hsba201402246k8.htm
FORM 6-K
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a - 16 or 15d - 16 of
 
the Securities Exchange Act of 1934
 
 
 
For the month of February
HSBC Holdings plc
 
42nd Floor, 8 Canada Square, London E14 5HQ, England
 
 
 
(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F).
 
Form 20-F   X              Form 40-F ......
 
(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934).
 
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(If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ..............).
 
 

 
 

 
 
 
HANG SENG BANK LIMITED
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 totalcapital 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 swapsWactivities. 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
  
             
Net income from financial instruments designated at fair value decreased by HK$31m, or 8.2%, to HK$345m, reflecting the fair value changes of assets held by the life insurance business. To the extent that this fair value gain was 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' or 'movement in present value of in-force long-term insurance business'.
 
 
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
)
             
Gains less losses from financial investments and fixed assets were HK$179m in 2013 compared with a loss of HK$5m in 2012, due mainly to the gain on the disposal of certain properties during the year.
 
 
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 Management activities 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).
 
At 31 December 2013, rescheduled loans and advances to customers had fallen by HK$73m, or 37.2%, to HK$123m compared with a year earlier, representing 0.02% of gross loans and advances to customers.
 
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
  
       
 
1Includes 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
  
               
                 
 
WThe 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
                                                                       
 
 
 



 

 
 
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 HSBC Holdings plc
 
 
 
 
 
                                                       By:
 
                                                                                       Name: Ben J S Mathews
 
                                                                                                 Title: Group Company Secretary
                     
                                                                                     Date: 24 February 2014