 )
      (812 )     (1,401 )
Of which:
                
- new and additional
     (1,104 )     (1,505 )
- releases
     230       48  
- recoveries
     62       56  
      (812 )     (1,401 )
                 
Other credit risk provisions
  
—
       (1,375 )
                 
Loan impairment charges and other
                
  credit risk provisions
     (812 )     (2,776 )

Loan impairment charges and other credit risk provisions fell by HK$1,964 million, or 70.7 per cent, to HK$812 million compared with a year earlier. With no impairment losses against available-for-sale securities, other credit risk provisions were down significantly when compared with 2008, which saw a HK$1,375 million write down of the carrying value of certain available-for-sale debt securities in the second half of the year.

Individually assessed provisions fell by HK$615 million due mainly to lower new and additional impairment charges and a higher net release on the accounts of certain corporate and commercial banking customers. The mortgage portfolio continued to be well secured with an average loan-to-value ratio below 40 per cent.

Collectively assessed provisions rose slightly by HK$26 million, reflecting a rise in credit card delinquencies against the backdrop of higher card spending and the uncertain economic environment. Impairment provisions for personal loan portfolios also increased modestly.
 
31

 
Operating expenses

Figures in HK$m
  
2009
    
2008
  
             
Employee compensation and benefits:
            
- salaries and other costs
     2,714       2,817  
- performance-related pay
     377       462  
- retirement benefit costs
     287       173  
      3,378       3,452  
General and administrative expenses:
                
- rental expenses
     445       423  
- other premises and equipment
     900       926  
- marketing and advertising expenses
     382       516  
- other operating expenses
     1,021       986  
      2,748       2,851  
Depreciation of business premises
                
  and equipment
     466       432  
Amortisation of intangible assets
     84       60  
      6,676       6,795  
                 
Cost efficiency ratio
     32.1 %     29.2 %
                 
Staff numbersW by region
     2009       2008  
                 
Hong Kong
     7,834       8,256  
Mainland
     1,449       1,450  
Others
     59       58  
Total
     9,342       9,764  
 
W Full-time equivalent

Operating expenses fell by HK$119 million, or 1.8 per cent, compared with 2008, reflecting lower staff-related expenses and the bank’s well-managed cost control in the difficult operating environment. Excluding mainland business, operating expenses fell by 2.0 per cent.

Employee compensation and benefits decreased by HK$74 million, or 2.1 per cent. Salaries and other costs decreased by 3.7 per cent, reflecting the decline in average headcount and other staff-related costs. Performance-related pay expenses dropped by 18.4 per cent. Retirement benefit costs increased, due mainly to a reduction in the expected investment return for 2009. General and administrative expenses decreased by 3.6 per cent, with close cost management in marketing and advertising partly offset by rising rental expenses. Depreciation charges rose by 7.9 per cent, reflecting the acquisition of equipment, fixtures and fittings for the bank’s Kowloon Bay office and head office in Central.

At 31 December 2009, the group’s number of full-time equivalent staff was down by 422 compared with the end of 2008 – with the reduction mainly at the group’s Hong Kong operations. The number of staff was closely monitored and headcount in Hong Kong was gradually reduced through natural attrition. Headcount for the bank’s mainland operations remained stable.

The cost efficiency ratio for 2009 was 32.1 per cent, compared with 29.2 per cent for 2008, with the increase in the ratio due primarily to the reduction in net operating income before impairment charges and other credit risk provisions.
 
32

 
Gains less losses from financial investments and fixed assets

Figures in HK$m
  
2009
    
2008
  
             
Net gains from disposal of
            
  available-for-sale equity securities
     161       646  
Net losses from disposal of
                
  available-for-sale debt securities
     (152 )     (83 )
Impairment of available-for-sale equity securities
     (4 )     (284 )
Gains less losses on disposal of assets held for sale
     187    
—
  
Gains less losses on disposal of fixed assets
     (6 )     (12 )
      186       267  
 
Gains less losses from financial investments and fixed assets fell by HK$81 million, or 30.3 per cent, compared with a year earlier. As the group disposed of most of its equity holdings in 2008, net gains from the disposal of available-for-sale equity securities decreased by HK$485 million, or 75.1 per cent and impairment charges for certain available-for-sale equity securities amounted to HK$4 million compared with charges of HK$284 million in 2008. The net gain on the disposal of assets held for sale increased by HK$187 million, due mainly to a gain on the disposal of a property.

Tax expense

Taxation in the consolidated income statement represents:

Figures in HK$m
  
2009
    
2008
  
             
Current tax – provision for Hong Kong profits tax
            
Tax for the year
     1,844       2,167  
Adjustment in respect of prior year
     (3 )     (350 )
                 
Current tax – taxation outside Hong Kong
                
Tax for the year
     50       (21 )
                 
Deferred tax
                
Origination and reversal of temporary differences
     365       31  
Effect of decrease in tax rate
                
  on deferred tax balances at 1 January
  
–
       (48 )
                 
Total tax expense
     2,256       1,779  
                 
The current tax provision is based on the estimated assessable profit for 2009, and is determined for the bank and its subsidiaries operating in Hong Kong by using the Hong Kong profits tax rate of 16.5 per cent (same as in 2008). 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 period when the liability is settled or the asset is realised.

Earnings per share

The calculation of earnings per share in 2009 is based on earnings of HK$13,221 million (HK$14,099 million in 2008) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from 2008).
 
33
 
Dividends per share

   
2009
    
2008
  
 
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
  
3.00
5,736
  
 
5.20
9,942
  
6.30
12,045
  

Segmental analysis

The group’s business comprises five customer groups. On first-time adoption of HKFRS 8 ‘Operating segments’ and in a manner consistent with the way in which information is reported internally for the purposes of resource allocation and performance assessment, the group has identified the following five reportable segments:

·  
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 Banking handles relationships with large corporate and institutional customers.
·  
Treasury engages in balance sheet management 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.

(a) Segment result

For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the customer groups by way of internal capital allocation and fund transfer-pricing mechanisms. Cost allocation is based on the direct costs incurred by the respective customer groups and apportionment of management overheads. Rental charges at market rates for usage of premises are reflected in other operating income for the ‘Other’ customer group and total operating expenses for the respective customer groups.

Profit before tax contributed by the customer groups in 2009 compared with 2008 is set out in the table below. More customer group analysis and discussions are set out in the ‘Customer group performance’ section on page 15.
 
Figures in HK$m
  
Personal
Financial
Services
    
Commercial
Banking
    
Corporate
Banking
    
Treasury
    
Other
    
Total
reportable
segments
  
                                     
Year ended 31 December 2009
                                    
                                     
Profit before tax
     7,258       2,637       915       3,393       1,274       15,477  
Share of profit before tax
     46.9 %     17.0 %     5.9 %     21.9 %     8.3 %     100.0 %
                                                 
Year ended 31 December 2008
                                                
                                                 
Profit before tax
     8,410       2,470       645       2,279       2,074       15,878  
Share of profit before tax
     52.9 %     15.6 %     4.1 %     14.4 %     13.0 %     100.0 %

 
34
 
(b)           Geographic information

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.

Figures in HK$m
  
Hong Kong
    
Americas
    
Mainland
and other
    
Total
  
                         
Year ended 31 December 2009
                        
                         
Income and expense
                        
Total operating income
     30,923       885       1,008       32,816  
Profit before tax
     12,902       799       1,776       15,477  
                                 
At 31 December 2009
                                
                                 
Total assets
     705,467       63,808       56,693       825,968  
Total liabilities
     733,842       1,109       32,793       767,744  
Interest in associates
     916    
–
       9,310       10,226  
Non-current assetsW
     13,947    
–
       317       14,264  
                                 
Year ended 31 December 2008
                                
                                 
Income and expense
                                
Total operating income
     31,381       2,378       1,000       34,759  
Profit before tax
     12,834       1,771       1,273       15,878  
                                 
At 31 December 2008
                                
                                 
Total assets
     656,411       55,365       50,392       762,168  
Total liabilities
     680,296       1,238       29,008       710,542  
Interest in associates
     883    
–
       7,987       8,870  
Non-current assetsW
     12,722    
–
       346       13,068  

WNon-current assets consist of properties, plant and equipment, goodwill and other intangible assets.
 
35

 
Analysis of assets and liabilities by remaining maturity

The maturity analysis is based on the remaining period at the end of the reporting period to the contractual maturity date, with the exception of the trading portfolio that may be sold before maturity and is accordingly recorded as ‘Trading’.

Figures in HK$m
  
Repayable
on
demand
    
One
month
or less
but not on
demand
    
One
month
to three
months
    
Three
months
to
one year
    
One
year
to five
 years
    
Over
five
years
    
Trading
    
No
contractual
maturity
    
Total
  
                                                       
Assets
                                                      
Cash and balances with banks and other financial institutions
     22,086       –       –       –       –       –       –       –       22,086  
Placings with and advances to banks and other financial institutions
     4,352       72,226       25,557       2,416       –       –       –       –       104,551  
Trading assets
     –       –       –       –       –       –       66,597       –       66,597  
Financial assets designated at fair value
     –       –       20       646       4,201       58       –       525       5,450  
Derivative financial instruments
     –       7       34       232       118       –       4,659       –       5,050  
Advances to customers
     9,254       22,927       25,005       51,673       121,394       114,368       –       –       344,621  
Financial investments
     –       18,081       16,708       49,955       129,898       26,051       –       809       241,502  
Investments in associates
     –       –       –       –       –       –       –       10,226       10,226  
Investment properties
     –       –       –       –       –       –       –       2,872       2,872  
Premises, plant and equipment
     –       –       –       –       –       –       –       7,178       7,178  
Interest in leasehold land held for own use under operating lease
     –       –       –       –       –       –       –       536       536  
Intangible assets
     –       –       –       –       –       –       –       4,214       4,214  
Other assets
     4,558       2,682       1,838       1,511       126       14       –       340       11,069  
Deferred tax assets
     –       –       –       –       –       –       –       16       16  
At 31 December 2009
     40,250       115,923       69,162       106,433       255,737       140,491       71,256       26,716       825,968  
                                                                         
                                                                         
Liabilities
                                                                        
Current, savings and other deposit accounts
     494,026       81,129       38,108       22,427       679       –       –       –       636,369  
Deposits from banks
     2,964       1,737       28       25       116       –       –       –       4,870  
Trading liabilities
     –       –       –       –       –       –       38,391       –       38,391  
Financial liabilities designated at fair value
     3       –       –       1,000       –       –       –       453       1,456  
Derivative financial instruments
     –       –       6       21       630       13       3,581       –       4,251  
Certificate of deposit and other debt securities in issue
     –       159       171       1,177       319       –       –       –       1,826  
Other liabilities
     6,044       3,158       1,955       1,452       150       116               2,410       15,285  
Liabilities to customers under insurance contracts
     –       –       –       –       –       –       –       54,240       54,240  
Current tax liabilities
     –       –       –       52       –       –       –       –       52  
Deferred tax liabilities
     –       –       –       –       –       –       –       1,684       1,684  
Subordinated liabilities
     –       –       –       3,516       5,804       –       –       –       9,320  
At 31 December 2009
     503,037       86,183       40,268       29,670       7,698       129       41,972       58,787       767,744  

 
 
36

 
Figures in HK$m
  
Repayable
on
demand
    
One
month
or less
but not on
demand
    
One
 month
 to three
 months
    
Three
 months
 to
 one year
    
One
 year
 to five
 years
    
Over
 five
 years
    
Trading
    
No contractual maturity
    
Total
  
                                                       
Assets
                                                      
Cash and balances with banks and other financial institutions
     24,822       –       –       –       –       –       –       –       24,822  
Placings with and advances to banks and other financial institutions
     6,440       40,585       15,934       6,620       –       –       –       –       69,579  
Trading assets
     –       –       –       –       –       –       108,389       –       108,389  
Financial assets designated at fair value
     –       35       91       1,052       6,004       230       –       386       7,798  
Derivative financial
                                                                        
Derivative financial instruments
     –       129       252       744       285       –       5,694       –       7,104  
Advances to customers
     19,056       14,830       22,376       47,777       121,586       103,496       –       –       329,121  
Financial investments
     5       9,921       15,718       28,041       101,512       25,379       –       583       181,159  
Investments in associates
     –       –       –       –       –       –       –       8,870       8,870  
Investment properties
     –       –       –       –       –       –       –       2,593       2,593  
Premises, plant and equipment
     –       –       –       –       –       –       –       7,090       7,090  
Interest in leasehold land held for own use under operating lease
     –       –       –       –       –       –       –       551       551  
Intangible assets
     –       –       –       –       –       –       –       3,385       3,385  
Other assets
     4,224       1,781       1,636       3,570       51       8       –       236       11,506  
Deferred tax assets
     –       –       –       –       –       –       –       201       201  
At 31 December 2008
     54,547       67,281       56,007       87,804       229,438       129,113       114,083       23,895       762,168  
                                                                         
                                                                         
Liabilities
                                                                        
Current, savings and other deposit accounts
     358,976       128,083       60,146       13,916       777       285       –       –       562,183  
Deposits from banks
     5,712       4,274       1,279       291       –       –       –       –       11,556  
Trading liabilities
     –       –       –       –       –       –       48,282       –       48,282  
Financial liabilities designated at fair value
     3       –       –       –       998       –       –       406       1,407  
Derivative financial instruments
     –       1       –       5       304       259       14,376       –       14,945  
Certificate of deposit and other debt securities  in issue
     –       295       –       1,082       1,395       –       –       –       2,772  
Other liabilities
     4,657       2,154       1,225       2,996       69       116       –       4,231       15,448  
Liabilities to customers under insurance contracts
     –       –       –       –       –       –       –       43,835       43,835  
Current tax liabilities
     –       1       –       93       –       –       –       –       94  
Deferred tax liabilities
     –       –       –       –       –       –       –       711       711  
Subordinated liabilities
     –       –       –       –       9,309       –       –       –       9,309  
At 31 December 2008
     369,348       134,808       62,650       18,383       12,852       660       62,658       49,183       710,542  

 

37

Cash and balances with banks and other financial institutions

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Cash in hand
  
4,299
      
3,696
  
Balances with central banks
  
3,397
      
2,426
  
Balances with banks and other financial institutions
  
14,390
      
18,700
  
   
22,086
      
24,822
  


Placings with and advances to banks and other financial institutions

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Placings with and advances to banks and
              
other financial institutions maturing within one month
  
76,579
      
47,025
  
Placings with and advances to banks and
              
other financial institutions maturing after one month
  
27,972
      
22,554
  
   
104,551
      
69,579
  


38
Trading assets

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
    
2008
  
             
Treasury bills
     62,028       103,621  
Other debt securities
     4,562       4,750  
Debt securities
     66,590       108,371  
Equity shares
     6    
–
  
Total trading securities
     66,596       108,371  
OtherW
     1       18  
Total trading assets
     66,597       108,389  
                 
Debt securities:
                
- listed in Hong Kong
     2,712       3,631  
- listed outside Hong Kong
     157       269  
      2,869       3,900  
- unlisted
     63,721       104,471  
      66,590       108,371  
Equity shares:
                
- listed in Hong Kong
     6    
–
  
                 
Total trading securities
     66,596       108,371  
                 
Debt securities:
                
Issued by public bodies:
                
- central governments and central banks
     65,817       107,428  
- other public sector entities
     369       378  
      66,186       107,806  
Issued by other bodies:
                
- banks and other financial institutions
     292       306  
- corporate entities
     112       259  
      404       565  
      66,590       108,371  
Equity shares:
                
Issued by corporate entities
     6    
–
  
Total trading securities
     66,596       108,371  

WThis represents amount receivable from counterparties on trading transactions not yet settled.

Beginning in late 2008, the bank took action to preserve its liquidity and yield by deploying surplus funds from matured available-for-sale securities and short-term interbank placements to high-quality trading debt securities. These trading securities are mostly in the form of treasury bills with short tenors issued by governments. During 2009, as the financial sector and credit environment began to stabilise, Treasury redeployed surplus funds generated upon the maturing of trading assets into interbank placements and available-for-sale debt securities to achieve yield enhancement while prudently managing risk. As a result, trading securities declined by HK$41,775 million, or 38.5 per cent, to HK$66,596 million when compared with 2008 year-end.
 
 
39
Financial assets designated at fair value

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Certificates of deposit
  
129
      
163
  
Other debt securities
  
4,798
      
7,273
  
Debt securities
  
4,927
      
7,436
  
Equity shares
  
523
      
362
  
   
5,450
      
7,798
  
               
Debt securities:
              
- listed in Hong Kong
  
3
      
834
  
- listed outside Hong Kong
  
194
      
1,004
  
   
197
      
1,838
  
- unlisted
  
4,730
      
5,598
  
   
4,927
      
7,436
  
Equity shares:
              
- listed in Hong Kong
  
21
      
26
  
- listed outside Hong Kong
  
69
      
57
  
   
90
      
83
  
- unlisted
  
433
      
279
  
   
523
      
362
  
               
   
5,450
      
7,798
  
               
Debt securities:
              
Issued by public bodies:
              
- central governments and central banks
  
154
      
924
  
- other public sector entities
  
168
      
564
  
   
322
      
1,488
  
Issued by other bodies:
              
- banks and other financial institutions
  
4,464
      
5,317
  
- corporate entities
  
141
      
631
  
   
4,605
      
5,948
  
   
4,927
      
7,436
  
Equity shares:
              
Issued by corporate entities
  
523
      
362
  
   
5,450
      
7,798
  
 

 
40
Advances to customers

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
    
2008
  
             
Gross advances to customers
     346,586       331,164  
Less:
                
Loan impairment allowances:
                
- individually assessed
     (1,151 )     (1,241 )
- collectively assessed
     (814 )     (802 )
      344,621       329,121  
                 
                 
Included in advances to customers are:
                
- Trade bills
     2,802       2,899  
- Less: loan impairment allowances
     (42 )     (30 )
      2,760       2,869  

Loan impairment allowances against advances to customers

                   
Figures in HK$m
  
Individually
assessed
    
Collectively
assessed
    
Total
  
                   
At 1 January 2009
     1,241       802       2,043  
Amounts written off
     (394 )     (526 )     (920 )
Recoveries of advances
                        
  written off in previous years
     24       38       62  
New impairment allowances
                        
  charged to income statement
     564       540       1,104  
Impairment allowances released
                        
  to income statement
     (254 )     (38 )     (292 )
Unwinding of discount of loan
                        
  impairment allowances
                        
  recognised as ‘interest income’
     (30 )     (2 )     (32 )
At 31 December 2009
     1,151       814       1,965  
 
 
41

 
Total loan impairment allowances as a percentage of gross advances to customers are as follows:

   
At 31 December
    
At 31 December
  
   
2009
      
2008
  
   
%
      
%
  
               
Loan impairment allowances:
              
- individually assessed
  
0.33
      
0.37
  
- collectively assessed
  
0.23
      
0.24
  
Total loan impairment allowances
  
0.56
      
0.61
  
 
Total loan impairment allowances as a percentage of gross advances to customers was 0.56 per cent at 31 December 2009 compared with 0.61 per cent at 2008 year-end. Individually assessed allowances as a percentage of gross advances fell by 0.04 percentage points to 0.33 per cent, reflecting the net release on certain corporate and commercial banking customer accounts during the year.


Impaired advances and allowances

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
    
2008
  
             
Gross impaired advances
     2,508       3,404  
Individually assessed allowances
     (1,151 )     (1,241 )
      1,357       2,163  
                 
Individually assessed allowances
                
  as a percentage of
                
  gross impaired advances
     45.9 %     36.5 %
                 
Gross impaired advances
                
  as a percentage of
                
  gross advances to customers
     0.7 %     1.0 %

Impaired advances are those advances where objective evidence exists that full repayment of principal or interest is considered unlikely.
 
42

 
Gross impaired advances fell by HK$896 million, or 26.3 per cent, to HK$2,508 million compared with the end of 2008, due mainly to the write-off of irrecoverable balances against impairment allowances and customer repayments offsetting the downgrade of certain commercial banking customers. Gross impaired advances as a percentage of gross advances to customers was 0.7 per cent, compared with 1.0 per cent at the end of 2008.

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
    
2008
  
             
             
Gross individually assessed
            
  impaired advances
     2,434       3,297  
Individually assessed allowances
     (1,151 )     (1,241 )
      1,283       2,056  
                 
Gross individually assessed
                
  impaired advances
                
  as a percentage of
                
  gross advances to customers
     0.7 %     1.0 %
                 
Amount of collateral which
                
  has been taken into account
                
  in respect of individually assessed
                
  impaired advances to customers
     1,024       1,502  

Collateral includes any tangible security that carries a fair market value and is readily marketable. This includes (but is not limited to) cash and deposits, stocks and bonds, mortgages over properties and charges over other fixed assets such as plant and equipment. Where collateral values are greater than gross advances, only the amount of collateral up to the gross advance is included.

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 31 December
    
At 31 December
  
         
2009
          
2008
  
   
HK$m
    
%
    
HK$m
    
%
  
                         
Gross advances to customers
                        
  which have been overdue
                        
  with respect to either principal
                        
  or interest for periods of:
                        
- more than three months but
                        
  not more than six months
     241       0.1       340       0.1  
- more than six months but
                                
  not more than one year
     353       0.1       419       0.1  
- more than one year
     864       0.2       311       0.1  
      1,458       0.4       1,070       0.3  
 
 
43

 
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.

Overdue advances rose by 36.3 per cent to HK$1,458 million at 31 December 2009. Overdue advances as a percentage of gross advances to customers stood at 0.4 per cent – up 0.1 percentage point compared with the end of 2008.


Rescheduled advances

Rescheduled advances and their expression as a percentage of gross advances to customers are as follows:

 
At 31 December
  
At 31 December
  
     
2009
      
2008
  
 
HK$m
  
%
  
HK$m
  
%
  
                 
Rescheduled advances to customers
703
  
0.2
  
281
  
0.1
  

Rescheduled advances are those advances 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 (page 49).

Rescheduled advances increased by HK$422 million, or 150.2 per cent, to HK$703 million at 31 December 2009, representing 0.2 per cent of gross advances to customers. The increase was mainly due to the debt restructuring of certain commercial banking and corporate customers.


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 that is different from that of the counterparty. At 31 December 2009, about 90 per cent (about 90 per cent at 31 December 2008) of the group’s advances to customers, including related impaired advances and overdue advances, were classified under Hong Kong. There was no geographical segment other than Hong Kong to which the bank’s advances to customers is not less than 10 per cent of the total loans and advances.

44

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 HKMA is as follows:

Figures in HK$m
  
At 31 December
2009
    
At 31 December
2008
  
             
Gross advances to customers for use in Hong Kong
            
             
Industrial, commercial and financial sectors
            
Property development
     23,618       25,314  
Property investment
     75,264       66,179  
Financial concerns
     2,720       3,146  
Stockbrokers
     480       526  
Wholesale and retail trade
     7,812       6,183  
Manufacturing
     12,080       12,828  
Transport and transport equipment
     6,503       8,400  
Recreational activities
     37       26  
Information technology
     1,247       1,075  
Other
     24,405       21,553  
      154,166       145,230  
Individuals
                
Advances for the purchase of flats under 
  the Government Home Ownership Scheme,
  Private Sector Participation Scheme and
  Tenants Purchase Scheme
     14,647       16,739  
Advances for the purchase of other residential properties
     96,651       89,669  
Credit card advances
     13,818       12,841  
Other
     11,961       11,892  
      137,077       131,141  
Total gross advances for use in Hong Kong
     291,243       276,371  
Trade finance
     19,215       19,039  
Gross advances for use outside Hong Kong
     36,128       35,754  
Gross advances to customers
     346,586       331,164  

At 31 December 2009, gross advances to customers were up HK$15.4 billion, or 4.7 per cent, at HK$346.6 billion compared with the previous year-end.

Loans for use in Hong Kong increased by HK$14.9 billion, or 5.4 per cent. New financing for corporate customers was active, reflecting strong growth in property investment lending in line with the buoyant property market. Following the Hong Kong Government’s launch of two government-guaranteed lending schemes – the SME Loan Guarantee Scheme (‘SGS’) and the Special Loan Guarantee Scheme (‘SpGS’) – to facilitate financial institutions in supporting SMEs in challenging credit conditions, the bank has actively promoted these schemes to its existing clientele and potential new customers. This boosted lending to the wholesale and retail trade sector. The decline in lending to manufacturing sector was mainly due to a large loan repayment during the year. Growth in lending to the ‘Other’ sector was due to the increase in new financing to certain large corporate customers.
 
45

 
Lending to individuals increased slightly by HK$5.9 billion, or 4.5 per cent. Excluding the fall in Government Home Ownership Scheme (‘GHOS’) mortgages, lending to individuals grew by 7.0 per cent. Despite intense competition, the bank was able to sustain a leading position in the mortgage market by offering comprehensive mortgage consultancy and e-mortgage services to capitalise on new business opportunities in the booming property market and the low interest rate environment. Riding on this momentum, residential mortgage lending to individuals grew by a remarkable 7.8 per cent. Sustained strong customer spending saw card advances increase by 7.6 per cent. The bank gained market share during the year, supported by a 6.5 per cent rise in the number of cards in issue and a 9.1 per cent increase in cardholder spending. Loans to other individuals remained broadly the same as in 2008.

Despite the contraction in global trade activity, trade finance was able to achieve modest growth against 2008 year-end, reflecting the bank’s success in broadening its range of product and service offerings for SME customers in Hong Kong, the Mainland and Macau.

Loans for use outside Hong Kong grew by 1.0 per cent. This was due largely to the 5.2 per cent expansion in the mainland loan portfolio, which had reached HK$28.3 billion at 31 December 2009. In the uncertain credit environment, the group took a prudent approach in extending its lending business on the Mainland.
 
 
46

 
 
Financial investments

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Available-for-sale at fair value:
              
- debt securities
  
192,486
      
144,520
  
- equity shares
  
347
      
434
  
Held-to-maturity debt securities at amortised cost
  
48,669
      
36,205
  
   
241,502
      
181,159
  
               
Fair value of held-to-maturity debt securities
  
49,805
      
39,315
  
               
Treasury bills
  
53,973
      
9,927
  
Certificates of deposit
  
7,665
      
12,871
  
Other debt securities
  
179,517
      
157,927
  
Debt securities
  
241,155
      
180,725
  
Equity shares
  
347
      
434
  
   
241,502
      
181,159
  
Debt securities:
              
- listed in Hong Kong
  
7,607
      
5,604
  
- listed outside Hong Kong
  
66,618
      
67,018
  
   
74,225
      
72,622
  
- unlisted
  
166,930
      
108,103
  
   
241,155
      
180,725
  
Equity shares:
              
- listed in Hong Kong
  
60
      
37
  
- listed outside Hong Kong
  
85
      
68
  
   
145
      
105
  
- unlisted
  
202
      
329
  
   
347
      
434
  
   
241,502
      
181,159
  
               
Fair value of listed financial investments
  
74,493
      
73,048
  
               
Debt securities:
              
Issued by public bodies:
              
- central governments and central banks
  
64,776
      
16,643
  
- other public sector entities
  
25,065
      
4,353
  
   
89,841
      
20,996
  
Issued by other bodies:
              
- banks and other financial institutions
  
133,312
      
144,167
  
- corporate entities
  
18,002
      
15,562
  
   
151,314
      
159,729
  
   
241,155
      
180,725
  
Equity shares:
              
Issued by corporate entities
  
347
      
434
  
   
241,502
      
181,159
  

 
47

 
Debt securities by rating agency designation
   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
AAA
  
74,339
      
40,775
  
AA- to AA+
  
98,811
      
71,511
  
A- to A+
  
58,749
      
56,296
  
B+ to BBB+
  
5,094
      
7,572
  
B and lower
  
–  
     
160
  
Unrated
  
4,162
      
4,411
  
   
241,155
      
180,725
  

Financial investments include treasury bills, certificates of deposit, other debt securities and equity shares intended to be held for an indefinite period of time.

Available-for-sale investments may be sold in response to needs for liquidity or changes in the market environment, and are carried at fair value with the gains and losses from changes 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.

Financial investments rose by HK$60.3 billion, or 33.3 per cent, compared with the end of 2008. Investments were primarily in high-quality debt securities or debt securities guaranteed by governments, reflecting the bank’s strategy to identify quality investment opportunities that enable it to optimise returns while prudently managing risk. At 31 December 2009, 98.3 per cent of the group’s holdings of debt securities were assigned with investment grade ratings by rating agencies. The unrated debt securities were issued by subsidiaries of investment-grade banks and are guaranteed by their corresponding holding companies. These notes rank pari passu with all of the respective guarantor’s other senior debt obligations. The group did not hold any investments in structured investment vehicles or any sub-prime related assets such as collateralised debt obligations, mortgage-backed securities and other asset-backed securities.
 
48

 
Amounts due from/to immediate holding company and fellow subsidiary companies

The amounts due from/to the bank’s immediate holding company and fellow subsidiary companies included in the assets and liabilities balances of the consolidated statement of financial position are as follows:

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Amounts due from:
              
Cash and balances with banks and
              
  other financial institutions
  
2,253
      
7,032
  
Placings with and advances to banks
              
  and other financial institutions
  
10,841
      
10,899
  
Financial assets designated at fair value
  
3,346
      
3,545
  
Derivative financial instruments
  
383
      
635
  
Financial investments
  
412
      
692
  
Other assets
  
65
      
226
  
   
17,300
      
23,029
  
               
Amounts due to:
              
Customer accounts
  
1,653
      
177
  
Deposits from banks
  
1,313
      
5,478
  
Derivative financial instruments
  
1,314
      
7,425
  
Subordinated liabilities
  
2,017
      
2,015
  
Other liabilities
  
330
      
274
  
   
6,627
      
15,369
  


Investments in associates

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Share of net assets
  
9,691
      
8,314
  
Intangibles
  
106
      
157
  
Goodwill
  
429
      
399
  
   
10,226
      
8,870
  

Investments in associates increased by HK$1,356 million, mainly due to the increase in the bank’s share of net assets of Industrial Bank Co., Ltd as well as its investment in Yantai Bank Co., Ltd.
 

 
49
Intangible assets

   
At 31 December
  
At 31 December
  
Figures in HK$m
  
2009
  
2008
  
             
Present value of in-force long-term
            
  insurance business
     3,466       2,707  
Internally developed software
     385       321  
Acquired software
     34       28  
Goodwill
     329       329  
      4,214       3,385  

 
 Other assets

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Items in the course of collection
              
  from other banks
  
4,343
      
4,028
  
Prepayments and accrued income
  
1,835
      
2,711
  
Assets held for sale
              
- Repossessed assets
  
47
      
136
  
- Other assets held for sale
  
–
      
16
  
Acceptances and endorsements
  
3,584
      
3,090
  
Retirement benefit assets
  
86
      
30
  
Other accounts
  
1,174
      
1,495
  
   
11,069
      
11,506
  

 
 Current, savings and other deposit accounts

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Current, savings and other deposit accounts:
              
- as stated in consolidated statement of
              
   financial position
  
636,369
      
562,183
  
- structured deposits reported as
              
   trading liabilities
  
22,212
      
29,785
  
   
658,581
      
591,968
  
By type:
              
- demand and current accounts
  
53,450
      
36,321
  
- savings accounts
  
437,440
      
294,556
  
- time and other deposits
  
167,691
      
261,091
  
   
658,581
      
591,968
  
 

 
50
Certificates of deposit and other debt securities in issue

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Certificates of deposit and
              
   other debt securities in issue:
              
- as stated in consolidated statement of
              
   financial position
  
1,826
      
2,772
  
- structured certificates of deposit
              
   and other debt securities in issue
              
   reported as trading liabilities
  
3,247
      
9,716
  
   
5,073
      
12,488
  
               
By type:
              
- certificates of deposit in issue
  
2,304
      
6,633
  
- other debt securities in issue
  
2,769
      
5,855
  
   
5,073
      
12,488
  

Customer deposits and certificates of deposit and other debt securities in issue stood at HK$663.7 billion at 31 December 2009, a rise of 9.8 per cent over the end of 2008. Higher growth was recorded in savings and current account balances, reflecting customer preference for liquidity in the prevailing low interest rate. Structured deposits and other structured certificates of deposits and other debt securities in issue fell, due primarily to reduced demand for such products in the uncertain investment environment. Deposits with Hang Seng (China) Limited rose significantly by 35.9 per cent.


Trading liabilities

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Structured certificates of deposit and
              
  other debt securities in issue
  
3,247
      
9,716
  
Structured deposits
  
22,212
      
29,785
  
Short positions in securities and other
  
12,932
      
8,781
  
   
38,391
      
48,282
  
 
Trading liabilities include customer deposits and certificates of deposit with embedded options or other derivatives, the market risk of which is managed in the trading book.

Other liabilities

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Items in the course of transmission
              
  to other banks
  
6,304
      
4,583
  
Accruals
  
2,039
      
2,924
  
Acceptances and endorsements
  
3,584
      
3,090
  
Retirement benefit liabilities
  
1,712
      
3,532
  
Other
  
1,646
      
1,319
  
   
15,285
      
15,448
  
 
 
51
 
Subordinated liabilities

     
At 31 December
    
At 31 December
  
Figures in HK$m
    
2009
      
2008
  
                   
Nominal value
Description
                
                   
Amount owed to third parties
                
                   
HK$1,500 million
Callable floating rate
                
 
  subordinated notes due June 2015
    
1,499
      
1,498
  
                   
HK$1,000 million
4.125 per cent callable fixed rate
                
 
  subordinated notes due June 2015
    
1,003
      
994
  
                   
US$450 million
Callable floating rate
                
 
  subordinated notes
                
 
  due July 2016
    
3,483
      
3,478
  
                   
US$300 million
Callable floating rate
                
 
  subordinated notes
                
 
  due July 2017
    
2,321
      
2,318
  
                 
Amount owed to HSBC Group undertakings
                
                   
US$260 million
Callable floating rate
                
 
  subordinated loan debt
                
 
  due December 2015
    
2,017
      
2,015
  
       
10,323
      
10,303
  
                   
Representing:
                  
- measured at amortised cost
    
9,320
      
9,309
  
- designated at fair value
    
1,003
      
994
  
       
10,323
      
10,303
  

There was no subordinated debt issued during 2009. The outstanding subordinated notes, which qualify as supplementary capital, serve to help the bank maintain a more balanced capital structure and support business growth.
 
 
52
 
Shareholders’ funds

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
    
2008
  
             
Share capital
     9,559       9,559  
Retained profits
     37,719       32,518  
Premises revaluation reserve
     3,994       3,711  
Cash flow hedges reserve
     174       562  
Available-for-sale investments reserve
                
- on debt securities
     (496 )     (4,137 )
- on equity securities
     239       314  
Capital redemption reserve
     99       99  
Other reserves
     3,303       3,264  
Total reserves
     45,032       36,331  
      54,591       45,890  
Proposed dividends
     3,633       5,736  
Shareholders’ funds
     58,224       51,626  
                 
Return on average shareholders’ funds
     24.6 %     26.0 %

Shareholders’ funds (excluding proposed dividends) grew by HK$8,701 million, or 19.0 per cent, to reach HK$54,591 million at 31 December 2009. Retained profits rose by HK$5,201 million, mainly reflecting the growth in 2009 profit after the appropriation of interim dividends and the increase in actuarial gains on the defined benefit scheme. Against the backdrop of the rebound in the property market during the year, the premises revaluation reserve increased by HK$283 million compared with 2008.

In accordance with accounting standards, available-for-sale debt and equity securities should be measured at fair value. The carrying amounts of the various debt and equity securities are reviewed at the end of the reporting period to determine whether there is any objective evidence of impairment. If evidence exists, the relevant carrying amount is reduced to the estimated recoverable amount by means of an impairment charge to the income statement.

The available-for-sale investments reserve for debt securities showed a deficit of HK$496 million compared with a deficit of HK$4,137 million at 2008 year-end, reflecting the improvement and stabilisation in global credit markets and the disposal of high-risk assets under the bank’s prudent risk management strategy. The group assessed that there were no impaired debt securities during the year, and accordingly, no impairment loss has been recognised.

The return on average shareholders’ funds was 24.6 per cent, compared with 26.0 per cent for 2008.

There was no purchase, sale or redemption by the bank, or any of its subsidiaries, of the bank’s securities in 2009.
 
53

 
Capital resources management

Analysis of capital base and risk-weighted assets

   
At 31 December
  
At 31 December
  
Figures in HK$m
  
2009
    
2008
  
               
Capital base
              
Core capital:
              
- Share capital
  
9,559
      
9,559
  
- Retained profits
  
31,708
      
24,290
  
- Classified as regulatory reserve
  
(920
)
 
  
(854
)
- Less: deductible of core capital
  
(561
)
 
  
(557
)
- Less: 50 per cent of total
              
  unconsolidated investments and
              
  other deductions
  
(7,330
)
    
(6,330
)
- Total core capital
  
32,456
      
26,108
  
               
Supplementary capital:
              
- Fair value gains on the revaluation
              
  of property
  
3,732
      
3,465
  
- Fair value gains on the revaluation
              
  of available-for-sale investment and
              
  equity
  
498
      
649
  
- Collective impairment allowances
  
81
      
78
  
- Regulatory reserve
  
101
      
94
  
- Surplus provision
  
–
      
101
  
- Term subordinated debt
  
10,354
      
10,357
  
- Less: 50 per cent of total
              
  unconsolidated investments and
              
  other deductions
  
(7,330
)
    
(6,330
)
- Total supplementary capital
  
7,436
      
8,414
  
               
Total capital base after deductions
  
39,892
      
34,522
  
               
Risk-weighted assets
              
- Credit risk
  
212,434
      
235,576
  
- Market risk
  
1,278
      
1,684
  
- Operational risk
  
39,017
      
38,104
  
   
252,729
      
275,364
  
               
Capital adequacy ratio
  
15.8
%
    
12.5
%
Core capital ratio
  
12.8
%
    
9.5
%
 
 
Capital ratios at 31 December 2009 were compiled in accordance with the Banking (Capital) Rules (‘the Capital Rules’) issued by the Hong Kong Monetary Authority (‘HKMA’) under section 98A of the Hong Kong Banking Ordinance for the implementation of Basel II, which came into effect on 1 January 2007. Having obtained approval from the HKMA to adopt the ‘advanced internal ratings-based approach’ (‘AIRB’) to calculate the risk-weighted assets for credit risk from 1 January 2009, the bank used the AIRB approach to calculate its credit risk exposure at 31 December 2009. The standardised (operational risk) approach and internal models approach were used to calculate its operational risk and market risk respectively. The capital adequacy ratio and core capital ratio at 31 December 2008 were calculated using the ‘foundation internal ratings-based approach’ (‘FIRB’). On 31 December 2009, the capital adequacy ratio and core capital ratio were 15.8 per cent and 12.8 per cent, compared with 12.5 per cent and 9.5 per cent at the end of 2008. The strengthening of these ratios largely reflects profit growth after accounting for dividends during the year, the improvement in the available-for-sale debt securities reserve due to the narrowing of credit spreads and the change in calculation methodology.
 
54

 
The basis of consolidation for the calculation of capital ratios under the Capital Rules follows the basis of consolidation for financial reporting with the exclusion of subsidiaries which are ‘regulated financial entities’ (e.g. insurance and securities companies) as defined by the Capital Rules. Accordingly, the investment costs of these unconsolidated regulated financial entities are deducted from the capital base.

To satisfy the provisions of the Hong Kong Banking Ordinance and regulatory requirements for prudential supervision purposes, the group has earmarked a regulatory reserve of HK$920 million (HK$854 million at 31 December 2008) from retained profits.

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:

   
2009
    
2008
  
             
The bank and its subsidiaries
            
  designated by the HKMA
  
48.1
%
  
46.4
%

55

Reconciliation of cash flow statement

(a)  
Reconciliation of operating profit to net cash flow from operating activities

Figures in HK$m
  
2009
    
2008
  
             
Operating profit
     13,324       13,725  
Net interest income
     (14,023 )     (16,232 )
Dividend income
     (16 )     (82 )
Loan impairment charges and other
                
  credit risk provisions
     812       2,776  
Impairment of available-for-sale equity securities
     4       284  
Depreciation
     466       432  
Amortisation of intangible assets
     84       60  
Amortisation of available-for-sale investments
     76       (398 )
Amortisation of held-to-maturity debt securities
     1       1  
Advances written off net of recoveries
     (858 )     (400 )
Interest received
     11,126       16,232  
Interest paid
     (1,478 )     (9,249 )
Operating profit before changes in working capital
     9,518       7,149  
Change in treasury bills and certificates of deposit
                
  with original maturity more than three months
     (41,353 )     14,016  
Change in placings with and advances to banks
                
  maturing after one month
     (5,418 )     (2,895 )
Change in trading assets
     77,386       (100,363 )
Change in financial assets designated at fair value
     (2,549 )     (276 )
Change in derivative financial instruments
     (8,640 )     7,848  
Change in advances to customers
     (15,454 )     (21,766 )
Change in other assets
     (1,070 )     (3,474 )
Change in financial liabilities designated at fair value
     8       5  
Change in current, savings and other deposit accounts
     74,186       15,530  
Change in deposits from banks
     (6,566 )     (8,300 )
Change in trading liabilities
     (9,891 )     131 )
Change in certificates of deposit and
                
  other debt securities in issue
     (946 )     (2,913 )
Change in other liabilities
     4,048       7,150  
Elimination of exchange differences
                
  and other non-cash items
     (5,523 )     4,542 )
Cash generated from/(used in) operating activities
     67,736       (83,616 )
Taxation paid
     (1,921 )     (3,214 )
Net cash inflow/(outflow) from operating activities
     65,815       (86,830 )
 

56
 

(b)           Analysis of the balances of cash and cash equivalents

   
At 31 December
    
At 31 December
  
Figures in HK$m
  
2009
      
2008
  
               
Cash and balances with banks and
              
  other financial institutions
  
22,086
      
24,822
  
Placings with and advances to banks and other
              
  financial institutions maturing within one month
  
74,459
      
44,572
  
Treasury bills
  
40,214
      
6,722
  
   
136,759
      
76,116
  


Contingent liabilities, commitments and derivatives

         
Credit
    
Risk-
  
   
Contract
    
equivalent
    
weighted
  
Figures in HK$m
  
amount
    
amount
    
amount
  
                   
At 31 December 2009
                  
                   
Direct credit substitutes
     3,121       2,987       1,785  
Transaction-related contingencies
     550       289       155  
Trade-related contingencies
     9,451       2,465       1,466  
Forward asset purchases
     36       36       36  
Undrawn formal standby facilities, credit lines
                        
  and other commitments to lend:
                        
- not unconditionally cancellable W
     29,069       16,447       7,720  
- unconditionally cancellable
     158,817       53,514       15,036  
      201,044       75,738       26,198  
                         
Exchange rate contracts:
                        
Spot and forward foreign exchange
     334,133       5,573       689  
Other exchange rate contracts
     51,624       1,644       489  
      385,757       7,217       1,178  
                         
Interest rate contracts:
                        
Interest rate swaps
     230,376       2,640       413  
Other interest rate contracts
     143    
–
    
–
  
      230,519       2,640       413  
                         
Other derivative contracts
     7,002       474       92  

 
WThe contract amount for undrawn formal standby facilities, credit lines and other commitments to lend with an original maturity of ‘not more than one year’ and ‘more than one year’ were HK$13,371 million and HK$15,698 million respectively.
 
 
57

 
         
Credit
    
Risk-
  
   
Contract
    
equivalent
    
weighted
  
Figures in HK$m
  
amount
    
amount
    
amount
  
                   
At 31 December 2008
                  
                   
Direct credit substitutes
     4,174       4,174       2,132  
Transaction-related contingencies
     1,016       507       418  
Trade-related contingencies
     7,046       1,409       922  
Forward asset purchases
     59       59       59  
Undrawn formal standby facilities, credit lines
                        
  and other commitments to lend:
                        
- not unconditionally cancellable
     23,708       15,992       6,389  
- unconditionally cancellable
     155,505       30,971       3,586  
      191,508       53,112       13,506  
                         
Exchange rate contracts:
                        
Spot and forward foreign exchange
     500,166       7,364       1,872  
Other exchange rate contracts
     51,226       1,836       778  
      551,392       9,200       2,650  
                         
Interest rate contracts:
                        
Interest rate swaps
     248,758       4,144       1,117  
Other interest rate contracts
     142       1    
–
  
      248,900       4,145       1,117  
                         
Other derivative contracts
     15,705       1,141       343  
                         
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 purpose of deriving the risk-weighted amounts. The nominal contract amounts, credit equivalent amounts, risk-weighted amounts and the consolidation basis for the periods indicated were calculated in accordance with the Banking (Capital) Rules issued by the HKMA, which came into effect on 1 January 2007.

For the above analysis, contingent liabilities and commitments are credit-related instruments that include acceptances and endorsements, 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.
 
58

 
Derivative financial instruments are held for trading, or financial instruments designated at fair value, or designated as either fair value hedges or cash flow hedges. The following table shows the nominal contract amounts and marked-to-market value of assets and liabilities by class of derivatives.
 
   
At 31 December 2009
    
At 31 December 2008
  
Figures in HK$m
  
Trading
    
Designated
at fair value
    
Hedging
    
Trading
    
Designated
at fair value
    
Hedging
  
                                     
Contract amounts:
                                    
Interest rate contracts
     163,354       1,160       66,554       161,519       1,797       85,942  
Exchange rate contracts
     473,989       89    
–
       655,777    
–
    
–
  
Other derivative contracts
     11,385    
–
    
–
       21,168    
–
    
–
  
      648,728       1,249       66,554       838,464       1,797       85,942  
                                                 
Derivative assets:
                                                
Interest rate contracts
     1,552       17       391       2,121       31       1,410  
Exchange rate contracts
     2,636       1    
–
       3,300    
–
    
–
  
Other derivative contracts
     453    
–
    
–
       242    
–
    
–
  
      4,641       18       391       5,663       31       1,410  
                                                 
Derivative liabilities:
                                                
Interest rate contracts
     1,623       13       670       2,249       30       569  
Exchange rate contracts
     938    
–
    
–
       5,717    
–
    
–
  
Other derivative contracts
     1,007    
–
    
–
       6,380    
–
    
–
  
      3,568       13       670       14,346       30       569  

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.


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 2009 (‘2009 accounts’), which will be delivered to the Registrar of Companies and the HKMA. The auditors expressed an unqualified opinion on those statutory accounts in their report dated 1 March 2010.

Disclosures required by the Banking (Disclosure) Rules issued by the HKMA are contained in the bank’s Annual Report which will be published on the websites of The Stock Exchange of Hong Kong Limited and the bank on the date of issue of this news release.

The 2009 accounts and this news release have been prepared on a basis consistent with the accounting policies adopted in the 2008 accounts except for the following:

On 1 January 2009, the group adopted the Amendments to HKFRS 7 ‘Financial Instruments: Disclosures – Improving Disclosures about Financial Instruments’. The amendments introduce a three level fair value hierarchy, which reflects the availability of observable market inputs when estimating fair values and clarifies the quantitative disclosures about the liquidity risk associated with financial instruments. The adoption of the amendment has no effect on the results reported in the consolidated financial statements.
 
59

 
On 1 January 2009, the group adopted HKFRS 8 ‘Operating Segments’ (HKFRS 8), which replaced HKAS 14 ‘Segment Reporting’. HKFRS 8 requires segment information to be reported using the same measure reported to the chief operating decision-maker for the purpose of making decisions about allocating resources to the segment and assessing its performance. The group’s HKFRS 8 operating segments are determined to be customer group segments because the chief operating decision-maker uses customer group information in order to make decisions about allocating resources and assessing performance. The five operating segments, or customer groups, are: Personal Financial Services, Commercial Banking, Corporate Banking, Treasury and Other. Segment information provided to the chief operating decision maker is on an HKFRS basis.

On 1 January 2009, the group adopted revised HKAS 1 ‘Presentation of Financial Statements’ (HKAS 1). The revised standard aims to improve users’ ability to analyse and compare information given in financial statements. The adoption of the revised standard has no effect on the results reported in the group’s consolidated financial statements. It does, however, result in certain presentational changes in the group’s primary financial statements, including:

·  
the presentation of all items of income and expenditure in two financial statements, the ‘Consolidated Income Statement’ and ‘Consolidated Statement of Comprehensive Income’;
·  
the presentation of the ‘Consolidated Statement of Changes in Equity’ as a financial statement, which replaces the ‘Reserves’ note on the financial statements; and
·  
the adoption of revised title ‘Consolidated Statement of Financial Position’ for the ‘Consolidated Balance Sheet’.

The group also adopted a number of insignificant amendments to standards and interpretations. These are described under note 7 of the 2009 Annual Report and Accounts.


2. Comparative figures

As a result of the application of HKAS 1 (revised 2007), Presentation of financial statements, certain comparative figures have been adjusted to conform with the current year’s presentation and to provide comparative amounts in respect of items disclosed for the first time in 2009. Further details of these developments are disclosed in the additional information above and note 5 of the 2009 Annual Report.


3. Property revaluation

The group’s premises and investment properties were revalued at 30 November 2009 and updated for any material changes at 31 December 2009 by DTZ Debenham Tie Leung Limited. 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 value for existing use and the basis of valuation for investment properties was open market value. The net revaluation surplus for group premises amounted to HK$669 million of which HK$700 million was credited to premises revaluation reserve and HK$31 million was charged to the income statement. Revaluation gains of HK$250 million on investment properties were recognised through the income statement. The related deferred tax provisions for group premises and investment properties were HK$109 million and HK$41 million respectively.

The revaluation exercise also covered business premises/investment properties reclassified as properties held for sale. In accordance with HKFRS 5, there was no revaluation gain/loss recognised through the income statement.

60

4. Foreign currency positions

Foreign currency exposures include those arising from trading, non-trading and structural positions. Net option position is calculated on the basis of delta-weighted positions of all foreign exchange options contracts. At 31 December 2009, the US dollar (US$) was the currency in which the group had non-structural foreign currency positions that were not less than 10 per cent of the total net position in all foreign currencies. The group also had a Chinese renminbi (RMB) structural foreign currency position, which was not less than 10 per cent of the total net structural position in all foreign currencies.

   
At 31 December
    
At 31 December
  
Figures in HK$m
        
2009
          
2008
  
   
US$
    
RMB
    
US$
    
RMB
  
Non-structural position
                        
Spot assets
     214,379       41,638       240,624       37,665  
Spot liabilities
     (164,511 )     (41,564 )     (200,971 )     (37,568 )
Forward purchases
     169,349       29,483       269,935       26,549  
Forward sales
     (219,453 )     (29,603 )     (303,047 )     (27,082 )
Net option position
     (4 )  
–
       (1 )  
–
  
Net (short)/long non-structural position
     (240 )     (46 )     6,540       (436 )

At 31 December 2009, the group’s major structural foreign currency positions were in US$ and RMB.

   
At 31 December
    
At 31 December
  
         
2009
    
2008
  
         
% of
          
% of
  
         
total net
          
total net
  
         
structural
          
structural
  
   
HK$m
    
position
    
HK$m
    
position
  
Structural positions
                        
US dollar
     285       1.9       285       2.0  
Renminbi
     14,550       96.2       13,343       96.5  


5. Ultimate holding company

Hang Seng Bank is an indirectly held, 62.14 per cent-owned, subsidiary of HSBC Holdings plc.


6. Register of shareholders

The register of shareholders of the bank will be closed on Tuesday, 16 March 2010, during which no transfer of shares can be registered. In order to qualify for the fourth interim dividend for 2009, 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 no later than 4:30 pm on Monday, 15 March 2010. The fourth interim dividend will be payable on Wednesday, 31 March 2010 to shareholders whose names appear on the register of shareholders of the bank on Tuesday, 16 March 2010. Shares of the bank will be traded ex-dividend as from Friday, 12 March 2010.


61

7. Proposed timetable for 2010 quarterly dividends

 
First
Second
Third
Fourth
 
interim dividend
interim dividend
interim dividend
interim dividend
         
Announcement
4 May 2010
2 August 2010
1 November 2010
28 February 2011
Book close and
        
  record date
19 May 2010
17 August 2010
16 November 2010
15 March 2011
Payment date
3 June 2010
1 September 2010
1 December 2010
30 March 2011


8. Code on Corporate Governance Practices

The bank is committed to high standards of corporate governance. The bank has followed the module on ‘Corporate Governance of Locally Incorporated Authorised Institutions’ under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority and has fully complied all the code provisions and most of the recommended best practices set out in the Code on Corporate Governance Practices contained in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited throughout the year ended 31 December 2009.

The Audit Committee of the bank has reviewed the results for the year ended 31 December 2009.


9. Board of Directors

At 1 March 2010, the Board of Directors of the bank comprises Dr Raymond K F Ch’ien* (Chairman), Mrs Margaret Leung (Vice-Chairman and Chief Executive), Dr John C C Chan*, Dr Marvin K T Cheung*, Mr Alexander A Flockhart#, Mr Jenkin Hui*, Mr William W Leung,  Dr Eric K C Li*, Dr Vincent H S Lo#, Mr Iain J Mackay#, Mrs Dorothy K Y P Sit#, Mr Richard Y S Tang* and Mr Peter T S Wong#.

*
Independent non-executive Directors
#
Non-executive Directors


10. 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 the bank’s website www.hangseng.com.

The 2009 Annual Report and Financial Statements, which contains all disclosures required by the Banking (Disclosure) Rules issued by the HKMA, will be published on the websites of The Stock Exchange of Hong Kong Limited and the bank on the date of issue of this news release. Printed copies of the 2009 Annual Report will be sent to shareholders in late March 2010.

Media enquiries to:
Walter Cheung
Telephone: (852) 2198 4020
Michelle Chan
Telephone: (852) 2198 4236

 
 
 
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