HSBC Holdings Regulatory News (HSBA)

5 Mar 2007 08:23

HSBC Holdings PLC05 March 2007 HANG SENG BANK LIMITED 2006 RESULTS - HIGHLIGHTS - Operating profit up 13.6 per cent to HK$12,576 million (HK$11,068 million in 2005). - Operating profit excluding loan impairment charges and other credit risk provisions up 9.9 per cent to HK$12,840 million (HK$11,686 million in 2005). - Profit before tax up 7.8 per cent to HK$14,395 million (HK$13,358 million in 2005). - Attributable profit up 6.1 per cent to HK$12,038 million (HK$11,342 million in 2005). - Return on average shareholders' funds of 27.4 per cent (27.5 per cent in 2005). - Assets up 15.2 per cent to HK$669.1 billion (HK$580.8 billion at 31 December 2005). - Earnings per share up 6.2 per cent to HK$6.30 per share (HK$5.93 per share in 2005). - Fourth interim dividend of HK$1.90 per share; total dividends of HK$5.20 per share for 2006 (HK$5.20 per share in 2005). - Total capital ratio of 13.6 per cent (12.8 per cent at 31 December 2005); tier 1 capital ratio of 10.7 per cent (10.4 per cent at 31 December 2005). - Cost efficiency ratio of 29.0 per cent (28.0 per cent in 2005). Within this document, the Hong Kong Special Administrative Region of thePeople's Republic of China has been referred to as 'Hong Kong'. Comment by Michael Smith, Chairman For the full year 2006, Hang Seng's results were supported by a strong economyin Hong Kong, distinguished by a buoyant stock market, ample liquidity and abenign credit environment. Attributable profit increased by 6.1 per cent compared with 2005, to reach arecord HK$12,038 million. Earnings per share were up 6.2 per cent at HK$6.30. The Directors have announced a fourth interim dividend of HK$1.90 per share. Inlight of capital requirements for future business expansion, particularly inmainland China, total distribution is HK$5.20 per share for 2006, the same as in2005. Net operating income before loan impairment charges and other credit provisionsincreased 11.4 per cent to HK$18,081 million. Successful efforts to expand anddiversify lending and attract new deposits drove an 8.3 per cent rise in netinterest income to HK$11,694 million. Our personal wealth management business achieved good growth in investmentservices, insurance and private banking. Commercial Banking performed strongly,underpinned by increases in customer advances and the development of corporatewealth management services. Investments in our mainland business producedpositive results, with encouraging growth in customer base, advances anddeposits, and profit contribution. Operating profit excluding loan impairment charges was up 9.9 per cent atHK$12,840 million. Operating profit rose by 13.6 per cent, reflecting asubstantial drop in loan impairment charges. Operating expenses increased by 15.3 per cent to HK$5,241 million withinvestments in human resources, IT, marketing and branding to support businessgrowth on the Mainland and in Hong Kong. Personal Financial Services' operating profit excluding loan impairment chargesgrew by 5.4 per cent to HK$7,840 million. Wealth management income was up 22.7per cent at HK$4,281 million, reflecting record investment product sales, a high level of stock market activity and a 17.5 per cent rise in lifeinsurance income. We also benefited from high levels of consumer confidence,recording significant increases in cardholder spending and personal lending. Commercial Banking's operating profit excluding loan impairment charges rose21.5 per cent to HK$2,001 million. Customer advances grew by 22.2 per cent withtrade finance gaining market share. Lending to middle market customers in themanufacturing, property, and wholesale and retail sectors grew as a result ofrefined segmentation and deepened relationships. Intensified marketing saw newSME accounts acquired in the second half of 2006 outpace the first half by 34.7per cent. Corporate wealth management business and card acquiring businesscontributed to 13.5 per cent growth in net fees and commissions and an 11.9 percent rise in trading income. With strong liquidity in the banking system continuing to squeeze corporate loanmargins, Corporate Banking focused on asset yield rather than increased lending.The strong 32.5 per cent growth in customer deposits and the further developmentof corporate treasury services helped to compensate for a decline in lending tolarge corporates. Net operating income increased by 11.8 per cent. Operatingprofit excluding loan impairment charges was HK$543 million, down 2.0 per centcompared with 2005. Treasury's operating profit excluding loan impairment charges declined 25.0 percent to HK$887 million. Efforts to expand proprietary trading andcustomer-driven business saw trading income grow by 66.1 per cent to HK$628million. However, net interest income fell by HK$514 million, or 51.7 per cent,as the balance sheet management portfolio continued to be challenged by risingfunding costs and flattened yield curves. Operating profit excluding loan impairment charges at our mainland branches roseby 211.9 per cent. We upgraded a representative office to a branch in Dongguanand opened three new sub-branches in 2006, bringing our total number of mainlandoutlets to 15. We were also granted permission to begin the necessarypreparations to establish our mainland subsidiary, which will be headquarteredin Shanghai. Including our share of profit from Industrial Bank Co., Ltd. ('IndustrialBank'), our mainland business contributed 6.1 per cent of total profit beforetax, compared with 4.5 per cent in 2005, bringing us closer to our target of 10per cent by 2010. Hong Kong is likely to experience above-trend growth in 2007. Economicuncertainty in the US generated by weaknesses in the housing market may resultin a slowing of export and re-export trade activity. However, sustained economicmomentum, the stabilisation of interest rates and the improving labour marketshould continue to drive domestic demand. The positive economic outlook for theMainland should also have a beneficial influence. We will take advantage of the favourable economic conditions to further expandcommercial lending and SME services. We will also focus on developing our wealthmanagement business by stepping up cross-selling efforts and launching newproducts to meet a wider variety of investment and insurance needs. We will further diversify our Treasury income by growing our customer-drivenbusiness and proprietary trading services, supported by closer collaborationwith other customer groups. Given the competitive corporate lending conditions,Corporate Banking will target asset yield, increase cross-selling and work togrow deposits by acquiring new customers. On the Mainland, we will continue with our two-pronged approach of organicgrowth and close collaboration with Industrial Bank. Further financial sector liberalisation at the end of 2006 marked the start of anew phase of financial services business opportunities on the Mainland. We willestablish our local subsidiary in the second quarter of 2007, which will enableus to benefit from the opening up of the retail renminbi ('RMB') market andincrease our RMB deposits base to support lending growth. We will expand our customer base on the Mainland through setting up new outletsin the high-growth Yangtze River Delta and Pearl River Delta regions, increasedmarketing and more promotion of our strong brand, including leveraging our roleas the compiler of the Hang Seng Index series. We will capitalise on our growing capabilities in southern China by offering agreater range of services to commercial banking customers with operations inHong Kong and on the Mainland. Our closer partnerships with SME customers willhelp us grow our mainland trade finance and corporate wealth managementbusiness. We aim to grow our mainland business to more than 2,000 staff and over 50outlets by 2010. Results summary Hang Seng Bank Limited ('the bank') and its subsidiaries and associates ('thegroup') reported an audited profit attributable to shareholders of HK$12,038million for 2006, a rise of 6.1 per cent over 2005. Earnings per share wereHK$6.30, up 6.2 per cent from 2005. Operating profit after loan impairment charges and other credit risk provisionsrose 13.6 per cent, reflecting encouraging growth in total operating income anda substantial reduction in loan impairment charges. The results, as highlightedbelow, benefited from sustained economic growth, a buoyant stock market and goodinvestment sentiment supported by ample liquidity and a benign creditenvironment. Net interest income^ rose by HK$898 million, or 8.3 per cent, with an increaseof 10.6 per cent in average interest-earning assets. The rise in net interestincome benefited from a 7.2 per cent growth in customer advances, driven byhigher yielding card and personal loans, trade finance and mainland renminbiadvances. A wider BLR/HIBOR gap improved the spread of BLR-based lending.Interest earned on net free funds and the debt securities portfolio of lifeinsurance fund investments also rose significantly. The contribution of thestrong 12.8 per cent rise in customer deposits, however, was offset by thenarrowing of deposit spreads on HK dollar savings and structured deposits. Thetreasury balance sheet management portfolio continued to be challenged by therise in funding costs and flattened yield curves. Net interest margin fellslightly by four basis points to 2.02 per cent. Net fees and commissions rose by HK$541 million, or 18.3 per cent. Theinvestment business took advantage of the buoyant stock market, ample liquidityand favourable investment sentiment to expand its product range and customerbase. Income from stockbroking and related services and private bankinginvestment services rose 63.3 per cent and 93.1 per cent respectively. Salesturnover of retail investment funds rose significantly by 40.6 per cent. Cardservices income increased by 22.0 per cent, supported by a rise of 10.5 per centin the number of cards issued as well as an 11.7 per cent increase in cardholderspending. Trading income^ rose by 50.3 per cent to HK$1,330 million. Foreign exchangeincome rose by 50.1 per cent, attributable to more active position taking,increased customer flows and spreads earned on foreign exchange option-linkedstructured products. Securities, derivatives and other trading also increasedwith improved trading results and strong growth in sales volume and profitearned on equity-linked investment products provided to customers. ^ With effect from 2006 reporting, interest income and expense from tradingassets and liabilities and from financial instruments designated at fair valueare reported under 'Net interest income' instead of 'Net trading income' and'Net income from financial instruments designated at fair value' respectively asin the previous year. Details of the change in accounting presentation are setout on page 56. For HSBC Group reporting, the reporting of such interest incomeand expense remains unchanged. Income from insurance business grew by HK$217 million, or 14.0 per cent: - net earned insurance premiums rose by HK$63 million; - life insurance fund investments reported a net gain of HK$910 million (compared with a loss of HK$25 million in 2005) under net income from financial instruments designated at fair value; - net interest income mainly from the debt securities portfolio of life insurance fund investments increased by HK$264 million. Net fee income related to insurance business fell by HK$29 million, mainly in general insurance agency commissions; - net insurance claims incurred and movement in policyholders' liabilities rose by HK$1,063 million, reflecting the growth in investment gains and interest income which are attributable to policyholders; and - the present value of in-force long-term insurance business under other operating income rose by HK$47 million. Net operating income before loan impairment charges and other credit riskprovisions recorded growth of HK$1,849 million, or 11.4 per cent, to HK$18,081million. Operating expenses rose by HK$695 million, or 15.3 per cent, to HK$5,241million, as the bank continued to expand its Hong Kong and mainland operations,with the number of full-time equivalent staff up 619 at year-end compared withthe previous year. Employee compensation and benefits rose by 18.1 per cent.Equipment-related costs increased with the development and enhancement of ITsystems for business expansion and regulatory-related projects. Marketingexpenditure rose due to the launch of the bank's new brand image and to supportnew investment and insurance products and credit card promotion campaigns. Thebank's mainland operation, which expanded its network from 12 to 15 outlets andincreased its number of staff from 377 to 661 during 2006, also accounted forthe bank's rise in operating expenses. Operating profit before loan impairment charges and other credit risk provisionswas up by 9.9 per cent. Loan impairment charges and other credit provisionsrecorded a substantial reduction of 57.3 per cent under a benign creditenvironment. Profit before tax was up 7.8 per cent to HK$14,395 million after taking intoaccount: - an increase of 76.7 per cent in profit on disposal of fixed assets and financial investments, mainly from the disposal of properties; - a decrease of 75.6 per cent in net surplus on property revaluation; and - an increase of 31.0 per cent in share of profits from associates, mainly contributed by Industrial Bank Co., Ltd. Balance sheet and key ratios Total assets rose by HK$88.2 billion, or 15.2 per cent, to HK$669.1 billion.Customer advances rose by 7.2 per cent with encouraging growth in card andpersonal loans, trade finance, commercial banking lending and mainland lending.Residential mortgages grew satisfactorily in an intensely competitive market.Interbank placing and money market instruments also increased, driven by the12.8 per cent growth in customer deposits. At 31 December 2006, theadvances-to-deposits ratio was 51.7 per cent, compared with 54.4 per cent at theend of 2005. Shareholders' funds (excluding proposed dividends) increased by HK$4,410million, or 11.3 per cent, to HK$43,348 million at 31 December 2006. Retainedprofits rose by HK$2,992 million, reflecting the growth in attributable profitand the realisation of the property revaluation reserve on the disposal ofproperties during the year. The available-for-sale investments reserve alsorose. The return on average total assets was 1.9 per cent, compared with 2.0 per centfor 2005. The return on average shareholders' funds was 27.4 per cent (27.5 percent in 2005). The total capital ratio strengthened to 13.6 per cent at 31 December 2006, upfrom 12.8 per cent at the end of 2005. The tier 1 ratio rose from 10.4 per centto 10.7 per cent. The capital base rose by HK$6,684 million in retained profitsand as a result of the issue of US$450 million subordinated notes. The growth incapital base supported the 11.1 per cent growth in risk-weighted assets. The bank maintained a strong liquidity position. The average liquidity ratio for2006 was 51.9 per cent (calculated in accordance with the Fourth Schedule of theHong Kong Banking Ordinance), compared with an average liquidity ratio of 45.1per cent for 2005. The cost efficiency ratio for 2006 was 29.0 per cent, compared with 28.0 percent for 2005. Dividends The Directors have declared a fourth interim dividend of HK$1.90 per share,which will be payable on 30 March 2007 to shareholders on the register ofshareholders as of 20 March 2007. Together with the interim dividends for thefirst three quarters, the total distribution for 2006 will amount to HK$5.20 pershare, the same as in 2005. Customer group performance Personal Inter- Financial Commercial Corporate segmentFigures in HK$m Services Banking Banking Treasury Other elimination Total Year ended 31Dec06 Net interest income 7,428 2,036 623 481 1,126 _ 11,694Net fee income/(expense) 2,576 809 86 (24) 50 _ 3,497Trading income 517 150 7 628 28 _ 1,330Net income/(expense) from financial instruments designated at fair value 910 _ _ (11) _ _ 899Dividend income 8 5 _ _ 34 _ 47Net earned insurance premiums 7,671 174 1 _ _ _ 7,846Other operating income 542 26 _ (4) 281 _ 845Inter-segment income _ _ _ _ 378 (378) _Total operating income 19,652 3,200 717 1,070 1,897 (378) 26,158Net insurance claims incurred and movement in policyholders' liabilities (8,014) (63) _ _ _ _ (8,077)Net operating income before loan impairment (charges)/releases and other credit risk provisions 11,638 3,137 717 1,070 1,897 (378) 18,081Loan impairment (charges)/releases and other credit risk provisions (165) (101) 14 _ (12) _ (264)Net operating income 11,473 3,036 731 1,070 1,885 (378) 17,817Total operating expenses^ (3,472) (1,098) (168) (175) (328) _ (5,241)Inter-segment expenses (326) (38) (6) (8) _ 378 _Operating profit 7,675 1,900 557 887 1,557 _ 12,576Profit on disposal of fixed assets and financial investments 26 _ _ _ 817 _ 843Net surplus on property revaluation _ _ _ _ 321 _ 321Share of profits from associates 29 362 _ 164 100 _ 655Profit before tax 7,730 2,262 557 1,051 2,795 _ 14,395Share of profit before tax^ ^ 52.9% 16.4% 3.8% 7.6% 19.3% _ 100.0% Operating profit excluding inter-segment transactions 8,001 1,938 563 895 1,179 _ 12,576 Operating profit excluding loan impairment (charges)/ releases and other credit risk provisions 7,840 2,001 543 887 1,569 _ 12,840 ^ Depreciation /amortisation included in operating expenses (106) (11) (4) (2) (210) _ (333) ^ ^ Share of profits from associates is adjusted to pre-tax basis for the purpose of calculating the CustomerGroups' share of profit before tax. At 31Dec06 Total assets 167,241 69,633 76,619 326,181 29,390 _ 669,064Total liabilities 429,667 82,340 41,959 38,609 27,791 _ 620,366Investments in associates 141 1,775 _ 801 771 _ 3,488Capital expenditure incurred during the year 159 44 11 8 157 _ 379 Personal Inter- Financial Commercial Corporate segmentFigures in HK$m Services Banking Banking Treasury Other elimination Total Year ended 31Dec05 (restated) Net interest income 7,092 1,587 612 995 510 _ 10,796Net fee income/(expense) 2,136 713 79 (21) 49 _ 2,956Trading income 367 134 6 378 _ _ 885Net income/(expense) from financial instruments designated at fair value (25) _ _ (7) _ _ (32)Dividend income 5 5 _ _ 50 _ 60Net earned insurance premiums 7,607 176 _ _ _ _ 7,783Other operating income 562 25 4 _ 207 _ 798Inter-segment income _ _ _ _ 308 (308) _Total operating income 17,744 2,640 701 1,345 1,124 (308) 23,246Net insurance claims incurred and movement in policyholders' liabilities (6,964) (50) _ _ _ _ (7,014)Net operating income before loan impairment (charges)/releases and other credit risk provisions 10,780 2,590 701 1,345 1,124 (308) 16,232Loan impairment (charges)/releases and other credit risk provisions 232 (803) (47) _ _ _ (618)Net operating income 11,012 1,787 654 1,345 1,124 (308) 15,614Total operating expenses^ (3,086) (903) (142) (157) (258) _ (4,546)Inter-segment expenses (258) (40) (5) (5) _ 308 _Operating profit 7,668 844 507 1,183 866 _ 11,068Profit on disposal of fixed assets and financial investments _ _ _ (217) 694 _ 477Net surplus on property revaluation _ _ _ _ 1,313 _ 1,313Share of profits from associates 18 234 _ 106 142 _ 500Profit before tax 7,686 1,078 507 1,072 3,015 _ 13,358Share of profit before tax^ ^ 56.8% 8.8% 3.7% 8.3% 22.4% _ 100.0% Operating profit excluding inter-segment transactions 7,926 884 512 1,188 558 _ 11,068 Operating profit excluding loan impairment (charges)/releases and other credit risk provisions 7,436 1,647 554 1,183 866 _ 11,686 ^ Depreciation /amortisation included in operating expenses (103) (13) (3) (2) (168) _ (289) ^ ^ Share of profits from associates is adjusted to pre-tax basis for the purpose of calculating theCustomer Groups' share of profit before tax. At 31Dec05 Total assets 152,086 54,319 77,514 266,645 30,256 _ 580,820Total liabilities 372,941 77,249 31,672 33,541 21,687 _ 537,090Investments in associates 116 1,454 _ 657 702 _ 2,929Capital expenditure incurred during the year 107 20 7 2 95 _ 231 Personal Financial Services ('PFS') reported a growth of 5.4 per cent inoperating profit excluding loan impairment charges to HK$7,840 million. Profitbefore tax was up by 0.6 per cent to HK$7,730 million. There was a net charge ofHK$165 million in loan impairment provisions compared with a substantial netrelease of HK$232 million in 2005 (mainly from mortgages and personal loans).New and additional loan impairment charges were stable as the credit quality ofthe PFS loan portfolio remained benign. Net interest income rose 4.7 per cent, driven by the growth in customer advancesand improvement in spreads on BLR-based lending. The positive impact ofencouraging growth of 13.6 per cent in customer deposits was, however, offset bythe narrowing of deposit spreads on HK dollar savings and structured deposits. The PFS loan portfolio grew 5.4 per cent, or HK$7,115 million, notwithstandingthe fall in Government Home Ownership Scheme mortgages and the disposal of apart of the taxi loan portfolio to balance the overall loan portfolio structure.(Excluding such factors, PFS achieved a growth of 10.7 per cent in customeradvances.) Residential mortgages, PFS's core loan product, reported encouraginggrowth of 5.9 per cent and gained market share amid intense market competition.Our marketing efforts have proved successful in improving credit card spendingas well as consumer borrowing such that our personal loans and card advancesrose 46.4 per cent and 22.1 per cent respectively. Advances for investment andIPO subscriptions, mainly to Private Banking and Prestige Banking customers,also reported significant growth. Non-interest income reported encouraginggrowth of 14.2 per cent with wealth management income rising 22.7 per cent. High levels of stock market and IPO activities, underpinned by ample liquidityand bullish investment sentiment, helped investment services achieve impressivegrowth: - Our stockbroking business out-performed the market with the growth of 86.6 per cent in turnover. Together with a 20.0 per cent increase in customer base, our securities services income rose 63.3 per cent. This reflected the popularity of our efficient e-banking and phone trading channels, the competitive pricing of broker commissions, IPO subscription package offers and successful promotion campaigns. - Our endeavours to maintain a broad range of quality funds from high-growth China and emerging markets equity funds to more conservative capital-guaranteed and fixed income bond funds resulted in much success and recognition. Retail investment fund sales grew by 40.6 per cent over 2005. Three funds managed by Hang Seng Investment Management Limited were named top-performing funds at the Lipper Fund Awards Hong Kong 2007. To capture the vast growth potential of the China equity market, Hang Seng continued to be active in launching and promoting China funds. The bank's flagship China funds, the Hang Seng China H-Share Index Leveraged 150 Fund and Hang Seng China Equity Fund, reported returns of 161.1 per cent and 107.6 per cent respectively in 2006. - Structured deposits and instruments continued to grow with the launch of more sophisticated structures linked to equities, indices, foreign exchange and bullion. Spreads earned on structured products rose by 48.1 per cent. Private banking maintained its growth momentum and delivered an outstandingresult by continuing to focus on providing tailor-made financial planningservices. Total operating income rose 51.1 per cent to HK$731 million and profitbefore tax rose by 46.3 per cent to HK$556 million. Hang Seng's life insurance business maintained its leading market position fornew annualised premiums business with the launch of new annuities and medicalinsurance products tailored for the needs of pre-retirees and retirees. As aresult, life insurance reported a rise of 17.5 per cent in operating income,driven by growth of 18.5 per cent in the number of policies in force. Card spending grew 11.7 per cent, boosted by promotions in joint effort withmerchants and the continued improvement in consumer sentiment. Card servicesincome rose by 22.0 per cent. The number of cards in force increased by 10.5 percent to 1.4 million. New cards launched during 2006 include the alpha card, adebit card to tap the youth market, and VISA Infinite, which targets top-tieraffluent customers. Commercial Banking ('CMB') achieved an encouraging increase of 21.5 per cent inoperating profit excluding loan impairment charges, driven by strong growth incustomer advances and corporate wealth management business. Taking into accountthe reduction in loan impairment provisions, profit before tax rose 109.8 percent. Net interest income reported strong growth of 28.3 per cent. Customer advancesrose 22.2 per cent, highlighting significant growth in trade finance andfactoring loans with good gains in market share, and advances to the property,manufacturing, and wholesale and retail sectors. The opening of a branch inDongguan, together with the existing branches in Guangzhou, Shenzhen and Macau,further strengthened the bank's competitive edge in providing seamless, one-stopcommercial banking services to Hong Kong customers within the Pearl River Deltaregion. The bank further enhanced its position as the preferred SME bank through variousinitiatives, such as the SME 'testimonial' TV commercial (part of the bank'sbrand revitalisation campaign), the launch of the Business Partner Direct24-hour manned telephone service hotline and the extended opening hours of MTRbranches. New SME accounts acquired in the second half of 2006 outpaced thefirst half by 34.7 per cent, as a result of intensified marketing. The heightened focus upon CMB under the bank's Roadmap for Growth has resultedin growth of 13.5 per cent in net fees and commissions and 11.9 per cent intrading income. The bank has continued to launch customer-centric propositions for specificindustries. For retailers, the bank is the only financial institution to haveintroduced Octopus Merchant services, which complement other retailer solutionssuch as credit card merchant services, renminbi deposits, retailer insuranceprotection and bulk cash deposit services. Net fee income from card acquiringbusiness achieved a strong growth of 45.1 per cent in 2006. CMB identified great opportunities in developing corporate wealth managementservices. A dedicated wealth management team was established in early 2006 tobetter serve the investment, treasury and risk management needs of commercialcustomers. Furthermore, keyperson insurance was launched in early 2006. Withthese initiatives, corporate wealth management grew strongly and accounted for22.5 per cent of CMB's non-interest income. An increasing trend in corporatewealth management is expected to further dilute the reliance on trade feeincome. The pace of online business banking has accelerated. At 31 December 2006, over38,000 customers had registered for Business e-banking services, an increase of32.1 per cent from the end of 2005. The number of online business bankingtransactions also grew by 46.8 per cent. Corporate Banking's ('CIB') net operating income increased by 11.8 per cent.Strong liquidity in the banking system continued to squeeze corporate loanmargins, and CIB stayed focused on asset yield rather than loan growth. Customerdeposits registered a healthy growth of 32.5 per cent. CIB also stepped up itsefforts in collaboration with Treasury in providing corporate treasury servicesand structured products to grow non-fund income. Operating profit beforeimpairment charges was down by 2.0 per cent. The strong growth of our targetedbusiness segments from diversification of customer base in Hong Kong and theMainland largely compensated for the fall in lending to large corporates. Profitbefore tax increased by 9.9 per cent, benefiting from a release in collectivelyassessed impairment allowances. Treasury's ('TRY') operating profit was down by 25.0 per cent at HK$887 million.Profit before tax, however, was down only 2.0 per cent, due to the absence oflosses on the disposal of investment securities (a loss of HK$217 million wasrecorded in the previous year). TRY continued to pursue its strategy ofenhancing trading capability and providing more sophisticated products forcorporate and individual customers. This led to a substantial 66.1 per centincrease in trading income, which reached HK$628 million. The balance sheetmanagement portfolio, however, continued to face the challenge of the rise infunding costs, particularly for the US dollar portfolio, as well as flattenedyield curves. Net interest income fell by 51.7 per cent. The position, however,has been improving since the second half of the year with the halt in US dollarinterest rate hikes and subdued HK dollar interest rates due to ample marketliquidity. Mainland business The bank expanded its network to 15 outlets in 2006 by upgrading therepresentative office in Dongguan to a branch and opening three new sub-branchesin Shanghai and Guangzhou. This is in pursuance of its strategy to focus on theYangtze River Delta and Pearl River Delta regions and to develop its PrestigeBanking customer base through its sub-branch network in major cities. Stronggrowth was recorded in customer advances, which rose 50.9 per cent to HK$15.9billion. Customer deposits also rose significantly by 51.1 per cent. Profitbefore tax rose 94.2 per cent to HK$134 million, with growth of 94.5 per cent innet operating income. By customer group, mainland PFS focused on the Prestige Banking segment,benefiting from Hang Seng's established strengths, including excellent customerservice, strong wealth management capabilities and experience in mortgagebusiness. CMB and CIB teams collaborated closely with their Hong Kongcounterparts to serve customers' business needs on the Mainland and in HongKong, and to cultivate new relationships to expand the mainland corporatecustomer base. TRY continued to manage the funding positions of the branches anddevelop structured investment products to meet customers' needs. Including our share of profit from Industrial Bank Co., Ltd., our mainlandbusiness contributed 6.1 per cent of total profit before tax, compared with 4.5per cent in 2005. Mainland business financial highlights 2006 2005Figures in HK$m Profit before tax of mainland branches 134 69Share of profit from mainland associate on pre-tax basis 763 547Profit before tax of mainland business 897 616 Share of group's profit before tax^ 6.1% 4.5% ^ Share of profit from associate is adjusted to pre-tax basis for the purposeof calculating the share of group's profit before tax. This information is provided by RNS The company news service from the London Stock Exchange