Hang Seng Bank FY2013 results

 

 

HANG SENG BANK LIMITED

2013 RESULTS - HIGHLIGHTS

 

·    Attributable profit up 38% to HK$26,678m (HK$19,327m in 2012). Excluding the Industrial Bank reclassification, attributable profit up 19%.

 

·    Profit before tax up 30% to HK$28,496m (HK$21,994m in 2012). Excluding the Industrial Bank reclassification, profit before tax up 19%.

 

·    Operating profit up 19% to HK$18,410m (HK$15,487m in 2012).

 

·    Operating profit excluding loan impairment charges up 19% to HK$18,946m (HK$15,873m in 2012).

 

·    Return on average shareholders' funds of 25.4% (22.8% in 2012). Excluding the Industrial Bank reclassification, return on average shareholders' funds of 17.6% (17.1% in 2012).

 

·    Assets up 6% to HK$1,143.7bn (HK$1,077.1bn at 31 December 2012).

 

·    Earnings per share up 38% to HK$13.95 per share (HK$10.11 per share in 2012). Excluding the Industrial Bank reclassification, earnings per share up 19% to HK$8.98 per share.

 

·    Fourth interim dividend of HK$2.20 per share; total dividends of HK$5.50 per share for 2013 (HK$5.30 per share in 2012).

 

·    Total capital ratio of 15.8%. Common equity tier 1 ('CET1') and tier 1 capital ratios both 13.8% at 31 December 2013 under Basel III; (capital adequacy ratio of 14.0% and core capital ratio of 12.2% at 31 December 2012 under Basel II).

 

·    Cost efficiency ratio of 32.4% (34.9% in 2012).

 

 

Industrial Bank Co., Ltd. ('Industrial Bank') reclassification

 

Reported results for 2013 include a non-distributable accounting gain on the reclassification of Industrial Bank from an associate to a financial investment of HK$8,454m before tax (HK$9,517m attributable profit). Reported results for 2012, when the investment in Industrial Bank was equity-accounted for, include share of profit from Industrial Bank of HK$5,199m before tax (HK$4,855m attributable profit). Figures quoted as 'excluding the Industrial Bank reclassification' have been adjusted for the above items.

 

Comparative figures have been restated to reflect the adoption of the Hong Kong Accounting Standard 19 'Employee Benefits', details of which are set out on page 67.

 

Within this document, the Hong Kong Special Administrative Region of the People's Republic of China has been referred to as 'Hong Kong'. The abbreviations 'HK$m' and 'HK$bn' represent millions and billions of Hong Kong dollars respectively.

 

 

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 ('the group') for the year ended 31 December 2013.

 

1          Highlights of 2013 Results

2          Contents

4          Chairman's Comment

5          Chief Executive's Review

7          Results Summary

10        Segmental Analysis

16        Consolidated Income Statement

17        Consolidated Statement of Comprehensive Income

18        Consolidated Balance Sheet

19        Consolidated Statement of Changes in Equity

21        Consolidated Cash Flow Statement

22        Financial Review

22        Net interest income

24        Net fee income

25        Net trading income

26        Net income from financial instruments designated at fair value

26        Other operating income

27        Analysis of income from wealth management business

28        Analysis of insurance business income

29        Loan impairment charges

30        Operating expenses

31        Gains less losses from financial investments and fixed assets

31        Net gain on reclassification of Industrial Bank Co., Ltd. ('Industrial Bank')

and Yantai Bank Co., Ltd. ('Yantai Bank')

32        Gain on disposal of a subsidiary 

32        Tax expense

33        Earnings per share

33        Dividends per share

33        Segmental analysis

36        Analysis of assets and liabilities by remaining maturity

38        Cash and balances with banks

38        Placings with and advances to banks

39        Trading assets

40        Financial assets designated at fair value

41        Loans and advances to customers

41        Loan impairment allowances against loans and advances to customers

42        Impaired loans and advances to customers and allowances

43        Overdue loans and advances to customers

44        Rescheduled loans and advances to customers

44        Segmental analysis of loans and advances to customers by geographical area

            45        Gross loans and advances to customers by industry sector

47        Financial investments

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

            companies

50        Interest in associates

50        Intangible assets

50        Other assets

51        Current, savings and other deposit accounts

51        Certificates of deposit and other debt securities in issue

52        Trading liabilities

52        Other liabilities

53        Subordinated liabilities

54        Shareholders' funds

55        Capital management

60        Liquidity ratio

61        Reconciliation of cash flow statement

62        Contingent liabilities, commitments and derivatives

65        Statutory accounts and accounting policies

67        Comparative figures

68        Change in accounting treatment for Industrial Bank Co., Ltd. and Yantai Bank Co., Ltd.

69        Property revaluation

70        Foreign currency positions

71        Ultimate holding company

71        Register of shareholders

71        Code on corporate governance practices

72        Board of Directors

72        News release

 

 

 

Comment by Raymond Ch'ien, Chairman

 

Hang Seng Bank returned solid results for 2013. We capitalised on early signs of a return to greater stability in the global economy by continuing to emphasise service excellence while further leveraging our competitive strengths.

 

Building on the strong platform provided by our extensive cross-border network, trusted brand and market insight, we enhanced operational efficiency, service convenience and product choice for customers.

 

Profit attributable to shareholders was HK$26,678m - an increase of 38% compared with 2012. Earnings per share also rose by 38% to HK$13.95. Excluding the Industrial Bank reclassification, profit attributable to shareholders and earnings per share both increased by 19% to HK$17,161m and HK$8.98 respectively.

 

Return on average shareholders' funds was 25.4%, compared with 22.8% last year. Excluding the Industrial Bank reclassification, return on average shareholders' funds was 17.6%, compared with 17.1% in 2012.

 

The Directors have declared a fourth interim dividend of HK$2.20 per share. This brings the total distribution for 2013 to HK$5.50 per share - up from HK$5.30 in 2012. We remain committed to a dividend policy that reflects a good balance between annual distributions and investment for future growth.

 

Economic environment

 

The global economic environment improved in 2013. The US economy expanded at a moderate pace, supported by indications of a recovery in the housing market. Conditions in the eurozone stabilised, with the region returning to economic growth in the second quarter, following an 18-month recession.

 

Favourable labour market conditions in Hong Kong underpinned consumer spending, supporting steady GDP growth of 3% for the first three quarters of the year. Trade activity, however, remained weak with the improvement in the global economy yet to be reflected in export demand. Private consumption remains the key economic driver and we expect 2013 full-year growth of 3%.

 

Mainland China's economy grew by 7.7% in 2013 - the same as in 2012, above the official target of 7.5%. The government's selective stimulation policies supported domestic consumption and investment, with real GDP expanding by 7.8% in the second half of the year - up from 7.6% in the first half. Economic challenges will persist in 2014, but domestic drivers should remain resilient and we expect real GDP growth of 7.6% for the year.

 

Asia will generally benefit from the recovery in the international economy, although the reduction of quantitative easing measures in the US will continue to create some challenges and uncertainty in the region. Closer economic integration in the Greater China region and Hong Kong's position as a primary centre for offshore renminbi financial services will open up new avenues for business.

 

We will take full advantage of new opportunities and maintain our strong position in our core business by continuing with our strategic plan for sustainable growth.

 

 

Review by Rose Lee, Vice-Chairman and Chief Executive

 

Hang Seng Bank made good progress with its customer-driven strategy to achieve solid results in 2013.

 

Profit attributable to shareholders increased by 38% compared with 2012 to HK$26,678m and return on average shareholders' funds was up 2.6 percentage points at 25.4%. Excluding the Industrial Bank reclassification, attributable profit rose by 19% and return on average shareholders' funds was 17.6%.

 

International economic conditions improved, but market competition remained strong as banks sought to capitalise on the upturn in investor sentiment and a more positive outlook among businesses in the region.

 

We continued to invest in technology, service channels and our branch network to deepen existing customer relationships and acquire new clients in target segments. Along with more effective cross-selling and other revenue diversification initiatives, this supported a 10% rise in net interest income and a 27% increase in non-funds income. Our strong product development capabilities facilitated a swift response to improvement in the investment environment, driving a 15% rise in total wealth management income.

 

Our extensive southern China network and deep market knowledge reinforced our position as a leading provider of cross-border and offshore renminbi-related services. In November, we became the first local financial institution in Hong Kong to launch a Renminbi Qualified Foreign Institutional Investor exchange-traded fund.

 

Enhancements to Hang Seng Bank (China) Limited's service delivery infrastructure include two sub-branch openings and the commencement of operations at Qianhai sub-branch. In July, we extended our business scope as one of the first foreign banks permitted to distribute domestic investment funds in mainland China.

 

Hang Seng's profit before tax rose by 30% to HK$28,496m. Excluding the Industrial Bank reclassification, profit before tax increased by 19% to HK$20,042m.

 

Net interest income grew by HK$1,658m to HK$18,604m, supported by the 8% increase in average interest-earning assets and a 4-basis-point improvement in net interest margin to 1.89%. Effective balance sheet management and the successful acquisition of new customers drove growth of 9% in lending and 6% in deposits.

 

Non-interest income rose by HK$2,023m to HK$9,458m, representing 33.7% of total operating income, compared with 30.5% in 2012.

 

With the 15% growth in net operating income before loan impairment charges outpacing the 7% rise in operating expenses, our cost efficiency ratio improved to 32.4% - down 2.5 percentage points compared with 2012.

 

On 31 December 2013, our total capital ratio under Basel III was 15.8% and our common equity tier 1 ratio was 13.8%.

 

Managing for sustainable growth

 

In a rapidly changing economic and regulatory environment, our strategic priorities are designed to uphold service excellence and drive the sustainable growth of our business. We will maintain our customer-focused approach and capitalise on our competitive strengths to reinforce our position as Hong Kong's leading domestic bank and a major provider of cross-border services as economic integration in the Greater China region increases.

 

Backed by our deeply rooted knowledge of local markets, good cross-border connectivity and trusted brand, we are well placed to benefit from ongoing financial liberalisation on the Mainland and initiatives to internationalise the renminbi. We will strengthen our mainland operational infrastructure and service delivery channels and step up collaborative and cross-referral initiatives to capture increased cross-border capital and trade flows. Earlier this month, we opened a Chengdu Branch and Shanghai Free Trade Zone sub-branch. We will continue to expand our market coverage by setting up more outlets in strategic locations.

 

We will enhance the end-to-end service experience for customers by making further investments in analytics, our branch network and other service delivery channels as well as in growing the skills and knowledge of staff.

 

Upholding high corporate governance and risk management standards remains central to our corporate value and in shaping our business for sustainable growth.

 

Building long-term relationships with customers, business partners and our local communities is a vital part of our ongoing success. Our commitment to helping society to prosper and flourish includes active participation in a diverse range of corporate responsibility activities.

 

I wish to thank our staff for their invaluable contributions to our achievements in 2013. Their dedication will ensure that we will continue to deliver service excellence to our customers and achieve optimal return for our shareholders.

 

 

Results summary

 

Hang Seng Bank Limited ('the bank') and its subsidiaries ('the group') reported a profit attributable to shareholders of HK$26,678m for 2013, up 38.0% compared with 2012. Earnings per share were up by 38.0% to HK$13.95. The attributable profit for the year included the HK$9,517m non-distributable accounting gain on the reclassification of Industrial Bank Co., Ltd. ('Industrial Bank').

 

Operating profit excluding loan impairment charges grew by HK$3,073m, or 19.4%, to HK$18,946m. This solid result was achieved as a result of our effective execution of the group's balanced growth strategy, which produced solid increases in operating profit across core businesses. Operating expenses rose, but to a lesser amount than the strong growth in income.

 

Net interest income grew by HK$1,658m, or 9.8%, to HK$18,604m, driven by the increase in average interest-earning assets and the widening of the net interest margin. The bank's successful efforts to expand and diversify lending and attract new deposits drove growth in both average loan and deposit balances. Net interest income also benefited from the increased return on the life insurance investment funds portfolio. Net interest margin and net interest spread both improved by four basis points to 1.89% and 1.77% respectively when compared with 2012. Loan spreads in Hong Kong improved, mainly in term lending. These improvements were partly offset by the compression of spreads in the trade-related lending business. Deposit spread also improved, benefitting from lower funding cost. The bank's continued efforts to enhance the deployment of renminbi ('RMB') funds also contributed to the improvement in net interest income and net interest margin. However, loan and deposit spreads in mainland China narrowed, reflecting an increase in market competition following the liberalisation of interest rate regulations during the year.  

 

Net fees and commissions grew across core business lines to rise by HK$801m, or 15.7%, to HK$5,887m. Improved market sentiment increased customer appetite for investment, leading to a 37.0% rise in retail investment funds income and growth of 14.0% in stockbroking and related services income. Insurance agency-related fee income rose by 20.2%, reflecting an increase in non-life insurance products distribution commissions, with a decrease in non-life insurance underwriting profit following the disposal of the general insurance manufacturing business in the second half of 2012. Credit card, trade-related and remittance businesses also performed well to record fee income increases of 14.9%, 7.5% and 15.6% respectively.  

 

Net trading income was broadly in line with 2012 at HK$2,045m. Dealing profits fell slightly by HK$70m, or 3.3%, to HK$2,052m. Foreign exchange revenues were lower as increased revenue from greater customer activity and higher demand for foreign exchange-linked structured treasury products - particularly renminbi-linked structured products - was more than offset by lower income from funding swap activities.

 

Dividend income increased significantly from HK$17m in 2012 to HK$1,014m, due mainly to the dividend received from Industrial Bank.

 

Income from insurance business (included under 'net interest income', 'net fee income', 'net trading income', 'net income from financial instruments designated at fair value', 'net earned insurance premiums', 'movement in present value of in-force long-term insurance business' and 'other' within 'other operating income', 'share of profits from associates', and after deducting 'net insurance claims incurred and movement in policyholders' liabilities') grew by HK$360m, or 10.8%, to HK$3,686m. Net interest income and fee income from the life insurance business increased by 6.6% as the size of the life insurance funds investment portfolio grew, reflecting net inflows from new and renewal life insurance business. The investment return on the life insurance funds investment portfolio rose, benefitting from fair value gains on investment properties. To the extent that these investment returns were attributed to policyholders of unit-linked life insurance policies, there was an offsetting movement reported under 'net insurance claims incurred and movement in policyholders' liabilities'. The movement in present value of in-force long-term insurance business rose by 46.6%, representing mainly the combined effect of the increase in volume of new life insurance business written during the year and the updated actuarial assumptions.

 

Operating expenses rose by HK$595m, or 7.0%, to HK$9,103m, reflecting continued investment in new business platforms and mainland operations to support long-term growth. Staff costs rose by 4.1%, reflecting the annual salary increment and increased headcount. General and administrative expenses rose by 12.5%, due mainly to higher rental expenses, processing charges and marketing expenditure. Mainland-related operating expenses increased by 7.6%, attributable mainly to the ongoing business expansion of Hang Seng China.

 

The cost efficiency ratio improved compared with 2012 as a result of the bank's efforts to optimise operational efficiency while maintaining growth momentum. With the 15.1% increase in net operating income before loan impairment charges outpacing the rise in operating expenses, the cost efficiency ratio improved by 2.5 percentage points to 32.4%. 

 

Loan impairment charges rose by HK$150m, or 38.9%, to HK$536m, largely due to the increase in impairment charges for credit card and personal loan portfolios, reflecting updated assumptions used in collective assessment models. Charges for individually assessed impairments recorded a moderate increase due to lower releases in 2013.

 

Operating profit rose by HK$2,923m, or 18.9%, to HK$18,410m.

 

Profit before tax grew by 29.6% to HK$28,496m after taking the following major items into account:

 

·      a HK$8,454m gain on the reclassification of Industrial Bank in January 2013 and a HK$297m loss on the reclassification of Yantai Bank in December 2013;

·      a HK$355m decrease in gain on the disposal of a subsidiary - specifically, the gain of HK$355m arising from the disposal of the group's general insurance manufacturing business in 2012;

·      a 53.1% (or HK$412m) increase in net surplus on property revaluation; and

·      an 89.6% (or HK$4,819m) reduction in share of profits from associates, mainly reflecting the reclassification of Industrial Bank as a financial investment.

 

Consolidated balance sheet and key ratios

 

Total assets rose by HK$66.6bn, or 6.2%, to HK$1,143.7bn. The group continued to pursue a balanced growth strategy in managing its assets and liabilities, and achieved stable growth in both loans and deposits. Loans and advances to customers increased by HK$50.1bn, or 9.3%, to HK$586.2bn, underpinned mainly by growth in the commercial and corporate lending businesses. Against a backdrop of reduced activity and government measures in the property sector, the group maintained its strong position in residential mortgages and reported growth of 4.9% compared with the end of 2012. Trade-related lending achieved modest growth against last year end, reflecting the bank's continued effort to deepen customer relationships. Customer deposits, including certificates of deposit and other debt securities in issue, increased by HK$50.9bn, or 6.2%, to HK$869.7bn. At 31 December 2013, the advances-to-deposits ratio was 67.4%, compared with 65.5% at 31 December 2012.

 

At 31 December 2013, shareholders' funds (excluding proposed dividends) were HK$103.6bn, an increase of HK$15.1bn, or 17.0%. Retained profits rose by HK$19.0bn, mainly reflecting the 2013 profit (including the accounting gain on Industrial Bank) after the appropriation of interim dividends during the year. The premises revaluation reserve increased by HK$1.1bn, or 8.1%, due to the increase in fair value of the bank's premises. The available-for-sale investment reserve recorded a deficit of HK$1.6bn, compared with a surplus of HK$0.2bn at the end of 2012, mainly reflecting the revaluation deficit on the bank's investment in Industrial Bank. Other reserves decreased by HK$3.2bn compared with last year end, reflecting the recycling of the cumulative foreign exchange and other reserves of Industrial Bank and Yantai Bank to retained profits as a result of their reclassification. 

 

The return on average total assets was 2.4% (1.9% for 2012). The return on average shareholders' funds was 25.4% (22.8% for 2012). Excluding the Industrial Bank reclassification, return on average total assets was 1.5%, compared with 1.4% for 2012. On the same basis, return on average shareholders' funds was 17.6%, compared with 17.1% a year earlier.

 

On 1 January 2013, the Hong Kong Monetary Authority ('HKMA') implemented the first phase of the Basel III capital framework. The capital disclosures reported for the end of December 2013 under Basel III are therefore not directly comparable with the disclosures reported for the end of December 2012, which were prepared on a Basel II basis. Under Basel III, the total capital ratio was 15.8% at 31 December 2013 and both the common equity tier 1 and tier 1 capital ratios stood at 13.8%. At 31 December 2012, the total capital adequacy ratio and core capital ratio were 14.0% and 12.2% respectively as calculated on a Basel II basis.

 

The bank continued to maintain liquidity at a comfortable level. The average liquidity ratio for 2013 was 34.9% (calculated in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance) compared with 36.9% for 2012.

 

Dividends

 

The Directors have declared a fourth interim dividend of HK$2.20 per share, which will be payable on 27 March 2014 to shareholders on the register as of 12 March 2014. Together with the interim dividends for the first three quarters, the total distribution for 2013 will be HK$5.50 per share.

 

 

Segmental analysis

 

	Hong Kong & other businesses
	Retail Banking			Corporate and								Mainland		Inter-
	and Wealth	Commercial										China	segment
Figures in HK$m	Management		Banking			Treasury		Other		Total		business	elimination				Total
Year ended
31 December 2013
Net interest income/(expense)	9,959		5,777			1,630		(221	)	17,145		1,459			__		18,604
Net fee income/(expense)	3,849		1,802			(6	)	144		5,789		98			__		5,887
Net trading income/(loss)	300		505			1,123		(14	)	1,914		131			__		2,045
Net income/(loss) from financial
instruments designated at fair
value	350		(5		)	__		__		345		__			__		345
Dividend income	__		7			__		1,007		1,014		__			__		1,014
Net earned insurance premiums	9,925		80			__		__		10,005		__			__		10,005
Other operating income	1,612		39			1		334		1,986		7			(57	)	1,936
Total operating income	25,995		8,205			2,748		1,250		38,198		1,695			(57	)	39,836
Net insurance claims
incurred and movement
in policyholders' liabilities	(11,702	)	(72		)	__		__		(11,774	)	__			__		(11,774	)
Net operating income before
loan impairment charges	14,293		8,133			2,748		1,250		26,424		1,695			(57	)	28,062
Loan impairment charges	(482	)	(46		)	__		__		(528	)	(8	)		__		(536	)
Net operating income	13,811		8,087			2,748		1,250		25,896		1,687			(57	)	27,526
Operating expensesW	(5,315	)	(1,828		)	(308	)	(230	)	(7,681	)	(1,479	)		57		(9,103	)
Impairment loss on intangible assets	(11	)	(2		)	__		__		(13	)	__			__		(13	)
Operating profit	8,485		6,257			2,440		1,020		18,202		208			__		18,410
Gains less losses from financial
investments and fixed assets	(1	)	4			1		176		180		(1	)		__		179
Gain on reclassification of   Industrial Bank	----		----			----		----		----		8,454			----		8,454
Loss on reclassification of   Yantai Bank	----		----			----		----		----		(297	)		----		(297	)
Net surplus on property
revaluation	__		__			__		1,188		1,188		__			__		1,188
Share of profits from associates	455		2			__		__		457		105			__		562
Profit before tax	8,939		6,263			2,441		2,384		20,027		8,469			__		28,496
Share of profit before tax	31.4	%	22.0		%	8.6	%	8.3	%	70.3	%	29.7	%		__		100.0	%
Share of profit before tax as a % of   Hong Kong & other businesses	44.6	%	31.3		%	12.2	%	11.9	%	100.0	%
Operating profit excluding loan
impairment charges	8,967		6,303			2,440		1,020		18,730		216			__		18,946
WDepreciation/amortisation
included in operating
expenses	(49	)	(30		)	(3	)	(695	)	(777	)	(98	)		__		(875	)
At 31 December 2013
Total assets	309,758		329,252			308,783		104,027		1,051,820		118,476			(26,566	)	1,143,730
Total liabilities	650,309		221,964			57,195		16,924		946,392		108,495			(18,935	)	1,035,952
Interest in associates	2,022		10			__		__		2,032		30			__		2,062
Non-current assets acquired
during the year	1,734		26			1		3,359		5,120		108			__		5,228

 

 

 

	Hong Kong & other businesses
	Retail Banking		Corporate and								Mainland		Inter-
	and Wealth	Commercial									China	segment
Figures in HK$m	Management		Banking		Treasury		Other		Total		business	elimination			Total
Year ended
31 December 2012 (restated)
Net interest income/(expense)	8,761		5,289		1,676		(328	)	15,398		1,548		__		16,946
Net fee income/(expense)	3,310		1,566		(28	)	141		4,989		97		__		5,086
Net trading income/(loss)	527		446		988		(12	)	1,949		114		__		2,063
Net (loss)/income from financial
instruments designated at fair
value	381		(5	)	__		__		376		__		__		376
Dividend income	__		7		__		10		17		__		__		17
Net earned insurance premiums	10,776		171		__		__		10,947		__		__		10,947
Other operating income	948		31		__		239		1,218		15		(52	)	1,181
Total operating income	24,703		7,505		2,636		50		34,894		1,774		(52	)	36,616
Net insurance claims
incurred and movement
in policyholders' liabilities	(12,120	)	(115	)	__		__		(12,235	)	__		__		(12,235	)
Net operating income before
loan impairment charges	12,583		7,390		2,636		50		22,659		1,774		(52	)	24,381
Loan impairment (charges)/
releases	(375	)	51		1		__		(323	)	(63	)	__		(386	)
Net operating income	12,208		7,441		2,637		50		22,336		1,711		(52	)	23,995
Operating expenses W	(4,835	)	(1,758	)	(276	)	(316	)	(7,185	)	(1,375	)	52		(8,508	)
Operating profit	7,373		5,683		2,361		(266	)	15,151		336		__		15,487
Gains less losses from financial
investments and fixed assets	__		(3	)	__		(1	)	(4	)	(1	)	__		(5	)
Gain on disposal of a subsidiary	187		168		__		__		355		__		__		355
Net surplus on property
revaluation	__		__		__		776		776		__		__		776
Share of profits from associates	291		2		__		__		293		5,088		__		5,381
Profit before tax	7,851		5,850		2,361		509		16,571		5,423		__		21,994
Share of profit before tax	35.7	%	26.6	%	10.7	%	2.3	%	75.3	%	24.7	%	__		100.0	%
Share of profit before tax as a % of   Hong Kong & other businesses	47.4	%	35.3	%	14.2	%	3.1	%	100.0	%
Operating profit excluding loan
impairment charges	7,748		5,632		2,360		(266	)	15,474		399		__		15,873
W Depreciation/amortisation
included in operating
expenses	(45	)	(26	)	(4	)	(691	)	(766	)	(111	)	__		(877	)
At 31 December 2012
Total assets	292,217		289,667		326,257		63,480		971,621		125,232		(19,757	)	1,077,096
Total liabilities	621,266		197,590		47,163		38,295		904,314		95,146		(14,687	)	984,773
Interest in associates	1,644		8		__		__		1,652		23,003		__		24,655
Non-current assets acquired  during the year	57		27		1		167		252		107		__		359

 

 

Retail Banking and Wealth Management ('RBWM') in Hong Kong reported a 13.9% increase in profit before tax to HK$8,939m. Excluding the disposal gain arising from the sale of the general insurance manufacturing business in 2012, profit before tax was up 16.6%. Operating profit excluding loan impairment charges rose by 15.7% to HK$8,967m.

 

Net interest income grew by 13.7% to HK$9,959m, supported by growth in unsecured lending and the insurance business. Amid keen market competition, RBWM adopted a tailored pricing strategy to attract new funds from the affluent customer segment and customer deposits grew by 3.8% compared with the end of 2012. Leveraging our strong balance sheet, we increased customer lending by 4.2%.

 

Non-interest income grew by 13.4% to HK$4,334m, due mainly to the 16.3% increase in net fee income to HK$3,849m. The successful execution of multiple initiatives to further enhance wealth management capabilities drove a 17.8% rise in wealth management income to HK$6,242m.

 

The unsecured lending business remained as a strong revenue driver, with total revenue rising by 7.6%. Total credit cards in circulation rose by 5.0% to 2.46 million and we were the third largest card issuer of VISA and MasterCard. Supported by effective marketing campaigns and our quality credit card customer base, card spending and receivables grew by 12.9% and 5.3% respectively. The personal loan portfolio grew by 12.9% compared with a year earlier to HK$6,632m.

 

Against a backdrop of reduced activity and tighter government measures in the property sector, we used our one-stop service proposition and diverse range of sales channels to sustain residential mortgage business momentum. We maintained our number-three market position, with an average market share of 16.0% in terms of new mortgage registrations. The residential mortgage portfolio grew by 3.6% year on year and there was modest growth in the yield.

 

With improved investor sentiment and increased stock market activity, we achieved a 23.2% increase in investment services income to HK$2,849m - driven largely by the 42.8% rise in turnover of retail investment funds and the 21.6% increase in turnover of securities services. Achievements in meeting growing customer demand for renminbi-related retail investment products included becoming the first local financial institution to launch a Renminbi Qualified Foreign Institution Investor exchange-traded fund (ETF) - the Hang Seng China A Industry Top Index ETF.

 

Total operating income from the insurance business was up 13.5% at HK$3,393m. Our customer driven products and promotional offers helped us grow annualised new life insurance premiums by 15.6% and total life insurance policies in-force by 3.6%. Steps to enrich our medical protection product suite included the launch of PreciousLife Critical Illness Life Insurance.

 

We responded to the growing demand for high quality and personalised wealth management solutions by continuing to develop strong value propositions and further enhance our service channels. This supported solid year-on-year growth in the number of Prestige and Preferred Banking customers. We expanded our number of Prestige and Preferred Banking Centres to 12. Targeting busy professionals and the young affluent customer segment, we introduced an innovative multimedia service concept with the opening of two 'iPoint' sales and service outlets in Central and Causeway Bay MTR stations.

 

Other technology-driven service enhancements in 2013 included the launch of our 'iPower' platform in April, which offers customers the option to manage their investment funds portfolio online and enjoy attractive subscription offers.

 

Corporate and Commercial Banking ('CNC') in Hong Kong reported profit before tax of HK$6,263m - up 7.1% compared with a year earlier. Excluding the gain arising from the disposal of the general insurance manufacturing business in 2012, profit before tax was up 10.2%.Operating profit excluding loan impairment charges increased by 11.9% to HK$6,303m.

 

Net interest income rose by 9.2% to HK$5,777m. Despite strong competition, we grew customer deposits and customer loans by 11.7% and 11.4% respectively. Commercial loans increased by 13.5% and trade finance was up 8.9%.

 

Non-interest income increased by 12.1% to HK$2,356m. Net fee income and net trading income grew by 15.1% and 13.2% to HK$1,802m and HK$505m respectively.

 

Investment services income rose by 22.1%, due mainly to the increase in revenue from investment fund sales and stockbroking. Foreign exchange and treasury income grew by 13.2% as our renminbi structured foreign exchange products were well-received by the market.

 

Through targeted marketing campaigns, we captured more cross-border fund flows to achieve a 27.8% rise in income from remittances.

 

We were successful in attracting and retaining new quality SME customers. Mainland companies represented 51% of newly acquired customers in 2013 - up from 41% in 2012. New customers were the primary drivers of growth in SME customer deposits and the 20.5% increase in non-interest income from SME business. Service initiatives targeting high-value SME customers included launching the 'UpBiz' Integrated Account with a designated trade advisory team and relationship managers, and rolling out the Hang Seng UnionPay RMB Diamond Commercial Card. We also opened two new Business Banking Centres in Sheung Shui and Kwun Tong and upgraded our Business Mobile Banking platform to enable payment authorisations and fund transfers to registered third parties. 

 

Our support for SMEs continued to enjoy independent recognition. Awards received during 2013 include an 'SME's Best Partner Award' from the Hong Kong General Chamber of Small and Medium Business for the eighth consecutive year.

 

Innovative new trade and supply chain solutions - including pre-delivery receivable financing under vendor-managed inventory - helped us win the 'Hong Kong Domestic Trade Finance Bank of the Year' award from Asian Banking & Finance for the second consecutive year.

 

We will continue to develop new value propositions to help corporate customers strengthen their business connectivity within the Greater Chinaregion. To drive sustainable growth in customer deposits and capture more cross-border trade and fund flows, we will make further investments in transaction banking infrastructures and product development. We will step up portfolio management and optimise the return on risk-weighted assets through solution-based selling and effective bundling of wealth management and transaction banking services.

 

Treasury ('TRY') in Hong Kong reported profit before tax of HK$2,441m - a year-on-year increase of 3.4%. Operating profit excluding loan impairment charges also rose by 3.4% to HK$2,440m.

 

Net interest income decreased by 2.7% to HK$1,630m. With the low interest rate environment and flattened yield curves, there were few opportunities for yield enhancement. As debt securities in the balance sheet management portfolio matured, the proceeds could only be reinvested in instruments at prevailing low rates. Our capacity to generate interest income was also adversely affected by the reduction in the commercial surplus available for deployment.

 

Non-interest income grew by 16.5% to HK$1,118m. Total net trading income increased by HK$135m, or 13.7%, to HK$1,123m. Option income from structured products increased, due partly to our efforts to capitalise on rising demand for renminbi-denominated products. Foreign exchange trading income also recorded encouraging growth as market activity increased, particularly in the second quarter of the year.

 

We remained a leading provider of gold investment opportunities, launching the Hang Seng God of Wealth Gold Bar and a gold-linked structured deposit during the year.

 

To further diversify the revenue base, we focused on cross-selling of Global Markets products to RBWM and CNC customers, with closer collaboration helping us to better identify the specific needs of clients.

 

Mainland China business

 

With a more modest pace of domestic investment and consumption, the mainland economy recorded moderate growth in 2013.

 

Interest margins were under continuous pressure with the further liberalisation of interest rates in July and tighter market liquidity working to intensify competition for deposits.

 

Amid these challenges, Hang Seng Bank (China) Limited ('Hang Seng China') will continue to progress its long-term growth strategy. We further strengthened our mainland franchise through selective network expansion, tailored product offerings and improved customer segmentation strategies. At the same time, we enhanced cross-border services by continuing to build on the good connectivity between Hang Seng's Hong Kong and mainland operations. This approach helped us maintain growth momentum to record an 18.6% increase in advances to customers and a 17.3% rise in customer deposits compared with the end of 2012.

 

We opened two new sub-branches during 2013 - Shantou sub-branch and Fuzhou Gulou sub-branch - bringing the number of outlets to 48 across 18 cities at the end of 2013. We also commenced operations at Qianhai sub-branch. With 22 outlets in Guangdong province, our growing brand recognition and strong network in southern China created new opportunities to further develop cross-border trade business. Chengdu Branch and Shanghai Free Trade Zone sub-branch were opened in 2014 and we will continue to expand our market coverage by opening more outlets in strategic locations.

 

To support the continued development of business infrastructure and meet new capital requirements of mainland China, additional capital of RMB2bn was invested in our mainland operations in October 2013.  

 

	As reported				Constant currencyW
Year ended 31 December 2013   compared with 31 December 2012
Total operating income		-4.5	%		-6.2	%
Operating profit		-38.1	%		-38.5	%
At 31 December 2013   compared with 31 December 2012
Gross loans and advances to customers		18.6	%		14.9	%
Customer deposits		17.3	%		13.7	%

 

Hang Seng China's total operating income decreased by 4.5% when compared with 2012. Net interest income decreased by 5.7% as growth in interest income from customer lending was more than offset by the rise in deposit costs due to keen competition for deposits and volatility in the inter-bank market. Investments in network expansion and infrastructure to improve the capabilities and efficiency of Hang Seng China's operations led to a 7.6% increase in operating expenses. We continued with our prudent credit risk management strategy while growing lending to record lower loan impairment charges compared with a year earlier. As a result of the above, operating profit was down 38.1%.

 

The reported mainland business results for 2013 include a HK$8,454m gain arising from the reclassification of Industrial Bank, a HK$297m loss arising from the reclassification of Yantai Bank and a HK$111m share of profit from Yantai Bank. Reported results for 2012, when the bank's investments in Industrial Bank and Yantai Bank are equity accounted for, include a HK$5,088m share of profits from these associates.

 

 

^WConstant currency comparatives for 2012 referred to in the tables above are computed by translating the functional currency (renminbi) of Hang Seng's mainland China business into Hong Kong dollars with respect to:

- the income statement for 2012, at the average rates of exchange for 2013; and

- the balance sheet at 31 December 2012, at the prevailing rates of exchange on 31 December 2013.

 

 

Consolidated Income Statement

 

	Year ended 31 December
Figures in HK$m		2013			2012
					(restated)
Interest income		23,825			21,861
Interest expense		(5,221	)		(4,915	)
Net interest income		18,604			16,946
Fee income		7,329			6,298
Fee expense		(1,442	)		(1,212	)
Net fee income		5,887			5,086
Net trading income		2,045			2,063
Net income from financial instruments
designated at fair value		345			376
Dividend income		1,014			17
Net earned insurance premiums		10,005			10,947
Other operating income		1,936			1,181
Total operating income		39,836			36,616
Net insurance claims incurred and
movement in policyholders' liabilities		(11,774	)		(12,235	)
Net operating income before loan impairment
charges		28,062			24,381
Loan impairment charges		(536	)		(386	)
Net operating income		27,526			23,995
Employee compensation and benefits		(4,432	)		(4,256	)
General and administrative expenses		(3,796	)		(3,375	)
Depreciation of premises, plant and equipment		(762	)		(762	)
Amortisation of intangible assets		(113	)		(115	)
Operating expenses		(9,103	)		(8,508	)
Impairment loss on intangible assets		(13	)		__
Operating profit		18,410			15,487
Gains less losses from financial investments and fixed assets		179			(5	)
Gain on reclassification of Industrial Bank		8,454			__
Loss on reclassification of Yantai Bank		(297	)		__
Gain on disposal of a subsidiary		__			355
Net surplus on property revaluation		1,188			776
Share of profits from associates		562			5,381
Profit before tax		28,496			21,994
Tax expense		(1,818	)		(2,667	)
Profit for the year		26,678			19,327
Profit attributable to shareholders		26,678			19,327
Earnings per share (in HK$)		13.95			10.11

 

Details of dividends payable to shareholders of the bank attributable to the profit for the year are set out on page 33.

 

 

Consolidated Statement of Comprehensive Income

 

				Year ended 31 December
Figures in HK$m				2013			2012
							(restated)
Profit for the year				26,678			19,327
Other comprehensive income
Items that will be reclassified   subsequently to the income statement   when specific conditions are met:
Available-for-sale investment reserve:
- fair value changes taken to equity:
-- on debt securities				(913	)		380
-- on equity shares				(2,638	)		90
- fair value changes transferred to income statement:
-- on hedged items				689			22
-- on disposal				(1	)		(1	)
- share of changes in equity of associates:
-- fair value changes				(1	)		459
-- fair value changes transferred to income statement on
reclassification of Industrial Bank and Yantai Bank				111			__
- deferred taxes				57			(157	)
- exchange difference				851			(1	)
Cash flow hedging reserve:
- fair value changes taken to equity				432			341
- fair value changes transferred to income statement				(445	)		(328	)
- deferred taxes				2			(2	)
Exchange differences on translation of:
- financial statements of overseas branches,
subsidiaries and associates				438			28
- cumulative foreign exchange reserve transferred to income
statement on reclassification of Industrial Bank and Yantai   Bank				(2,150	)		__
- other				2			__
Others				30			(35	)
Items that will not be reclassified   subsequently to the income statement:
Premises:
- unrealised surplus on revaluation of premises				2,103			2,222
- deferred taxes				(337	)		(358	)
- exchange difference				3			__
Defined benefit plans:
- actuarial gains on defined benefit plans				778			724
- deferred taxes				(128	)		(120	)
Share-based payments				(3	)		(7	)
Other comprehensive income for the year, net of tax				(1,120	)		3,257
Total comprehensive income for the year				25,558			22,584
Total comprehensive income for the year attributable
to shareholders				25,558			22,584

 

 

Consolidated Balance Sheet

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
					(restated)
ASSETS
Cash and balances with banks		33,294			20,506
Placings with and advances to banks		131,363			140,382
Trading assets		31,996			34,399
Financial assets designated at fair value		6,987			8,343
Derivative financial instruments		6,646			5,179
Loans and advances to customers		586,240			536,162
Financial investments		282,845			253,408
Interests in associates		2,062			24,655
Investment properties		10,918			4,860
Premises, plant and equipment		21,000			19,262
Intangible assets		7,974			6,783
Other assets		22,405			23,157
Total assets		1,143,730			1,077,096
LIABILITIES AND EQUITY
Liabilities
Current, savings and other deposit accounts		824,996			769,147
Deposits from banks		11,826			19,845
Trading liabilities		62,117			59,853
Financial liabilities designated at fair value		489			464
Derivative financial instruments		5,246			4,118
Certificates of deposit and other
debt securities in issue		8,601			11,291
Other liabilities		20,467			21,653
Liabilities to customers under insurance contracts		85,844			81,670
Current tax liabilities		692			588
Deferred tax liabilities		3,850			4,323
Subordinated liabilities		11,824			11,821
Total liabilities		1,035,952			984,773
Equity
Share capital		9,559			9,559
Retained profits		78,679			59,683
Other reserves		15,334			19,257
Proposed dividends		4,206			3,824
Shareholders' funds		107,778			92,323
Total equity and liabilities		1,143,730			1,077,096

 

 

Consolidated Statement of Changes in Equity

 

				Year ended 31 December
Figures in HK$m				2013		2012
Share capital
At beginning and end of the year				9,559		9,559
Retained profits (including proposed dividends)
At beginning of the year				63,507		53,152
Dividends to shareholders
- dividends approved in respect of the      previous year				(3,824	)	(3,633	)
- dividends declared in respect of the      current year				(6,309	)	(6,309	)
Transfer				2,184		373
Total comprehensive income     for the year				27,327		19,924
				82,885		63,507
Other reserves
Premises revaluation reserve
At beginning of the year				13,790		12,280
Transfer				(655	)	(354	)
Total comprehensive income for the year				1,769		1,864
				14,904		13,790
Available-for-sale investment reserve
At beginning of the year				227		(561	)
Transfer				__		(4	)
Total comprehensive income for the year				(1,845	)	792
				(1,618	)	227
Cash flow hedging reserve
At beginning of the year				17		6
Total comprehensive income for the year				(11	)	11
				6		17
Foreign exchange reserve
At beginning of the year				3,071		3,043
Transfer				(64	)	__
Total comprehensive income for the year				(1,712	)	28
				1,295		3,071
Other reserves
At beginning of the year				2,152		2,155
Cost of share-based payment arrangements				30		47
Transfer				(1,465	)	(15	)
Total comprehensive income for the year				30		(35	)
				747		2,152

 

 

				Year ended 31 December
Figures in HK$m				2013		2012
Total equity
At beginning of the year				92,323		79,634
Dividends to shareholders				(10,133	)	(9,942	)
Cost of share-based payment      arrangements				30		47
Total comprehensive income     for the year				25,558		22,584
				107,778		92,323

 

 

Consolidated Cash Flow Statement

 

	Year ended 31 December
Figures in HK$m		2013				2012
						(restated)
Net cash inflow/ (outflow) from operating activities		23,102				(7,905	)
Cash flows from investing activities
Dividends received from associates		__				658
Purchase of an interest in an associate		__				(32	)
Purchase of available-for-sale investments		(43,174	)			(36,218	)
Purchase of held-to-maturity debt securities		(1,563	)			(747	)
Proceeds from sale or redemption of
available-for-sale investments		33,488				54,839
Proceeds from redemption of
held-to-maturity debt securities		84				573
Net cash inflow from the sale of loan portfolio		663				48
Net cash inflow from the sale of a subsidiary		__				1,382
Purchase of properties, plant and equipment and intangible assets		(3,589	)			(359	)
Proceeds from sale of properties, plant and equipment and assets held for sale		911				87
Interest received from available-for-sale investments		1,525				1,873
Dividends received from available-for-sale investments		1,013				16
Net cash (outflow)/ inflow from investing activities		(10,642	)			22,120
Cash flows from financing activities
Dividends paid		(10,133	)			(9,942	)
Interest paid for subordinated liabilities		(311	)			(289	)
Issue of subordinated liabilities		__				2,326
Repayment of subordinated liabilities		__				(2,326	)
Net cash outflow from financing activities		(10,444	)			(10,231	)
Increase in cash and cash equivalents		2,016				3,984
Cash and cash equivalents at 1 January		115,947				113,637
Effect of foreign exchange rate changes		(2,184	)			(1,674	)
Cash and cash equivalents at 31 December		115,779				115,947

 

 

Financial Review

 

Net interest income

 

Figures in HK$m		2013			2012
Net interest income/(expense) arising from:
- financial assets and liabilities that are not at fair value
through profit and loss		20,242			18,162
- trading assets and liabilities		(1,697	)		(1,268	)
- financial instruments designated at fair value		59			52
		18,604			16,946
Average interest-earning assets		986,606			917,236
Net interest spread		1.77	%		1.73	%
Net interest margin		1.89	%		1.85	%

 

Net interest income rose by HK$1,658m, or 9.8%, to HK$18,604m, driven mainly by the 7.6% increase in average interest-earning assets and an improvement in the net interest margin.

 

The rise in average interest-earning assets was underpinned by 11.7% growth in average customer lending, notably in mortgage, corporate and trade-related lending. The rise in net interest income also includes higher contributions from the insurance debt securities portfolio - which grew by 8.5% - and from offshore RMB business following the increased deployment of RMB funds in customer lending, interbank placements and debt securities.

 

Net interest margin and net interest spread both improved by four basis points to 1.89% and 1.77% respectively. In Hong Kong, asset spreads on customer loans widened, with improvement in spreads on term lending resulting from higher yield partly offset by the compression of spreads for trade-related lending due to keen competition. Average customer deposit balances increased and deposit spreads improved benefitting from a lower funding cost. On the Mainland, net interest margin and net interest spread were under continuous downward pressure in light of the further liberalisation of interest rates and strong competition for deposits.

 

Net interest income in the second half of 2013 grew by HK$666m, or 7.4%, compared with the first half, reflecting the combined effect of an increase in average interest earning assets, widening loan spreads, improved returns from offshore RMB business, less volatility in the mainland interbank market, and more calendar days in the second half.  

 

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).

 

The table below presents the net interest income of Hang Seng, as included in the HSBC Group accounts:

 

Figures in HK$m		2013			2012
Net interest income and expense reported   as 'Net interest income'
- Interest income		23,613			21,537
- Interest expense		(3,371	)		(3,375	)
- Net interest income		20,242			18,162
Net interest income and expense reported   as 'Net trading income'		(1,697	)		(1,268	)
Net interest income and expense reported   as 'Net income from financial instruments   designated at fair value'		59			52
Average interest-earning assets		951,178			865,876
Net interest spread		2.03	%		2.00	%
Net interest margin		2.13	%		2.10	%

 

Net fee income

 

Figures in HK$m		2013				2012
- Stockbroking and related services		1,073				941
- Retail investment funds		1,548				1,130
- Insurance agency		441				367
- Account services		354				353
- Private banking service fee		104				93
- Remittances		348				301
- Cards		2,142				1,865
- Credit facilities		370				356
- Trade services		585				544
- Other		364				348
Fee income		7,329				6,298
Fee expense		(1,442	)			(1,212	)
		5,887				5,086

 

Service enhancements and steps to diversify revenue generated a broad-based increase of HK$801m, or 15.7%, in net fee income to HK$5,887m when compared with 2012.

 

Strong customer demand and favourable market sentiment drove the 14.0% increase in stockbroking and related services fee income and growth of 37.0% in retail investment funds fee income.

 

Insurance-related fee income rose by 20.2%, benefitting from the increase in non-life insurance products distribution commission during the year following the bank's disposal of its general insurance manufacturing business in 2012, though this also led to a corresponding fall in non-life insurance underwriting profit.

 

Gross fee income from credit card business grew by 14.9%. The bank's effective marketing and premium customer base supported a 12.9% rise in card spending and 5.1% increase in the number of cards in circulation. Credit facilities fee income rose by 3.9%, due mainly to higher fees from increased corporate lending.

 

Fees from remittances and trade-related service income recorded growth of 15.6% and 7.5% respectively, underpinned by increased business volumes.   

 

 

Net trading income

 

Figures in HK$m		2013			2012
- Foreign exchange		1,964			1,986
- Interest rate derivatives		64			28
- Debt securities		(35	)		15
- Equities and other trading		59			93
Dealing profits		2,052			2,122
Net loss from hedging activities		(7	)		(59	)
		2,045			2,063

 

Net trading income was broadly in line with 2012. Dealing profits fell by HK$70m, or 3.3%, to HK$2,052m. Foreign exchange income decreased slightly, with higher foreign exchange revenues from increased customer activities and increased demand for foreign exchange option-linked structured products more than offset by lower income from funding swaps^Wactivities. Income from interest rate derivatives, debt securities, equities and other trading activities fell by HK$48m, or 35.3%, to HK$88m. This was primarily due to losses on equity options backing a life endowment product compared with a gain last year, which resulted in an offsetting movement in 'Net insurance claims incurred and movement in policyholders' liabilities'. Debt securities also recorded a loss compared with a gain in 2012, reflecting the movement in market interest rates. These declines were partly offset by higher gains on foreign exchange linked structured products and interest rate derivatives trading. The net loss from hedging activities was lower than 2012.

 

 

^WFrom time to time Treasury 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 HKAS 39, 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.

 

 

Net income from financial instruments designated at fair value

 

Figures in HK$m		2013			2012
Net income on assets designated at fair value
which back insurance and investment contracts		345			376

Other operating income

 

Figures in HK$m		2013			2012
Rental income from investment properties		293			197
Movement in present value of in-force long-term
insurance business		1,195			815
Other		448			169
		1,936			1,181

 

Other operating income rose by HK$755m, or 63.9%, to HK$1,936m compared with 2012, driven by the increase in rental income, growth in the movement in present value of in-force long-term insurance business and a revaluation gain on a property held by the insurance business. The increase in the movement in present value of in-force long-term insurance business was due mainly to the combined effect of the increase in volume of new life insurance business written during the year and updated actuarial assumptions.

 

 

Analysis of income from wealth management business

 

Figures in HK$m		2013				2012
						(restated)
Investment income:
- retail investment funds		1,548				1,130
- structured investment productsW		965				977
- stockbroking and related services		1,041				910
- margin trading and others		358				275
		3,912				3,292
Insurance income:
- life insurance		3,479				3,016
- general insurance and others		207				310
		3,686				3,326
Total		7,598				6,618

 

^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 profits generated from the selling of structured investment products in issue, reported under net trading income.

 

The bank maintained its strong position for wealth management business by leveraging its diverse portfolio of investment and insurance products to provide customers with wealth management solutions tailored to their specific needs. This supported a strong 14.8% year-on-year growth in income to HK$7,598m.

 

Improved investment sentiment and customer-focused initiatives underpinned investment services income growth of 18.8% to HK$3,912m. Sales of retail investment funds gained strong momentum to achieve a 37.0% increase in income, driven by a 42.9% rise in retail investment fund turnover. Stockbroking and related services income increased by 14.4%.

 

 

Analysis of insurance business income

 

Figures in HK$m		2013				2012
Life insurance:
- net interest income and fee income		3,033				2,845
- investment returns on life insurance funds (including
share of associate's profit and surplus on property   revaluation backing insurance contracts)		1,020				761
- net earned insurance premiums		10,005				10,774
- net insurance claims incurred and movement
in policyholders' liabilities		(11,774	)			(12,179	)
- movement in present value of in-force
long-term insurance business		1,195				815
		3,479				3,016
General insurance and others		207				310
Total		3,686				3,326

 

 

Insurance income grew by HK$360m, or 10.8%, to HK$3,686m.

 

New and enhanced insurance products offered protection strategies for a wide range of life stages. Total policies in-force and total annualised new premiums at 31 December 2013 were up 3.7% and 16.2% respectively year-on-year. In response to the low interest rate environment and to achieve stable growth in life insurance income, part of the insurance funds investment portfolio was invested in commercial property and this returned a revaluation gain in 2013.

 

Net interest income and fee income from the life insurance investment portfolio rose by 6.6% as a result of net inflows from new and renewal life insurance business. Investment returns on life insurance funds (including the bank's share of an associate's profit and the fair value gain on a commercial property backing insurance contracts) improved by 34.0% and were reported under 'net trading income', 'net income/(loss) from financial instruments designated at fair value', 'other operating income' and 'share of profits from associates'. To the extent that the investment return is attributable to policyholders, there is an offsetting movement reported under 'net insurance claims incurred and movement in policyholders' liabilities' or 'movement in present value of in-force long-term insurance business'. The movement in present value of in-force long-term insurance business increased by 46.6%, due mainly to the combined effect of higher life insurance business sales during the year and updated actuarial assumptions. 

 

General insurance business income decreased by 33.2% to HK$207m following the completion of the disposal of our general insurance manufacturing business in the second half of 2012. The decrease in non-life insurance underwriting profit was offset by a corresponding increase in non-life insurance products distribution commission reported under 'net fee income'.  

 

 

Loan impairment charges

 

Figures in HK$m		2013			2012
Net charge for impairment of loans and advances   to customers:
Individually assessed impairment allowances:
- new allowances		(191	)		(294	)
- releases		91			224
- recoveries		16			13
		(84	)		(57	)
Net charge for collectively assessed impairment   allowances		(452	)		(329	)
Net charge for loan impairment		(536	)		(386	)

 

Loan impairment charges increased by HK$150m, or 38.9%, to HK$536m compared with a year earlier. Overall credit quality was relatively stable with loan impairment ratios remaining at a low level.  

 

Individually assessed impairment charges rose by HK$27m, or 47.4%, reflecting lower releases for corporate and commercial banking customers in 2013. There was a reduction in loan impairment charges for mainland operations.

 

Collectively assessed impairment charges rose by HK$123m, or 37.4%. Higher charges on the credit card and personal loan portfolios were recorded, reflecting the updated assumptions used in collective assessment models. Impairment allowances for loans not individually identified as impaired recorded a lower net release compared with 2012.

 

 

Operating expenses

 

Figures in HK$m		2013			2012
				(restated)
Employee compensation and benefits:
- salaries and other costs		3,991			3,800
- retirement benefit costs		441			456
		4,432			4,256
General and administrative expenses:
- rental expenses		645			559
- other premises and equipment		1,098			964
- marketing and advertising expenses		713			617
- other operating expenses		1,340			1,235
		3,796			3,375
Depreciation of premises, plant
and equipment		762			762
Amortisation of intangible assets		113			115
		9,103			8,508
Cost efficiency ratio		32.4	%		34.9	%
Full-time equivalent staff numbers by region		2013			2012
Hong Kong and others		8,001			7,797
Mainland		1,855			1,883
Total		9,856			9,680

 

Operating expenses rose by HK$595m, or 7.0%, compared with 2012,reflecting the bank's continued investment in new business platforms and mainland operations to support long-term growth. Mainland-related operating expenses increased by 7.6% due to ongoing investment in enhancing Hang Seng China's infrastructure and service capabilities.

 

Employee compensation and benefits increased by HK$176m, or 4.1%. Salaries and other costs increased by 5.0%, reflecting the annual salary increment and the increase in staff headcount. General and administrative expenses were up 12.5%, due mainly to the rise in marketing expenditure to support business growth. Rental expenses rose as a result of increased rents for branches in Hong Kong and on the Mainland. Other premises and equipment expenses also increased as a result of higher processing charges and information technology expenses.

 

At 31 December 2013, the group's number of full-time equivalent staff was up by 176 compared with the end of 2012.

 

The bank continued to focus on enhancing operational efficiency while maintaining growth momentum. With the increase in net operating income before loan impairment charges outpacing the growth in operating expenses, the cost efficiency ratio improved by 2.5 percentage points to 32.4%.

 

 

Gains less losses from financial investments and fixed assets 

 

Figures in HK$m		2013			2012
Net gains from disposal of
available-for-sale securities		1			1
Gains less losses on disposal of assets held for sale		177			__
Gains less losses on disposal of loans and advances		5			(4	)
Gains less losses on disposal of fixed assets		(4	)		(2	)
		179			(5	)

 

Net gain on reclassification of Industrial Bank Co., Ltd. ('Industrial Bank') and Yantai Bank Co., Ltd. ('Yantai Bank')

 

Figures in HK$m		2013			2012
Gain on reclassification of Industrial Bank		8,454			__
Loss on reclassification of Yantai Bank		(297	)		__
		8,157			__

 

On 7 January 2013, Industrial Bank completed a private placement of additional share capital to a number of third parties, thereby diluting the group's equity holding from 12.8% to 10.9%. As a result of this and other factors, the group considers that it is no longer in a position to exercise significant influence over Industrial Bank and it therefore ceased to account for the investment as an associate from that date, giving rise to an accounting gain of HK$8,454m.

 

The group's investment in Yantai Bank was equity accounted with effect from January 2009, reflecting the group's significant influence over this associate. On 13 December 2013, Yantai Bank approved an increase in its registered share capital to enable a private placement of additional share capital to a third party, leading to the group's equity holding being diluted from 20% to 15.09%. As a result of this and other factors, the group considers that it is no longer in a position to exercise significant influence over Yantai Bank and ceased to account for its investment as an associate from that date. Thereafter, the holding in Yantai Bank is classified as an available-for-sale financial investment. The loss arising from this reclassification was HK$297m.

 

 

Gain on disposal of a subsidiary 

 

Figures in HK$m		2013			2012
Net gain from disposal of a
subsidiary		__			355

The HK$355m gain on disposal of a subsidiary in 2012 represented the disposal of the group's general insurance manufacturing business in the second half of the year.

 

 

Tax expense

 

Taxation in the consolidated income statement represents:

 

Figures in HK$m		2013			2012 (restated)
Current tax - provision for Hong Kong profits tax
Tax for the year		2,534			2,225
Adjustment in respect of prior years		(14	)		(75	)
Current tax - taxation outside Hong Kong
Tax for the year		213			92
Adjustment in respect of prior years		7			(2	)
Deferred tax
Origination and reversal of temporary differences		(922	)		427
Total tax expense		1,818			2,667

 

The current tax provision is based on the estimated assessable profit for 2013, and is determined for the bank and its subsidiaries operating in Hong Kong by using the Hong Kong profits tax rate of 16.5% (unchanged from 2012). 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. The release in deferred tax was mainly related to the reclassification of Industrial Bank as a financial investment.

 

 

Earnings per share

 

The calculation of earnings per share in 2013 is based on earnings of HK$26,678m (HK$19,327m in 2012) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from 2012).

 

 

Dividends per share

 

		2013			2012
	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	2.20	4,206		2.00	3,824
	5.50	10,515		5.30	10,133

 

 

Segmental analysis

 

Hong Kong Financial Reporting Standard 8 ('HKFRS 8') requires segmental disclosure to be based on the way that the group's chief operating decision-maker regards and manages the group, with the amounts reported for each reportable segment being the measures reported to the group's chief operating decision-maker for the purpose of assessing segmental performance and making decisions about operating matters. To align with the information reported internally to the group's senior executive management for the purposes of resources allocation and performance assessment, the group has presented the following five reportable segments. Consolidation adjustments made in preparing the group's financial statements and inter-segment elimination of income or expenses upon consolidation are included in the 'Inter-segment elimination'.

 

Hong Kong and other businesses segment

·    Retail Banking and Wealth Managementactivities offer a broad range of products and services to meet the personal banking, consumer lending and wealth management needs of individual customers. Personal banking products typically include current and savings accounts, mortgages and personal loans, credit cards, insurance and wealth management.

·    Corporate and Commercial Banking activities include the provision of financial services, payments and cash management, international trade finance, insurance, wealth management and tailored financial solutions to corporate and commercial customers.

·    Treasury activities are mainly the provision of treasury operation services in credit, interest rates, foreign exchange, money markets and securities services. 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, equity shares and subordinated debt funding.

 

Mainland China business segment

·    Mainland China business segment comprises the business of Hang Seng Bank (China) Limited and the bank's share of profit from mainland associates.

 

 

(a) Segmental result

 

For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the business segments by way of internal capital allocation and fund transfer-pricing mechanisms. Cost allocation is based on the direct costs incurred by the respective business segments and apportionment of management overheads. Bank-owned premises are reported under the 'Other' segment. When these premises are utilised by Global Businesses, notional rent will be charged to the relevant business segments based on market rates.

 

Profit before tax contributed by the business segments for the periods stated is set out in the table below. More business segment analysis and discussion is set out in the 'Segmental analysis' section on page 10.

 

	Hong Kong & other businesses
	Retail Banking		Corporate and																			Mainland
	and Wealth	Commercial																			China
Figures in HK$m	Management		Banking								Treasury						Other			Total	business					Total
Year ended 31 December 2013
Profit before tax	8,939		6,263								2,441						2,384			20,027		8,469				28,496
Share of profit before tax	31.4	%	22.0							%	8.6					%	8.3		%	70.3	%	29.7			%	100.0	%
Share of profit before tax as a   % of Hong Kong & other   businesses	44.6	%	31.3							%	12.2					%	11.9		%	100.0	%
Year ended 31 December 2012 (restated)
Profit before tax	7,851		5,850								2,361						509			16,571		5,423				21,994
Share of profit before tax	35.7	%	26.6							%	10.7					%	2.3		%	75.3	%	24.7			%	100.0	%
Share of profit before tax as a   % of Hong Kong & other   businesses	47.4	%	35.3							%	14.2					%	3.1		%	100.0	%

 

 

(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.

 

											Inter-segment
Figures in HK$m	Hong Kong			Mainland			Americas		Others		elimination		Total
Year ended 31 December 2013
Income and expense
Total operating income		37,458			1,695		600		171		(88	)	39,836
Profit before tax		19,343			8,469		573		111		__		28,496
At 31 December 2013
Total assets		1,048,106			118,476		185		12,702		(35,739	)	1,143,730
Total liabilities		943,141			108,495		48		12,356		(28,088	)	1,035,952
Equity		104,965			9,981		137		346		(7,651	)	107,778
Share capital		9,559			8,847		18		12		(8,877	)	9,559
Interest in associates		2,032			30		__		__		__		2,062
Non-current assetsW		38,786			1,105		__		1		__		39,892
Year ended 31 December 2012 (restated)
Income and expense
Total operating income		33,682			1,774		1,097		144		(81	)	36,616
Profit before tax		15,428			5,423		1,047		96		__		21,994
At 31 December 2012
Total assets		967,288			125,232		61,296		11,768		(88,488	)	1,077,096
Total liabilities		901,369			95,146		60,129		11,523		(83,394	)	984,773
Equity		65,919			30,086		1,167		245		(5,094	)	92,323
Share capital		9,559			6,112		18		13		(6,143	)	9,559
Interest in associates		1,652			23,003		__		__		__		24,655
Non-current assetsW		29,872			1,032		__		1		__		30,905

^W Non-current assets consist of properties, plant and equipment, goodwill and other intangible assets.

 

 

Analysis of assets and liabilities by remaining maturity

 

The maturity analysis is based on the remaining contractual maturity at the balance sheet date, with the exception of the trading portfolio that may be sold before maturity and is accordingly recorded as 'Trading'.

 

One month

Over one

Over three

Over one

Repayable on

or less but not on

month but within three

months but within

year but within five

Over five

No contractual

Figures in HK$m

demand

demand

months

one year

years

years

Trading

maturity

Total

At 31 December 2013

Assets

Cash and balances with

banks

33,294

__

__

__

__

__

__

__

33,294

Placings with and

advances to banks

2,645

62,104

58,380

6,206

__

2,028

__

__

131,363

Trading assets

__

__

__

__

__

__

31,996

__

31,996

Financial assets designated

at fair value

__

__

5

38

482

287

__

6,175

6,987

Derivative financial

instruments

__

__

177

210

372

17

5,870

__

6,646

Loans and advances

to customers

10,528

46,148

49,992

117,086

193,905

168,581

__

__

586,240

Financial investments

__

35,239

52,689

60,243

66,896

39,469

__

28,309

282,845

Interest in associates

__

__

__

__

__

__

__

2,062

2,062

Investment properties

__

__

__

__

__

__

__

10,918

10,918

Premises, plant and

equipment

__

__

__

__

__

__

__

21,000

21,000

Intangible assets

__

__

__

__

__

__

__

7,974

7,974

Other assets

8,691

5,624

3,808

2,275

1,439

130

__

438

22,405

55,158

149,115

165,051

186,058

263,094

210,512

37,866

76,876

1,143,730

Liabilities

Current, savings and other

deposit accounts

601,180

113,464

71,154

36,116

3,081

1

__

__

824,996

Deposits from banks

3,868

7,570

388

__

__

__

__

__

11,826

Trading liabilities

__

__

__

__

__

__

62,117

__

62,117

Financial liabilities

designated at fair value

2

__

__

__

__

487

__

__

489

Derivative financial

instruments

__

15

6

216

362

122

4,525

__

5,246

Certificates of deposit and

other debt securities

in issue

__

__

__

3,949

4,652

__

__

__

8,601

Other liabilities

5,977

5,240

3,917

2,391

167

71

__

2,704

20,467

Liabilities to customers

under insurance contracts

__

__

__

__

__

__

__

85,844

85,844

Current tax liabilities

__

__

__

692

__

__

__

__

692

Deferred tax liabilities

__

__

__

__

__

__

__

3,850

3,850

Subordinated liabilities

__

__

__

__

__

11,824

__

__

11,824

611,027

126,289

75,465

43,364

8,262

12,505

66,642

92,398

1,035,952

 

 

One month

Over one

Over three

Over one

Repayable on

or less but not on

month but within three

months but within

year but within five

Over five

No contractual

Figures in HK$m

demand

demand

months

one year

years

years

Trading

maturity

Total

At 31 December 2012 (restated)

Assets

Cash and balances with

banks

20,506

__

__

__

__

__

__

__

20,506

Placings with and

advances to banks

4,179

73,188

54,329

6,987

__

1,699

__

__

140,382

Trading assets

__

__

__

__

__

__

34,399

__

34,399

Financial assets designated

at fair value

__

__

__

3,618

213

216

__

4,296

8,343

Derivative financial

instruments

__

2

15

103

219

__

4,840

__

5,179

Loans and advances

to customers

10,414

40,796

44,088

106,540

178,956

155,368

__

__

536,162

Financial investments

__

20,652

66,362

47,075

77,379

40,535

__

1,405

253,408

Interest in associates

__

__

__

__

__

__

__

24,655

24,655

Investment properties

__

__

__

__

__

__

__

4,860

4,860

Premises, plant and

equipment

__

__

__

__

__

__

__

19,262

19,262

Intangible assets

__

__

__

__

__

__

__

6,783

6,783

Other assets

12,282

4,094

2,892

3,098

209

220

__

362

23,157

47,381

138,732

167,686

167,421

256,976

198,038

39,239

61,623

1,077,096

Liabilities

Current, savings and other

deposit accounts

566,743

102,915

64,682

33,919

888

__

__

__

769,147

Deposits from banks

3,369

13,982

2,491

3

__

__

__

__

19,845

Trading liabilities

__

__

__

__

__

__

59,853

__

59,853

Financial liabilities

designated at fair value

1

__

__

__

__

463

__

__

464

Derivative financial

instruments

__

__

20

30

1,053

252

2,763

__

4,118

Certificates of deposit and

other debt securities

in issue

__

__

__

7,353

3,938

__

__

__

11,291

Other liabilities

7,745

4,627

2,592

2,960

55

18

__

3,656

21,653

Liabilities to customers

under insurance contracts

__

__

__

__

__

__

__

81,670

81,670

Current tax liabilities

__

__

__

588

__

__

__

__

588

Deferred tax liabilities

__

__

__

__

__

__

__

4,323

4,323

Subordinated liabilities

__

__

__

__

__

11,821

__

__

11,821

577,858

121,524

69,785

44,853

5,934

12,554

62,616

89,649

984,773

 

 

 

Cash and balances with banks

	At 31 December			At 31 December
Figures in HK$m		2013			2012
					(restated)
Cash in hand		6,005			4,465
Balances with central banks		16,712			8,973
Balances with banks		10,577			7,068
		33,294			20,506

 

 

Placings with and advances to banks

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Placings with and advances to banks
maturing within one month		64,749			77,367
Placings with and advances to banks
maturing after one month
but less than one year		64,586			61,316
Placings with and advances to banks
maturing after one year		2,028			1,699
		131,363			140,382

 

 

Trading assets

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Treasury bills		18,336			26,808
Certificates of deposit		__			400
Other debt securities		5,471			6,106
Debt securities		23,807			33,314
Investment funds		28			30
Total trading securities		23,835			33,344
OtherW		8,161			1,055
Total trading assets		31,996			34,399
Debt securities:
- listed in Hong Kong		3,783			3,046
- listed outside Hong Kong		169			238
		3,952			3,284
- unlisted		19,855			30,030
		23,807			33,314
Investment funds:
- listed in Hong Kong		28			30
Total trading securities		23,835			33,344
Debt securities:
Issued by public bodies:
- central governments and central banks		22,650			31,105
- other public sector entities		__			80
		22,650			31,185
Issued by other bodies:
- banks		853			934
- corporate entities		304			1,195
		1,157			2,129
		23,807			33,314
Investment funds:
Issued by corporate entities		28			30
Total trading securities		23,835			33,344

 

^W This represents the amount receivable from counterparties on trading transactions not yet settled.

 

 

Trading assets decreased by HK$2.4bn, or 7.0%, compared with the end of 2012 reflecting the reduction in Hong Kong Exchange Fund bills. At 31 December 2013, trading assets were mostly Hong Kong Exchange Fund bills with short tenors.

 

 

 

Financial assets designated at fair value

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Debt securities		812			4,047
Equity shares		3,639			1,632
Investment funds		2,536			2,664
		6,987			8,343
Debt securities:
- listed in Hong Kong		103			38
- listed outside Hong Kong		541			336
		644			374
- unlisted		168			3,673
		812			4,047
Equity shares:
- listed in Hong Kong		2,072			1,632
- listed outside Hong Kong		1,546			__
		3,618			1,632
- unlisted		21			__
		3,639			1,632
Investment funds:
- listed in Hong Kong		32			30
- listed outside Hong Kong		314			599
		346			629
- unlisted		2,190			2,035
		2,536			2,664
		6,987			8,343
Debt securities:
Issued by public bodies:
- central governments and central banks		358			181
- other public sector entities		44			1
		402			182
Issued by other bodies:
- banks		208			3,687
- corporate entities		202			178
		410			3,865
		812			4,047
Equity shares:
Issued by banks		634			370
Issued by public sector entities		12			13
Issued by corporate entities		2,993			1,249
		3,639			1,632
Investment funds:
Issued by banks		__			400
Issued by corporate entities		2,536			2,264
		2,536			2,664
		6,987			8,343

 

 

Loans and advances to customers

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Gross loans and advances to customers		587,688			537,571
Less:
Loan impairment allowances:
- individually assessed		(709	)		(681	)
- collectively assessed		(739	)		(728	)
		586,240			536,162

 

 

Loan impairment allowances against loans and advances to customers

		Individually		Collectively
Figures in HK$m		assessed		assessed					Total
At 1 January 2013		681			728				1,409
Amounts written off		(69	)		(494		)		(563	)
Recoveries of advances
written off in previous years		16			52				68
New impairment allowances
charged to income statement		191			562				753
Impairment allowances released
to income statement		(107	)		(110		)		(217	)
Unwinding of discount of loan
impairment allowances
recognised as 'interest income'		(5	)		(4		)		(9	)
Exchange		2			5				7
At 31 December 2013		709			739				1,448

 

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

 

	At 31 December			At 31 December
		2013			2012
		%			%
Loan impairment allowances:
- individually assessed		0.12			0.13
- collectively assessed		0.13			0.13
Total loan impairment allowances		0.25			0.26

Total loan impairment allowances as a percentage of gross loans and advances to customers were maintained at a low level, with a year-on-year improvement of one-basis-point to 0.25% at 31 December 2013. Individually assessed allowances as a percentage of gross loans and advances also improved by one basis point to 0.12%. Collectively assessed allowances as a percentage of gross loans and advances remained unchanged compared with the end of 2012 at 0.13%.

 

 

Impaired loans and advances to customers and allowances

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Gross impaired loans and advances		1,311			1,340
Individually assessed allowances		(709	)		(681	)
		602			659
Individually assessed allowances
as a percentage of
gross impaired loans and advances		54.1	%		50.8	%
Gross impaired loans and advances
as a percentage of
gross loans and advances to customers		0.22	%		0.25	%

 

Impaired loans and advances to customers are those loans and advances where objective evidence exists that full repayment of principal or interest is considered unlikely.

 

Gross impaired loans and advances fell by HK$29m, or 2.2%, to HK$1,311m compared with the end of 2012. Gross impaired loans and advances as a percentage of gross loans and advances to customers improved by three basis points to 0.22%.

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Gross individually assessed
impaired loans and advances		1,157			1,190
Individually assessed allowances		(709	)		(681	)
		448			509
Gross individually assessed
impaired loans and advances
as a percentage of
gross loans and advances to customers		0.20	%		0.22	%
Amount of collateral which
has been taken into account
in respect of individually assessed
impaired loans and advances to customers		516			498

 

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 loans and advances to customers, only the amount of collateral up to the gross loans and advances is included.

 

 

Overdue loans and advances to customers

 

Loans and advances that are more than three months overdue and their expression as a percentage of gross loans and advances to customers are as follows:

 

	At 31 December				At 31 December
			2013				2012
	HK$m		%		HK$m		%
Gross loans and advances
which have been overdue
with respect to either principal
or interest for periods of:
- more than three months but
not more than six months	121		__		114		__
- more than six months but
not more than one year	73		__		143		__
- more than one year	637		0.1		662		0.2
	831		0.1		919		0.2

 

Loans and advances with a specific repayment date are classified as overdue when the principal or interest is overdue and remains unpaid at year-end. Loans and advances repayable by regular instalments are treated as overdue when an instalment payment is overdue and remains unpaid at year-end. Loans and 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 loans and advances have remained continuously outside the approved limit advised to the borrower for more than the overdue period in question.

 

Overdue loans and advances decreased by HK$88m, or 9.6%, to HK$831m compared with the end of 2012. Overdue loans and advances as a percentage of gross loans and advances to customers improved to 0.1% at the end of 2013 compared with 0.2% at 31 December 2012.

 

 

Rescheduled loans and advances to customers

 

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

 

	At 31 December				At 31 December
			2013				2012
	HK$m		%		HK$m		%
Rescheduled loans and advances to customers	123		__		196		__

 

Rescheduled loans and advances to customers are those loans and 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 loan 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 loans and advances to customers that have been overdue for more than three months under the rescheduled terms are reported as overdue loans and advances (page 43).

 

 

Segmental analysis of loans and advances to customers by geographical area

 

Loans and 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 a loan is guaranteed by a party located in an area that is different from that of the counterparty.

 

Figures in HK$m	At 31 December 2013
	Gross loans and advances		Individually  impaired loans and advances		Overdue loans and advances		Individually assessed allowances		Collectively assessed allowances
Hong Kong		480,545		924		642		527		589
Rest of Asia-Pacific		99,987		233		189		182		140
Others		7,156		__		__		__		10
		587,688		1,157		831		709		739

 

Figures in HK$m	At 31 December 2012
	Gross  loans and advances		Individually  impaired loans and advances		Overdue loans and advances		Individually assessed allowances		Collectively assessed allowances
Hong Kong		447,310		948		718		503		561
Rest of Asia-Pacific		84,428		218		201		177		156
Others		5,833		24		__		1		11
		537,571		1,190		919		681		728

 

 

Gross loans and advances to customers by industry sector

 

The analysis of gross loans and advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority ('HKMA') is as follows:

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Gross loans and advances to customers for
use in Hong Kong
Industrial, commercial and
financial sectors
Property development		30,529			29,771
Property investment		100,912			103,675
Financial concerns		2,773			3,595
Stockbrokers		304			325
Wholesale and retail trade		21,912			16,445
Manufacturing		17,372			15,212
Transport and transport equipment		6,289			5,774
Recreational activities		160			244
Information technology		1,870			1,430
Other		35,664			26,766
		217,785			203,237
Individuals
Loans and advances for the purchase of flats under
the Government Home Ownership
Scheme, Private Sector Participation
Scheme and Tenants Purchase Scheme		14,452			13,886
Loans and advances for the purchase of other
residential properties		131,305			125,176
Credit card loans and advances		21,419			20,389
Other		14,431			13,514
		181,607			172,965
Total gross loans and advances for use in   Hong Kong		399,392			376,202
Trade finance		52,117			47,555
Gross loans and advances for use outside   Hong Kong		136,179			113,814
Gross loans and advances to customers		587,688			537,571

 

 

At 31 December 2013, gross loans and advances to customers were up HK$50.1bn, or 9.3%, at HK$587.7bn compared with the end of 2012.

 

Loans for use in Hong Kong increased by HK$23.2bn, or 6.2%. Lending to industrial, commercial and financial sectors grew by 7.2%. Lending to the property development sector increased by 2.5% while loans to the property investment sector declined by 2.7%. Lending to financial concerns fell by 22.9%, due mainly to repayments. The bank remained a major market participant in Hong Kong Government-organised schemes to support SMEs, which, in part, helped drive growth of 33.2% in lending to the wholesale and retail trade sector and of 14.2% in loans to manufacturing businesses. Lending to the 'Other' sector grew by 33.2%, due mainly to the granting of certain new working capital financing facilities to large corporate customers.

 

Lending to individuals rose by 5.0% compared with the end of 2012. Against a backdrop of reduced property sector activity and government measures, the bank was able to grow its residential mortgage portfolio by 4.9% compared with the end of 2012. Credit card loans and advances grew by 5.1%, supported by the 5.1% rise in the number of cards in circulation and the 12.9% growth in cardholder spending.

 

Despite trade activity remaining weak, trade-related lending grew by 9.6% compared with the end of 2012, reflecting Corporate and Commercial Banking's achievement in deepening customer relationships and strengthening its collaboration with its business partners to support trade business in particular on the Mainland.

 

Loans for use outside Hong Kong increased by 19.7% compared with the end of 2012, driven largely by lending on the Mainland. The mainland loan portfolio increased by 18.6% to HK$61.2bn, underpinned by the expansion of renminbi lending to corporate borrowers. The overall credit quality remained stable.

 

 

Financial investments

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Available-for-sale at fair value:
- debt securities		183,344			185,443
- equity shares		27,948			295
- investment funds		48			39
Held-to-maturity debt securities at amortised cost		71,505			67,631
		282,845			253,408
Fair value of held-to-maturity debt securities		72,014			72,716
Treasury bills		91,811			98,262
Certificates of deposit		9,729			11,228
Other debt securities		153,309			143,584
Debt securities		254,849			253,074
Equity shares		27,948			295
Investment funds		48			39
		282,845			253,408
Debt securities:
- listed in Hong Kong		11,709			16,625
- listed outside Hong Kong		48,424			48,166
		60,133			64,791
- unlisted		194,716			188,283
		254,849			253,074
Equity shares:
- listed in Hong Kong		67			65
- listed outside Hong Kong		26,897			6
		26,964			71
- unlisted		984			224
		27,948			295
Investment funds:
- unlisted		48			39
		282,845			253,408
Fair value of listed financial investments		87,320			66,270
Debt securities:
Issued by public bodies:
- central governments and central banks		127,599			128,587
- other public sector entities		27,680			23,638
		155,279			152,225
Issued by other bodies:
- banks		69,189			76,854
- corporate entities		30,381			23,995
		99,570			100,849
		254,849			253,074
Equity shares:
Issued by banks		27,510			6
Issued by corporate entities		438			289
		27,948			295
Investment funds:
Issued by corporate entities		48			39
		282,845			253,408

 

 

Debt securities by rating agency designation

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
AA- to AAA		187,387			183,420
A- to A+		59,463			61,001
B+ to BBB+		5,714			6,161
Unrated		2,285			2,492
		254,849			253,074

 

Financial investments include treasury bills, certificates of deposit, other debt securities, investment funds 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$29.4bn, or 11.6%, compared with the end of 2012. Debt securities investment increased by HK$1.8bn, while equity shares rose by HK$27.7bn due to the reclassification of the bank's investments in Industrial Bank and Yantai Bank from associated companies to available-for-sale financial investments.

 

Investments were primarily in high-quality debt securities or debt securities guaranteed by governments, reflecting the bank's strategy of identifying quality investment opportunities that enable it to optimise returns while prudentially managing risk. At 31 December 2013, about 99.0% 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 were guaranteed by their corresponding holding companies. Those 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.

 

 

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 balance sheet are as follows:

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
					(restated)
Amounts due from:
Cash and balances with banks		2,418			1,081
Placings with and advances to banks		15,331			14,294
Financial assets designated at fair value		__			3,446
Derivative financial instruments		607			415
Loans and advances to customers		__			400
Financial investments		__			74
Other assets		23			60
		18,379			19,770
Amounts due to:
Current, savings and other deposit accounts		1,042			871
Deposits from banks		1,117			5,004
Derivative financial instruments		856			657
Subordinated liabilities		11,824			11,821
Other liabilities		460			457
		15,299			18,810

 

 

Interest in associates

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Share of net assets		2,062			24,151
Intangible assets		__			29
Goodwill		__			475
		2,062			24,655

 

Interest in associates fell by HK$22,593m compared with the end of 2012, due mainly to the reclassification of Industrial Bank and Yantai Bank as financial investments during 2013.

 

 

Intangible assets

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Present value of in-force long-term
insurance business		7,198				6,003
Internally developed software		378				400
Acquired software		69				51
Goodwill		329				329
		7,974				6,783

 

 

Other assets

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
					(restated)
Items in the course of collection
from other banks		4,743			5,642
Bullion		4,184			6,576
Prepayments and accrued income		3,519			2,999
Assets held for sale
- repossessed assets		9			16
- other assets held for sale		__			593
Acceptances and endorsements		6,351			5,264
Retirement benefit assets		40			31
Other accounts		3,559			2,036
		22,405			23,157

 

 

Current, savings and other deposit accounts

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Current, savings and other deposit accounts:
- as stated in consolidated balance sheet		824,996			769,147
- structured deposits reported as
trading liabilities		34,489			38,113
		859,485			807,260
By type:
- demand and current accounts		74,664			68,071
- savings accounts		526,403			495,880
- time and other deposits		258,418			243,309
		859,485			807,260

 

 

Certificates of deposit and other debt securities in issue

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Certificates of deposit and
other debt securities in issue:
- as stated in consolidated balance sheet		8,601			11,291
- structured certificates of deposit
and other debt securities in issue
reported as trading liabilities		1,615			248
		10,216			11,539
By type:
- certificates of deposit in issue		8,601			11,291
- other debt securities in issue		1,615			248
		10,216			11,539

Customer deposits - including current, savings and other deposit accounts, certificates of deposit and other debt securities in issue - stood at HK$869.7bn at 31 December 2013 - a 6.2% rise compared with the end of 2012. Deposits in Hang Seng China also rose by 17.3%, driven mainly by renminbi deposits.

 

At 31 December 2013, the advances-to-deposits ratio was 67.4%, compared with 65.5% at 31 December 2012.

 

 

Trading liabilities

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Structured certificates of deposit and
other debt securities in issue		1,615			248
Structured deposits		34,489			38,113
Short positions in securities and others		26,013			21,492
		62,117			59,853

 

 

Other liabilities

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
Items in the course of transmission
to other banks		6,987			8,153
Accruals		3,330			3,248
Acceptances and endorsements		6,351			5,264
Retirement benefit liabilities		1,772			2,448
Other		2,027			2,540
		20,467			21,653

 

 

Subordinated liabilities

 

		At 31 December			At 31 December
Figures in HK$m			2013			2012
Nominal value	Description
Amounts owed to HSBC Group undertakings
US$775m	Floating rate
	subordinated loan debt
	due December 2020		6,009			6,007
US$450m	Floating rate
	subordinated loan debt
	due July 2021		3,489			3,488
US$300m	Floating rate
	subordinated loan debt
	due July 2022		2,326			2,326
			11,824			11,821
Representing:
- measured at amortised cost			11,824			11,821

 

 

The outstanding subordinated loan debts serve to help the bank maintain a balanced capital structure and support business growth.

 

Shareholders' funds

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
					(restated)
Share capital		9,559			9,559
Retained profits		78,679			59,683
Premises revaluation reserve		14,904			13,790
Cash flow hedging reserve		6			17
Available-for-sale investment reserve
- on debt securities		(113	)		(57	)
- on equity securities		(1,505	)		284
Capital redemption reserve		99			99
Other reserves		1,943			5,124
Total reserves		94,013			78,940
		103,572			88,499
Proposed dividends		4,206			3,824
Shareholders' funds		107,778			92,323
Return on average shareholders' funds		25.4	%		22.8	%

 

Shareholders' funds (excluding proposed dividends) grew by HK$15,073m, or 17.0%, to HK$103,572m at 31 December 2013. Retained profits rose by HK$18,996m, mainly reflecting the 2013 profit (including the accounting gain on Industrial Bank) after the appropriation of interim dividends during the year. The premises revaluation reserve increased by HK$1,114m, or 8.1%, mainly reflecting the improved commercial property market during the first half of 2013.

 

The available-for-sale investment reserve for equity securities recorded a deficit of HK$1,505m compared with a surplus of HK$284m at 2012 year-end, caused mainly by the share price of Industrial Bank being lower at 31 December 2013 than on reclassification as a financial investment on 7 January 2013. Changes in the fair value of the bank's investment in Industrial Bank are recognised in the available-for-sale investment reserve unless the investment becomes impaired. If the investment becomes impaired, the cumulative revaluation deficit would be reclassified from the available-for-sale investment reserve to the income statement. The group will continue to perform an impairment review of its investment in Industrial Bank at each balance sheet date in accordance with the group's accounting policy on impairment of available-for-sale financial assets.

 

The available-for-sale investment reserve for debt securities recorded a deficit of HK$113mcompared with a deficit of HK$57m at the end of 2012, reflecting the widening of credit spreads of debt securities in the group's investment portfolios. The group assessed that there were no impaired debt securities during the year, and accordingly, no impairment loss has been recognised.

 

Other reserves decreased by HK$3,181m compared with 2012 year-end, reflecting the recycling of the cumulative foreign exchange and other reserves of Industrial Bank and Yantai Bank to retained profits as a result of their reclassification. 

 

The return on average shareholders' funds was 25.4%, compared with 22.8% for 2012. Excluding the Industrial Bank reclassification, the return on average shareholders' funds was 17.6%, compared with 17.1% for 2012.

 

There was no purchase, sale or redemption by the bank, or any of its subsidiaries, of the bank's securities during 2013.

 

 

Capital management

 

The Banking (Capital) (Amendment) Rules 2012, effective on 1 January 2013, signified the first phase of the Basel III capital requirements in Hong Kong. The definition of regulatory capital under Basel III is different from that under Basel II which was used at 31 December 2012. The capital disclosures for December 2013 under Basel III are, therefore, not directly comparable with the disclosures for December 2012 prepared on a Basel II basis. Certain comparative figures have not been provided where the current year is the first year of disclosure.

 

The group uses the advanced internal ratings-based approach to calculate its credit risk for the majority of its non-securitisation exposures. For market risk, the group uses an internal models approach to calculate its general market risk for the risk categories of interest rate and foreign exchange (including gold bullion) exposures and the standardised (market risk) approach for calculating other market risk positions. For operational risk, the group uses the standardised (operational risk) approach to calculate its operational risk.

 

The basis of consolidation for the calculation of capital ratios under the Banking (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 Banking (Capital) Rules. Accordingly, the investment cost of these unconsolidated regulated financial entities is deducted from the capital base.

 

The tables in subsequent sections show the capital ratios, risk-weighted assets and capital base as contained in the 'Capital Adequacy Ratio' return required to be submitted to the Hong Kong Monetary Authority ('HKMA') by the bank on a consolidated basis as specified by the HKMA under the requirements of section 3C(1) of the Banking (Capital) Rules.

 

The bank and its subsidiaries maintain a regulatory reserve to satisfy the provisions of the Banking Ordinance and local regulatory requirements for prudential supervision purposes. At 31 December 2013, the effect of this requirement is to restrict the amount of reserves which can be distributed to shareholders by HK$5,440m (31 December 2012: HK$4,866m).

 

There are no relevant capital shortfalls in any of the group's subsidiaries at 31 December 2013 (31 December 2012: nil) which are not included in the group's consolidation for regulatory purposes.

 

 

(a) Capital base

 

Figures in HK$m	At 31 December 2013
Common Equity Tier 1 ('CET1') Capital
Shareholders' equity		98,068
- Shareholders' equity per balance sheet		107,778
- Unconsolidated subsidiaries		(9,710	)
Regulatory deductions to CET1 capital		(41,329	)
- Cash flow hedging reserve		(6	)
- Changes in own credit risk on fair valued liabilities		(4	)
- Reserves arising from revaluation of property1		(20,481	)
- Regulatory reserve		(5,440	)
- Intangible assets		(401	)
- Defined benefit pension fund assets		(33	)
- Deferred tax assets net of deferred tax liabilities		(43	)
- Valuation adjustments		(180	)
- Significant capital investments in unconsolidated financial sector entities		(500	)
- Excess AT1 deductions		(14,241	)
Total CET1 Capital		56,739
Additional Tier 1 ('AT1') Capital
Total AT1 capital before regulatory deductions		__
Regulatory deductions to AT1 capital		__
- Significant capital investments in unconsolidated financial sector entities		(14,241	)
- Excess AT1 deductions		14,241
Total AT1 Capital		__
Total Tier 1 ('T1') Capital		56,739
Tier 2 ('T2') Capital
Total T2 capital before regulatory deductions		22,518
- Term subordinated debt		10,872
- Property revaluation reserves1		9,216
- Impairment allowances and regulatory reserve eligible for inclusion in T2 capital		2,430
Regulatory deductions to T2 capital		(14,241	)
- Significant capital investments in unconsolidated financial sector entities		(14,241	)
Total T2 Capital		8,277
Total Capital		65,016

 

¹ Includes the revaluation surplus on investment properties which is reported as part of retained profits and related adjustments made in accordance with the Banking (Capital) Rules issued by the HKMA.

 

(b) Risk-weighted assets by risk type 

 

Figures in HK$m	At 31 December 2013
Credit risk		365,077
Market risk		4,293
Operational risk		41,100
Total		410,470

 

(c) Capital ratios (as a percentage of risk-weighted assets) 

 

The capital ratios on a consolidated basis calculated in accordance with the Banking (Capital) Rules are as follows:

	At 31 December 2013
CET1 capital ratio		13.8%
Tier 1 capital ratio		13.8%
Total capital ratio		15.8%

 

(d) Capital instruments

 

The following is a summary of the group's CET1 and T2 capital instruments:

	At 31 December 2013
CET1 capital instruments issued by the bank
Ordinary shares:
1,911,842,736 issued and fully paid ordinary shares of HK$5 each		HK$9,559m
T2 capital instruments
Issued by the bank:
Subordinated loan due 2020 (nominal value: US$775m)		HK$6,009m
Subordinated loan due 2021 (nominal value: US$450m)		HK$3,489m
Subordinated loan due 2022 (nominal value: US$300m)		HK$2,326m

 

(e) Additional information

 

To comply with the Banking (Disclosure) Rules ('BDR'), the following capital information can be found in the Regulatory Disclosures section of our website www.hangseng.com:

 

·      A description of the main features and the full terms and conditions of the group's capital instruments.

 

·      A detailed breakdown of the group's CET1 capital, AT1 capital, T2 capital and regulatory deductions, using the standard template as specified by the HKMA.

 

·      A full reconciliation between the group's accounting and regulatory balance sheets, using the standard template as specified by the HKMA.

 

 

 

Capital base and risk-weighted assets

 

				At 31 December
Figures in HK$m								2012
Core capital:
Paid-up ordinary share capital								9,559
- Reserves per balance sheet								78,940
- Unconsolidated subsidiaries								(8,872	)
- Cash flow hedging reserve								(17	)
- Regulatory reserve								(4,866	)
- Reserves arising from revaluation of property
and unrealised gains on available-for-sale
equities and debt securities								(18,936	)
Total reserves included in core capital								46,249
- Goodwill, intangible assets and valuation adjustment								(965	)
- 50% of unconsolidated investments								(13,683	)
- 50% of securitisation positions and other deductions								(158	)
Deductions								(14,806	)
Total core capital								41,002
Supplementary capital:
- Term subordinated debt								11,821
- Property revaluation reserves 1								5,894
- Available-for-sale investments revaluation reserves 2								183
- Regulatory reserve 3								303
- Collective impairment allowances 3								46
- Excess impairment allowances over expected losses 4								1,727
Supplementary capital before deductions								19,974
- 50% of unconsolidated investments								(13,683	)
- 50% of securitisation positions and other deductions								(158	)
Deductions								(13,841	)
Total supplementary capital								6,133
Capital base								47,135
Risk-weighted assets
- Credit risk								295,743
- Market risk								2,447
- Operational risk								37,827
								336,017
Capital adequacy ratio								14.0	%
Core capital ratio								12.2	%

 

 

Reserves and deductible items

 

				At 31 December
Figures in HK$m								2012
Published reserves								39,152
Profit and loss account								7,097
Total reserves included in core capital								46,249
Total of items deductible 50% from core capital
and 50% from supplementary capital								27,682

 

 

¹ Includes the revaluation surplus on investment properties which is reported as part of retained profits and adjustments made in accordance with the Banking (Capital) Rules.

 

² Includes adjustments made in accordance with the Banking (Capital) Rules.

 

³ Total regulatory reserves and collective impairment allowances are apportioned between the standardised approach and internal ratings-based approach in accordance with the Banking (Capital) Rules. Those apportioned to the standardised approach are included in supplementary capital. Those apportioned to the internal ratings-based approach are excluded from supplementary capital.

 

⁴ Excess impairment allowances over expected losses are applicable to non-securitisation exposures calculated by using the internal ratings-based approach.

 

Capital ratios at 31 December 2012 on a Basel II basis were compiled in accordance with the Banking (Capital) Rules under the Hong Kong Banking Ordinance.

 

 

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:

 

		2013			2012
The bank and its subsidiaries
designated by the HKMA		34.9	%		36.9	%

 

 

Reconciliation of cash flow statement

 

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

 

Figures in HK$m		2013			2012
					(restated)
Operating profit		18,410			15,487
Net interest income		(18,604	)		(16,946	)
Dividend income		(1,014	)		(17	)
Loan impairment charges		536			386
Impairment loss of intangible assets		13			__
Depreciation		762			762
Amortisation of intangible assets		113			115
Amortisation of available-for-sale investments		67			(47	)
Amortisation of held-to-maturity debt securities		1			1
Loans and advances written off net of recoveries		(495	)		(633	)
Movement in present value of in-force long-term   insurance business		(1,195	)		(815	)
Interest received		22,760			20,086
Interest paid		(4,999	)		(4,567	)
Operating profit before changes in working capital		16,355			13,812
Change in treasury bills and certificates of deposit
with original maturity more than three months		5,631			(39,942	)
Change in placings with and advances to banks
maturing after one month		(3,271	)		(11,989	)
Change in trading assets		4,705			10,132
Change in financial assets designated at fair value		__			140
Change in derivative financial instruments		(339	)		(1,199	)
Change in loans and advances to customers		(50,676	)		(55,425	)
Change in other assets		(1,846	)		(10,724	)
Change in current, savings and other deposit accounts		55,832			69,290
Change in deposits from banks		(8,019	)		5,841
Change in trading liabilities		2,264			141
Change in certificates of deposit
and other debt securities in issue		(2,690	)		2,007
Change in other liabilities		3,020			9,737
Elimination of exchange differences
and other non-cash items		4,832			2,228
Cash generated from/ (used in) operating activities		25,798			(5,951	)
Taxation paid		(2,696	)		(1,954	)
Net cash inflow/ (outflow) from operating activities		23,102			(7,905	)

 

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

 

	At 31 December			At 31 December
Figures in HK$m		2013			2012
					(restated)
Cash and balances with banks		33,294			20,506
Items in the course of collection from other banks		4,743			5,642
Placings with and advances to banks
maturing within one month		62,043			74,552
Treasury bills		22,686			22,090
Certificates of deposit		__			1,310
Less: items in the course of transmission to other banks		(6,987	)		(8,153	)
		115,779			115,947

 

 

Contingent liabilities, commitments and derivatives

 

					Credit		Risk-
	Contract			equivalent		weighted
Figures in HK$m		amounts			amounts		amounts
At 31 December 2013
Direct credit substitutes		8,977			8,184		4,807
Transaction-related contingencies		1,821			187		131
Trade-related contingencies		14,922			1,630		922
Forward asset purchases		43			43		43
Undrawn formal standby facilities, credit lines
and other commitments to lend:
- not unconditionally cancellable W		28,343			13,947		6,102
- unconditionally cancellable		243,895			77,069		18,813
		298,001			101,060		30,818
Exchange rate contracts:
Spot and forward foreign exchange		537,659			4,414		1,133
Other exchange rate contracts		108,223			3,651		2,570
		645,882			8,065		3,703
Interest rate contracts:
Interest rate swaps		225,524			2,021		626
		225,524			2,021		626
Other derivative contracts		6,122			423		188

^W The contract amounts for undrawn formal standby facilities, credit lines and other commitments to lend with original maturity of 'up to one year' and 'over one year' were HK$3,723m and HK$24,620m respectively.

 

 

				Credit		Risk-
	Contract		equivalent		weighted
Figures in HK$m		amounts		amounts		amounts
At 31 December 2012
Direct credit substitutes		7,259		7,041		3,805
Transaction-related contingencies		1,250		128		54
Trade-related contingencies		11,548		1,181		696
Forward asset purchases		51		51		51
Undrawn formal standby facilities, credit lines
and other commitments to lend:
- not unconditionally cancellable		33,261		15,258		6,189
- unconditionally cancellable		247,891		82,049		24,909
		301,260		105,708		35,704
Exchange rate contracts:
Spot and forward foreign exchange		544,790		4,197		728
Other exchange rate contracts		111,945		2,355		1,545
		656,735		6,552		2,273
Interest rate contracts:
Interest rate swaps		230,032		2,121		472
		230,032		2,121		472
Other derivative contracts		4,856		452		143

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.

 

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. Those transactions are, therefore, subject to the same credit origination, portfolio management and collateral requirements as for customers applying for loans. As the facilities may expire without being drawn upon, the total of the contract amounts does not represent future liquidity requirements.

 

Derivative financial instruments are held for trading, designated at fair value, or designated as either fair value 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 2013				At 31 December 2012
Figures in HK$m		Trading		Hedging		Trading		Hedging
Contract amounts:
Interest rate contracts		193,353		32,249		192,421		37,739
Exchange rate contracts		802,099		3,463		826,210		4,263
Other derivative contracts		9,988		__		17,614		__
		1,005,440		35,712		1,036,245		42,002
Derivative assets:
Interest rate contracts		1,553		109		1,438		59
Exchange rate contracts		4,253		667		3,024		280
Other derivative contracts		64		__		378		__
		5,870		776		4,840		339
Derivative liabilities:
Interest rate contracts		1,348		715		1,292		1,352
Exchange rate contracts		3,019		6		1,419		3
Other derivative contracts		158		__		52		__
		4,525		721		2,763		1,355

 

The above derivative assets and liabilities, being the positive or negative marked-to-market value of the respective derivative contracts, represent gross replacement costs.

 

 

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 2013 ('2013 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 24 February 2014.

 

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 Hong Kong Exchanges and Clearing Limited and the bank on the date of the issue of this news release.

 

Except as described below, the accounting policies and methods of computation adopted by the group for this news release are consistent with those described on pages 84 to 103 of the 2012 accounts.

 

On 1 January 2013, the group adopted the following significant new standards and amendments to standards. The impact of these new standards and amendments are as follow:

 

·   Amendments to HKAS 1 'Presentation of Financial Statements - Presentation of items of other comprehensive income' require grouping of items presented in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss subsequently. The group's presentation of other comprehensive income in the consolidated financial statements has been modified retrospectively.

 

·   HKFRS 10 'Consolidated Financial Statements', HKFRS 11 'Joint Arrangements', HKFRS 12 'Disclosure of Interests in Other Entities', HKAS 27 (2011) 'Separate Financial Statements', HKAS 28 (2011) 'Investments in Associates and Joint Ventures' and amendments to HKFRS 10, HKFRS 11 and HKFRS 12 'Transition Guidance' ('Consolidation Standards') are required to be applied retrospectively.

 

Under HKFRS 10, there is one approach for determining consolidation for all entities, based on the concepts of power, variability of returns and their linkage. This replaces the approach which applied to financial statements emphasised legal control or exposure to risks and rewards, depending on the nature of the entity under previous HKAS 27 'Consolidated and Separate Financial Statements' and the Former Standing Interpretations Committee's Interpretation 12 'Consolidation - Special Purpose Entities' (HK-SIC 12) adopted by HKICPA. The group controls and consequently consolidates an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns by exercising its power over the entity. Under HKFRS 11, it places more focus on the investors' rights and obligations than on the structure of the arrangement when determining the type of joint arrangement with which the group is involved and introduces the concept of a joint operation.

 

In accordance with the Transition Guidance, the group reviewed the population of investments in entities as at 1 January 2013 to determine whether entities previously consolidated or unconsolidated have been changed their consolidation status as a result of applying the Consolidation Standards. The review result concluded that the effect of applying the Consolidation Standards was immaterial on the group's consolidated financial statements and no restatements are necessary.

 

HKFRS 12 is a comprehensive standard on disclosure requirements for all forms of interests in other entities, including unconsolidated structured entities. The disclosure requirements of HKFRS 12 do not require comparative information to be provided for periods prior to initial application. The application of HKFRS 12 did not have a material effect on the group's consolidated financial statements.

 

·   HKFRS 13 'Fair Value Measurement' ('HKFRS 13') establishes a single framework for measuring fair value and introduces new requirements for disclosure of fair value measurements. HKFRS 13 is required to be applied prospectively from the beginning of the first annual period in which it is applied.

 

The group has adopted HKFRS 13 since 1 January 2013 with fair values measured according to the standard's requirements for both financial instruments and non-financial instruments. In particular, the group's premises and investment properties were revalued at market value and taken into account the highest and best use of the property (i.e. the property use that is physically possible, legally permissible and financially feasible) from the perspective of market participants.

 

The disclosure requirements of HKFRS 13 do not require comparative information to be provided for periods prior to initial application. An entity is required to make disclosures for each class of assets and liabilities determined based on the nature, characteristics, and risks of the asset or liability, and the level into which it is categorised within the fair value hierarchy. The group has provided these disclosures in the notes 36 and 37 to the financial statements.

 

·   The Amendments to HKAS 19 'Employee Benefits' require the replacement of interest cost and expected return on plan assets by a finance cost component comprising the net interest on the net defined benefit liability or asset. This finance cost component is determined by applying the same discount rate used to measure the defined benefit obligation to the net defined benefit liability or asset. The difference between the actual return on plan assets and the return included in the finance cost component in the income statement will be presented in other comprehensive income. The amendments have been applied retrospectively with comparative figures adjusted accordingly.

 

For the group

Figures in HK$m	As reported		Adjustment		Restated
Year ended 31 December 2012
Consolidated income statement:
Employee compensation and benefits	(4,137	)	(119	)	(4,256	)
Profit before tax	22,113		(119	)	21,994
Tax expense	(2,687	)	20		(2,667	)
Profit attributable to shareholders	19,426		(99	)	19,327
Earnings per share (HK$)	10.16		(0.05	)	10.11
Consolidated statement of comprehensive income:
Defined benefit plans:
- actuarial gains on defined benefit plans	605		119		724
- deferred taxes	(100	)	(20	)	(120	)
Other comprehensive income for the year,
net of tax	3,158		99		3,257

 

·   Amendments to HKFRS 7 'Disclosures - Offsetting Financial Assets and Financial Liabilities' require disclosure of the effect or potential effects of netting arrangements on the entity's financial position. The amendments require disclosure of recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement. The amendments have been applied retrospectively. The application of these amendments did not have a material effect on the group's consolidated financial statements.

 

 

2. Comparative figures

 

As a result of the adoption of the amendments to HKAS 19 'Employee Benefits', 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 2013.

 

 

3. Change in accounting treatment for Industrial Bank Co., Ltd. and Yantai Bank Co., Ltd.

 

Industrial Bank

On 7 January 2013, Industrial Bank completed a private placement of additional share capital to a number of third parties, thereby diluting the group's equity holding from 12.8% to 10.9%. As a result of this and other factors, the group considers that it is no longer in a position to exercise significant influence over Industrial Bank and it therefore ceased to account for the investment as an associate from that date, giving rise to an accounting gain on the reclassification of Industrial Bank of HK$9,517m in 2013. The accounting gain included the deemed disposal profit on the reclassification of HK$8,454m and the release of deferred tax amounting to HK$1,063m.

 

The holding in Industrial Bank has since been recognised as a financial investment in the balance sheet of the group, with any subsequent movement in its fair value reflected in accordance with current applicable Hong Kong Financial Reporting Standards. At 31 December 2013, there was a revaluation deficit on the investment in Industrial Bank recorded in the 'available-for-sale investment reserve', reflecting the decline in its fair value below the deemed cost upon reclassification based on the share price on 4 January 2013. The change in fair value of the bank's investment in Industrial Bank is recognised in the available-for-sale investment reserve unless the investment becomes impaired. If the investment becomes impaired, the cumulative revaluation deficit would be reclassified from the available-for-sale investment reserve to the income statement.

 

The group will continue to perform an impairment review of its investment in Industrial Bank at each balance sheet date in accordance with the group's accounting policy on impairment of available-for-sale financial assets. Dividends from Industrial Bank are recognised in the group's consolidated income statement. This change has been incorporated and reflected in the group's 2013 annual results.

 

Financial implication of change in accounting treatment on Industrial Bank:-

 

From 2013 onwards, the reclassification of Industrial Bank and the change in accounting treatment will result in an increase in the group's dividend income, subject to the amount of dividend to be declared by Industrial Bank and a decrease in the share of profit from associates. The share of profit from Industrial Bank was HK$5,199m in 2012.

 

Since there are significant financial implications as a result of the change in accounting treatment for Industrial Bank, the key financial results and performance metrics are not directly comparable when comparing 2013 with 2012. For the sake of comparison, we have prepared the following key financial results and performance metrics by excluding the accounting gain in 2013 and share of Industrial Bank's profit in 2012.

 

 

	As reported				Excluding Industrial Bank reclassification
	Year ended 31 December				Year ended 31 December
	2013		2012	ChangeW	2013	2012	ChangeW
Attributable profit	26,678		19,327	38.0%	17,161	14,472	18.6%
Profit before tax	28,496		21,994	29.6%	20,042	16,795	19.3%
Return on average   shareholders' funds (%)	25.4		22.8	2.6pp	17.6	17.1	0.5pp
Return on average total   assets (%)		2.4	1.9	0.5pp	1.5	1.4	0.1pp
Earnings per share (HK$)		13.95	10.11	38.0%	8.98	7.57	18.6%

 

^W Change in 'pp' represents change in percentage points.

 

Yantai Bank

 

The group's investment in Yantai Bank was equity accounted with effect from January 2009, reflecting the group's significant influence over this associate. On 13 December 2013, Yantai Bank approved an increase in its registered share capital to enable a private placement of additional share capital to a third party, leading to the group's equity holding being diluted from 20% to 15.09%. As a result of this and other factors, the group considers that it is no longer in a position to exercise significant influence over Yantai Bank and ceased to account for its investment as an associate from that date. Thereafter, the holding in Yantai Bank is classified as an available-for-sale financial investment. The loss arising from this reclassification was HK$297m and is reflected in the group's 2013 financial statements. The change in accounting treatment did not have a significant impact on the group income statement for 2013.

 

 

4. Property revaluation

 

The group's premises and investment properties were revalued at 30 November 2013 and updated for any material changes at 31 December 2013 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 property was market value which is consistent with the definition of fair value under HKFRS 13 'Fair Value Measurement' and takes into account the highest and best use of the property from the perspective of market participants. The highest and best use takes into account the use of the property that is physically possible, legally permissible and financially feasible as described in HKFRS 13. The net revaluation surplus for group premises amounted to HK$2,100m, of which HK$2,103m was credited to the premises revaluation reserve and HK$3m was debited to the income statement. The related deferred tax provision for group premises was HK$350m. Revaluation gains of HK$1,058m on investment properties (excluding the revaluation gain on properties backing insurance contracts) and those under held for sale of HK$133m were recognised through the income statement.

 

 

5. Foreign currency positions

 

Foreign currency exposures include those arising from trading, non-trading and structural positions. The net option position is calculated on the basis of delta-weighted positions of all foreign exchange options contracts. At 31 December 2013, the US dollar ('US$'), Chinese renminbi ('RMB'), Euro ('EUR') and Australian dollar ('AUD') were the currencies in which the group had non-structural foreign currency positions that were not less than 10% of the total net position in all foreign currencies. The group also had a RMB structural foreign currency position, which was not less than 10% of the total net structural position in all foreign currencies.

 

Figures in HK$m	US$		RMB		EUR		AUD		Other foreign currencies		Total foreign currencies
At 31 December 2013
Non-structural position
Spot assets	176,324		157,293		4,807		20,569		44,217		403,210
Spot liabilities	(154,695	)	(137,449	)	(7,621	)	(26,347	)	(32,777	)	(358,889	)
Forward purchases	287,769		132,637		7,320		13,358		28,817		469,901
Forward sales	(310,493	)	(150,555	)	(4,610	)	(7,658	)	(40,072	)	(513,388	)
Net options position	404		(146	)	__		(15	)	(215	)	28
Net long/(short)
non-structural position	(691	)	1,780		(104	)	(93	)	(30	)	862
Structural position	205		37,530		__		__		535		38,270

 

 

Figures in HK$m	US$		RMB		EUR		AUD		Other foreign currencies		Total foreign currencies
At 31 December 2012
Non-structural position
Spot assets	160,217		119,957		18,553		50,739		74,895		424,361
Spot liabilities	(144,015	)	(112,827	)	(10,637	)	(50,157	)	(47,997	)	(365,633	)
Forward purchases	301,222		83,737		7,280		8,503		18,791		419,533
Forward sales	(313,787	)	(90,096	)	(15,227	)	(9,028	)	(45,669	)	(473,807	)
Net options position	160		(142	)	19		82		(93	)	26
Net long/(short)
non-structural position	3,797		629		(12	)	139		(73	)	4,480
Structural position	205		30,375		__		__		434		31,014

 

 

6. Ultimate holding company

 

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

 

7. Register of shareholders

 

The register of shareholders of the bank will be closed on Wednesday, 12 March 2014, during which no transfer of shares can be registered. To qualify for the fourth interim dividend for 2013, all transfers, accompanied by the relevant share certificates, must be lodged with the bank's registrar, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration not later than 4:30 pm on Tuesday, 11 March 2014. The fourth interim dividend will be payable on Thursday, 27 March 2014 to shareholders whose names appear on the register of shareholders of the bank on Wednesday, 12 March 2014. Shares of the bank will be traded ex-dividend as from Monday, 10 March 2014.

 

 

8. Code on corporate governance practices

 

The bank is committed to high standards of corporate governance with a view to safeguarding the interests of shareholders, customers, staff and other stakeholders. The bank has followed the module on 'Corporate Governance of Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the HKMA and has fully complied with all the code provisions and most of the recommended best practices set out in the Corporate Governance Code 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 2013.

 

The Audit Committee of the bank has reviewed the results for the year ended 31 December 2013.

 

 

9. Board of Directors

 

At 24 February 2014, the Board of Directors of the bank comprises Dr Raymond K F Ch'ien* (Chairman), Ms Rose W M Lee (Vice-Chairman and Chief Executive), Dr John C C Chan*, Mr Nixon L S Chan, Dr Marvin K T Cheung*, Ms L Y Chiang*, Mr Andrew H C Fung, Dr Fred Zuliu Hu*, Ms Sarah C Legg^#, Dr Eric K C Li*, Dr Vincent H S Lo^#, Mr Richard Y S Tang*, Mr Peter T S Wong^# and Mr Michael W K Wu*.

 

 

*   Independent Non-executive Directors

^#   Non-executive Directors

 

 

10. News release

 

This news release is available on the bank's website www.hangseng.com.

 

The 2013 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 Hong Kong Exchanges and Clearing Limited and the bank on the date of issue of this news release. Printed copies of the 2013 Annual Report will be sent to shareholders in late-March 2014.

 

Media enquiries to:

Walter Cheung                           Telephone: (852) 2198 4020

Ruby Chan                                 Telephone: (852) 2198 4236