HK & Shanghai Bking Corp 2013 Interims

Comment by Stuart Gulliver, Chairman

The pace of economic growth in Asia slowed during the first half of 2013, as China recorded a more modest rate of growth and demand for consumer goods and raw materials reduced.  Mainland China's GDP is now expected to grow by 7.4% this year and in 2014. Given its significant economic links to mainland China, forecasts for Hong Kong have also been lowered and GDP is now expected to grow by 2.5% this year. However, we believe that China's reform agenda will provide the basis for more sustainable growth in the medium to long term. Therefore, despite this slowdown in the short term, the long-term economic trends remain intact. The faster-growing markets will continue to account for the majority of global growth in the years to come and trade and capital flows will continue to expand.

Against this backdrop, The Hongkong and Shanghai Banking Corporation Limited continued to perform well as we maintained our focus on deepening and building customer relationships, controlling risk, leveraging our global connectivity and reengineering our business. During the period we completed the sale of our 18% shareholding in Bao Viet Holdings ('Bao Viet') and our insurance businesses in South Korea and Taiwan, and in July we announced plans to wind down our remaining Retail Banking and Wealth Management services in South Korea. Reported profit before tax was HK$95,550m, an increase of 65% over the first half of 2012. This included the net gain on disposal of our shareholding in Ping An Insurance (Group) Company of China, Limited ('Ping An') of HK$30,747m and an accounting gain on reclassification of Industrial Bank Co., Limited ('Industrial Bank') as a financial investment of HK$8,454m.

Customer loans grew by 6% during the period as we continued to support our customers, while deposits declined by 2% and, at the period end, the loans to deposits ratio stood at 65.7%. In competitive markets for both loans and deposits, spreads reduced. Asset quality continued to be strong and loan impairment charges fell. We maintained our focus on improving efficiency, reducing operating expenses by 3% while continuing to invest in growth.

Profits in Commercial Banking ('CMB') were 4% higher than in the first half of 2012, driven by increased revenues as we grew term and trade lending and generated higher fee income from collaboration with Global Banking and Markets. However, asset spreads narrowed due to increased competition. We remained vigilant over asset quality and loan impairment charges remained low. Among several awards, we gained 'Best Cash Management House in Asia' from Euromoney and Asiamoney's 'Best Foreign Commercial Bank in China'.

In Retail Banking and Wealth Management ('RBWM') profits were broadly unchanged, as revenues increased in Hong Kong due to higher deposit and mortgage balances and increased fees from broking and unit trusts, offset in the Rest of Asia-Pacific by the absence of revenues from disposed businesses. We maintained our focus on secured lending at low loan to value ratios. We continued to invest in our distribution channels, including our network in mainland China, and successfully launched mobile banking during the period. We were awarded 'Best Regional Retail Business' and 'Best Foreign Retail Bank in China' by The Asian Banker.

Global Banking and Markets ('GB&M') profits were broadly unchanged. We continued to improve the breadth and balance of our business lines and develop our aim to be the leading international bank. We achieved good results and progress from M&A, Equity Capital Markets and Payments and Cash Management alongside our established leading positions in debt markets. During the half year we won several major industry awards, including Euromoney's 'Best Bank in Hong Kong' and 'Best Debt House in Asia', Asiamoney's 'Best provider of offshore renminbi products and services' and Finance Asia's 'Best Investment Bank in Hong Kong'.

The outlook for Asia's economies is for growth to continue at a reduced pace. With strong capital and liquidity and sound asset quality, we are in good shape to meet any challenges and to grow market share as we continue to invest in our priority growth markets. Our primary focus will remain on supporting our customers through the cycle and helping them to grow their businesses and achieve their personal and corporate ambitions.