HSBC Holdings Regulatory News (HSBA)

5 Mar 2007 08:20

HSBC Holdings PLC05 March 2007 THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED 2006 CONSOLIDATED RESULTS - HIGHLIGHTS - Net operating income before loan impairment charges and other credit risk provisions up 19.6 per cent to HK$92,325 million (HK$77,222 million in 2005).- Pre-tax profit up 15.0 per cent to HK$52,016 million (HK$45,249 million in 2005).- Attributable profit up 14.7 per cent to HK$37,709 million (HK$32,873 million in 2005).- Return on average shareholders' equity of 31.1 per cent (37.4 per cent in 2005).- Assets up 17.9 per cent to HK$3,151 billion (HK$2,673 billion at the end of 2005); risk-weighted assets up 10.5 per cent to HK$1,368 billion (HK$1,238 billion at 31 December 2005).- Total capital ratio of 13.5 per cent; tier 1 capital ratio of 12.3 per cent (12.4 per cent and 11.7 per cent at 31 December 2005).- Cost efficiency ratio of 41.4 per cent (41.2 per cent for 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 Vincent Cheng, Chairman In 2006, The Hongkong and Shanghai Banking Corporation achieved a robust pre-taxprofit of HK$52,016 million, up 15.0 per cent over 2005. Buoyant economicconditions, expansion of customer group businesses and widening net interestmargins in the region supported this strong result. In Hong Kong, pre-tax profitgrew 10.9 per cent to HK$37,978 million. For the rest of Asia-Pacific, pre-taxprofit was up 27.6 per cent to HK$13,992 million - a significant increase as wecontinued to reap the benefits of our investments in businesses in countrieswith strong economic growth. Around the region, there were several outstanding achievements in 2006. InIndia, our pre-tax profit grew 86.0 per cent to HK$2,336 million. Meanwhile,HSBC's mainland China network, excluding associates, recorded a 34.6 per centrise in profit to HK$998 million. With more than 50 outlets (including Hang SengBank), our mainland China network also remains the largest of any foreign bank.We launched direct banking in Taiwan in September 2006 and in Korea in Februaryof this year. Our consumer finance businesses in Australia and India, launchedin 2005, began to pick up momentum and we launched a new consumer financeoperation in Indonesia in 2006. In addition, in February 2007 we announced anagreement to increase our stake in Vietnam Technological and CommercialJoint-Stock Bank (Techcombank) from 10 per cent to 20 per cent once regulationspermit. In 2006, we launched a new Takaful (Islamic insurance) joint venturecompany in partnership with Jerneh Asia Berhad and The Employees Provident Fundof Malaysia. While we continue to focus on growing our businesses in the regionorganically, we remain open to expanding the scope and breadth of our reachthrough strategic acquisitions if the right opportunities arise. Our net operating income before loan impairment charges was HK$92,325 million,up 19.6 per cent. Balance sheet growth, wider deposit spreads, growth in demandfor wealth management products in rising equity markets, and successful GlobalMarkets trading activities in the region all contributed to this growth. The net charge for loan impairment and other credit risk provisions rose byHK$2,745 million to HK$4,809 million, reflecting significantly higher provisionslinked to personal lending outside Hong Kong, particularly in Taiwan andIndonesia, and higher charges resulting from volume growth in credit cards inHong Kong. Personal Financial Services reported a pre-tax profit of HK$21,889 million,which was up 1.2 per cent compared to 2005 due to the impact of theaforementioned provisions including Taiwan and Indonesia. Net operating incomebefore loan impairment charges rose strongly by 15.9 per cent to HK$46,073million as our operations in the region continued to expand. In Hong Kong there were also several notable successes. In 2006, HSBC was theleading bank in new residential mortgage lending, credit card issuance andreceivables, unit trust sales, and the origination and distribution ofstructured products. In new residential mortgage lending we captured a 17.6 percent market share, largely due to a simplified pricing campaign launched in thefirst quarter of 2006. Including Hang Seng Bank, the HSBC Group's market sharereached 33.3 per cent. HSBC, again including Hang Seng Bank, now has 4.6 millioncards in issue in the territory, up 16.7 per cent from 2005. Average receivablesin these portfolios also grew strongly, up 15.0 per cent to HK$26,655 million.Group fee income from cards rose by HK$671 million, up 29.1 per cent. Group unittrust sales grew by 60.9 per cent to HK$59,000 million. Insurance revenues grewby 13.0 per cent to HK$4,719 million. In the rest of the region, competitive pricing and increased marketing activityboosted income from mortgages in Singapore and Taiwan. Similarly, increasedmarketing led to a rise in income from interest earned on credit cards in thePhilippines, Indonesia and India. Our cards in issue in the region continued togrow strongly. In India we added 800,000 cards to reach two million in issue.Cards in issue increased elsewhere as well: up 34.6 per cent in the Philippinesto 816,000; up 20.0 per cent in Singapore to 531,000; up 42.2 per cent in SriLanka to 265,000; and up 28.0 per cent in Australia to 189,000. In 2006, HSBCwas the second largest credit card issuer in the Philippines in terms ofbillings and receivables. Our Commercial Banking business had an outstanding year, reporting pre-taxprofit of HK$14,945 million, up 34.3 per cent. This result was driven by balancesheet growth and widening deposit spreads. Commercial Banking continued to growdeposits, which rose 17.2 per cent to HK$439 billion, and lending balances, alsoup 17.2 per cent to HK$276 billion. We also continued to expand our presence inthe SME sector and to increase cross-border referrals to capture opportunitiesarising from the growing cross-border flows in trade, services and investment.Our Commercial Banking business continues to position itself to provide supportfor and to benefit from the growing regional trade and payment flows, inparticular those associated with China's economic expansion and development.Income from insurance and investment sales rose significantly in Hong Kong, up59.2 per cent to HK$1,523 million. Corporate, Investment Banking and Markets reported a pre-tax profit of HK$15,243million, up 15.0 per cent and driven by robust performances in GlobalTransaction Banking and strong trading profits in Global Markets. These tradingresults were largely on the back of customer flows, with particular successoutside Hong Kong. Declining balance sheet management revenues continued to dragon earnings as the cost of funding fixed rate asset positions, put on in earlierperiods, rose significantly. These positions had largely run off by the end ofthe first half of 2006. Net interest income in Global Transaction Bankingincreased by 62.7 per cent from business growth and improved deposits spreadsmost notably in India, Hong Kong, Singapore, Taiwan, mainland China and Korea.Overall, net fee income was boosted by the rising volumes in regional equitymarkets in the year, increasing by 28.7 per cent to HK$6,937 million. Inparticular, fee income from securities services increased 42.0 per cent fromrising equity market volumes, notably in India, mainland China and Singapore,and fee income from asset management business rose 48.1 per cent. Net tradingincome rose 20.3 per cent to HK$8,682 million as currency volatility providedgood trading opportunities and customer volumes increased in India, mainlandChina and Singapore. Looking forward, we will continue to invest in growth markets across theAsia-Pacific region, which remains an important growth engine for the HSBCGroup. We intend to further strengthen our distribution capability. Ourextensive and unique footprint in the region already provides us with acompetitive advantage and the use of channels such as direct banking furtherextends our reach to both existing and new customers. We will continue toenhance and grow our product and service capabilities to ensure we providecomprehensive services for our target customer segments across the region. Wewill also continue to watch for opportunities presented by possible strategicand selective acquisitions. In Hong Kong, which continues to be a major gatewayto mainland China, our operations remain the regional hub and fulcrum point ofHSBC in Asia. Our strategy in the territory is straightforward: we intend tomaintain our leading position as we further grow both our market share and ourshare of our customers' business. We will also actively and prudently manage ourcosts. In mainland China, we will continue our successful two-pronged strategyof growing organically and developing our strategic partnerships. The general outlook for Asia's burgeoning economies remains positive against abackdrop of supportive global economic growth, demand for goods and servicesfrom OECD countries and growth in intra-regional trade, including 'South South'economic flows. HSBC, for its part, has made significant progress in recentyears investing in its Asian emerging market operations. As a result, we arewell positioned to pursue the expanding opportunities in financial services asthese economies grow and develop. Results by Customer Group Corporate, Investment Personal Banking Intra- Financial Commercial and Private segmentFigures in HK$m Services Banking Markets Banking Other elimination Total Year ended 31Dec06 Net interest income/(expense) 30,090 14,006 9,104 45 (4,201) 2,055 51,099 Net fee income/(expense) 10,512 5,018 6,937 101 (164) - 22,404 Net trading income 889 796 8,682 14 825 (2,288) 8,918 Net income/(loss) from financial instruments designated at fair value 3,364 (384) 74 (1) (616) 233 2,670 Gains less losses from financial investments 108 - 226 - 1,132 - 1,466 Dividend income 9 10 55 - 675 - 749 Net earned insurance premiums 20,741 972 133 - - - 21,846 Other operating income 2,262 348 430 14 7,005 (4,406) 5,653 Total operating income 67,975 20,766 25,641 173 4,656 (4,406) 114,805 Net insurance claims incurred and movement in policyholders' liabilities (21,902) (478) (100) - - - (22,480) Net operating income before loan impairment charges and other credit risk provisions 46,073 20,288 25,541 173 4,656 (4,406) 92,325 Loan impairment charges and other credit risk provisions (4,528) (446) 250 - (85) - (4,809) Net operating income 41,545 19,842 25,791 173 4,571 (4,406) 87,516 Operating expenses (19,913) (6,531) (11,219) (167) (4,815) 4,406 (38,239) Operating profit/(loss) 21,632 13,311 14,572 6 (244) - 49,277 Share of profit in associates and joint venture 257 1,634 671 - 177 - 2,739 Profit/(loss) before tax 21,889 14,945 15,243 6 (67) - 52,016 Share of profit/(loss) before tax 42.1% 28.7% 29.3% - (0.1%) - 100.0% Advances to customers 446,990 276,172 301,069 3,312 16,239 - 1,043,782 Customer accounts 1,121,286 438,943 417,335 7,253 4,650 - 1,989,467 Year ended 31Dec05 Net interest income/(expense) 26,801 11,089 8,725 63 (3,800) 613 43,491 Net fee income 8,050 4,524 5,388 55 80 - 18,097 Net trading income/(loss) 683 638 7,215 10 (582) (784) 7,180 Net income/(loss) from financial instruments designated at fair value 666 (648) 122 - 73 171 384 Gains less losses from financial investments - 23 19 - 714 - 756 Dividend income 5 14 167 - 182 - 368 Net earned insurance premiums 18,437 756 147 - - - 19,340 Other operating income 1,984 295 572 13 6,338 (4,305) 4,897 Total operating income 56,626 16,691 22,355 141 3,005 (4,305) 94,513 Net insurance claims incurred and movement in policyholders' liabilities (16,889) (330) (72) - - - (17,291) Net operating income before loan impairment charges and other credit risk provisions 39,737 16,361 22,283 141 3,005 (4,305) 77,222 Loan impairment charges and other credit risk provisions (1,344) (896) 165 - 11 - (2,064) Net operating income 38,393 15,465 22,448 141 3,016 (4,305) 75,158 Operating expenses (16,932) (5,424) (9,642) (113) (4,008) 4,305 (31,814) Operating profit/(loss) 21,461 10,041 12,806 28 (992) - 43,344 Share of profit in associates and joint venture 179 1,090 446 - 190 - 1,905 Profit/(loss) before tax 21,640 11,131 13,252 28 (802) - 45,249 Share of profit/(loss) before tax 47.8% 24.6% 29.3% - (1.7%) - 100.0% Advances to customers 436,676 235,675 309,092 3,230 14,653 - 999,326 Customer accounts 984,734 374,370 366,752 7,405 1,849 - 1,735,110 Personal Financial Services reported profit before tax of HK$21,889 million, anincrease of 1.2 per cent over 2005 as strong growth in operating income of 15.9per cent was offset by higher credit card impairment allowances in Taiwan andIndonesia, and investment expenditure in the rest of Asia-Pacific. Overall, net interest income increased by HK$3,289 million, or 12.3 per cent,compared with 2005. In Hong Kong, net interest income rose by HK$2,029 million,or 10.0 per cent, as effective management of deposit pricing amid the continuedtrend of rising interest rates resulted in a further widening of liabilityspreads. Average customer account balances rose by 7.1 per cent, reflectingsuccessful promotional campaigns and customer preference for maintainingliquidity in order to take advantage of short-term investment opportunities. Thelocal mortgage market remained highly competitive as sales volumes in thehousing market slowed and margins were impacted by a higher cost of funds andcompetitor price promotions. However, HSBC regained leadership in market shareof new business, largely as a result of a simplified pricing campaign launchedby the bank in Hong Kong in the first quarter of 2006. Credit card lending grew,but net interest income fell as the benefit of higher receivables was more thanoffset by a rise in funding costs. In the rest of Asia-Pacific, net interest income rose by HK$1,260 million, or19.6 per cent, reflecting strong balance sheet growth across the region. Thedeposit base expanded in a number of countries, particularly Singapore,Indonesia and mainland China, reflecting evolution of the focused strategy onHSBC Premier customers, and deposit spreads improved on the back of higherinterest rates. Income from mortgages increased as lending grew, notably inSingapore and Taiwan, led by competitive pricing and increased marketingactivity. Interest earned on credit cards was higher in the Philippines,Indonesia and India, reflecting growth in receivables, but spreads narrowed inthe face of increased funding costs. Credit card interest income fellsignificantly in Taiwan as lending was reduced following the introduction of agovernment debt renegotiation scheme with zero or low rates for delinquentborrowers. Income from personal instalment loans rose, notably in India, Koreaand Indonesia, following the successful launch of these products in mid-2005. Net fee income of HK$10,512 million was 30.6 per cent higher than in 2005,driven by buoyant regional and global stock markets and greater demand forwealth management products. In Hong Kong, fee income was up by HK$1,828 million,or 31.7 per cent. Fee income from stockbroking and custody services rose by 80.3per cent, reflecting higher stock market transaction volumes. Sales of unittrusts increased significantly as investors switched to equity-related products,encouraged by improved markets and the launch of new investment funds. In therest of Asia-Pacific, fee income rose by 27.7 per cent on the back of strongdemand for investment products in Korea, Taiwan, India and Singapore, withrevenue from wealth management sales in the region increasing by HK$355 million,or 33.8 per cent. Fee income from credit cards was HK$671 million, or 29.1 per cent, higher thanin 2005 as the group strengthened its position as the largest card issuer inHong Kong, with over 4.6 million cards in force. In the rest of Asia-Pacific,particularly India and the Philippines, expansion of the cards businesscontinued. This was supported by extensive marketing campaigns and salesefforts, resulting in a rise of 21.3 per cent in the number of cards to a totalof 5.7 million issued, and a 19.3 per cent increase in cardholder spending. Insurance income rose by 13.0 per cent, with continued focus on the developmentof the group's retirement planning proposition and was supported by increasedlevels of marketing activity and distribution channel development. Sales ofother life assurance products also grew and revenue from general insurance,particularly medical, travel and home insurance, increased. Gains from financial investments principally comprise profit realised from thepartial disposal of shares held in MasterCard Inc. Other operating income increased by HK$278 million, attributable to gains on thesale of the Australian stockbroking, margin lending and broker-originatedmortgage businesses, and the share of profit attributable to Personal FinancialServices from the transfer of the credit card merchant acquiring business to ajoint venture company set up with Global Payments Inc. These gains werepartially offset by lower IT cost recoveries in Hong Kong from other regionalgroup entities resulting from a change in the charging methodology acrosscustomer groups. The charge for loan impairment increased by HK$3,184 million to HK$4,528million, largely attributable to higher credit card delinquency levels in Taiwanand Indonesia. Delinquency rates and write-offs rose in Taiwan largely as aresult of government measures to control consumer credit growth. Indonesia hasbeen affected by higher minimum repayment rules, coupled with a hefty reductionin the government subsidy of fuel prices. Volume growth in credit cardreceivables in Hong Kong and in personal instalment loans in other parts of theregion also contributed to the increased charge, whereas the prior periodbenefited from non-recurring releases of provisions against mortgage lending andrestructured facilities in Hong Kong. Operating expenses were HK$2,981 million, or 17.6 per cent, higher than in 2005,principally driven by continued investment to develop and expand the business inthe rest of the Asia-Pacific region. In Hong Kong, operating expenses rose by10.6 per cent, largely in relation to major credit card marketing campaigns andheadcount growth in customer-facing roles. Staff recruitment increased tosupport the introduction in September 2006 of the five-day working week andextended opening hours, and payroll costs further rose due to higherperformance-related bonuses and annual salary increments. Technology costs werealso higher, reflecting investment in customer portfolio management systems andthe enhancement of distribution channel capabilities. In the rest ofAsia-Pacific, costs increased by HK$1,936 million, or 27.4 per cent, notably inIndia and Korea, as the group continued to pursue organic growth in the region.Headcount rose by 29.1 per cent as sales and support functions were expanded,and premises costs rose as new branches were opened in mainland China and anumber of other countries. Higher marketing costs were incurred to drive salesand promote the HSBC brand, with specific campaigns targeted to increasecustomer numbers and raise market share in credit cards, mortgages and personalloans, and to attract new deposits. In addition, costs were incurred in thestart-up of the consumer finance business in the region, particularly in India,Australia and Indonesia, and in relation to the launch of HSBC Direct in Taiwanand Korea in September 2006 and February 2007 respectively. Income from associates of HK$257 million includes improved results from Bank ofCommunications and Industrial Bank. Commercial Banking reported profit before tax of HK$14,945 million, an increaseof 34.3 per cent over 2005, driven by improved deposit spreads and balance sheetgrowth. Net interest income increased by HK$2,917 million, or 26.3 per cent, comparedwith 2005. This reflected growth in average deposits and advances as well asimprovements in deposit spreads following further rises in interest rates acrossthe region this year. In Hong Kong, net interest income rose by HK$1,916million, or 22.5 per cent, due to growth in liability balances, reflecting theactive promotion of the 'BusinessVantage' account in Hong Kong and the wideningof deposit spreads. Strong demand for credit continued in the property sectorand from manufacturers with operations on the Mainland, but lending margins werecompressed due to keen market competition and higher funding costs. Emphasis onthe small business segment was strengthened with the opening of dedicated smallbusiness banking centres, more relationship managers and sales staff, and thelaunch of a streamlined lending process. Cross-border relationships continued tobe an area of emphasis, and the regional alignment proposition was enhanced tocapture business flows between Hong Kong, mainland China, Taiwan and Vietnam,which led to a significant increase in inter-office referrals. In the rest of Asia-Pacific, net interest income grew by 39.0 per cent.Liability spreads improved across the region and the deposit base expanded invarious countries, particularly in Taiwan, Singapore and India, followingsuccessful marketing campaigns and sales incentives. Account balances in Indiaincreased also due to the receipt of IPO funds. In addition, the offshorebusiness in Mauritius performed well. Term lending and trade finance increased,notably in mainland China, India, Korea and Australia as a result of promotionalactivities, enhanced packaged lending propositions, together with expansion ofthe branch network and internet banking. Asset spreads also improved. Net fee income rose by HK$494 million, or 10.9 per cent, largely attributable tohigher fees from account services and remittances, particularly in Hong Kong asa result of enhancements to the product range and increased cross-borderremittances. Credit card merchant acquiring fees dropped by 11.5 per cent as themajority of the business was transferred in July 2006 into a joint venturecompany set up with Global Payments Inc. Fees from trade services were higherwith increases in mainland China, India, Bangladesh and Indonesia partiallyoffset by lower revenues in Hong Kong due to intense market competition. Buoyantlocal equity markets and the launch of new investment products contributed toincreased wealth management sales in Hong Kong. Income from sales of foreignexchange and interest rate derivative products increased by 24.8 per cent,benefiting from an increase in hedging transactions and cross-border payments. Insurance revenues, particularly from life insurance products, continued to growfollowing the establishment of a dedicated commercial banking insurance divisionlast year. Income increased by 71.2 per cent. Fees from the Mandatory ProvidentFund business in Hong Kong also grew strongly. Other operating income increased by HK$53 million, due to the share of profitattributable to Commercial Banking from the transfer of the credit card merchantacquiring business to a joint venture company set up with Global Payments Inc. The charge for loan impairment was HK$450 million lower than in 2005, reflectinga decrease in new specific provisions in Hong Kong, although releases in HongKong, mainland China, India and Singapore were lower. Credit quality generallyremained stable. Operating expenses increased by 20.4 per cent over 2005. The number of sales andback-office staff rose in support of SME initiatives, insurance businessexpansion, product development and increased branch presence, and expenditurerose on marketing campaigns to win new business and raise market penetration.Ongoing investment in the development and promotion of internet banking andother lower-cost delivery channels resulted in higher IT and infrastructurecosts. Business Internet Banking in Hong Kong continued to show impressivegrowth and was enhanced to support sales of unit trusts and structured deposits.User numbers increased by over 20 per cent and the proportion of onlinetransactions grew by 42.2 per cent. Staff costs and marketing expenditure rosein Korea and mainland China in order to further develop the group's commercialbanking business in these countries. Income from associates was HK$544 million higher than in the prior year andincludes improved results from Bank of Communications and Industrial Bank. Corporate, Investment Banking and Markets reported profit before tax ofHK$15,243 million, 15.0 per cent higher than 2005, attributable to an excellentperformance in Global Transaction Banking and strong trading profits in GlobalMarkets. Net interest income increased by HK$379 million, or 4.3 per cent, compared with2005. In Global Markets, balance sheet management revenues declined as the costof funding fixed rate asset positions, put on in earlier periods, rosesignificantly, although these asset positions had, however, largely run off bythe end of the first half of 2006. In addition, flat yield curves made itdifficult to generate income through position-taking. Net interest income inGlobal Transaction Banking increased by 62.7 per cent, notably in India, HongKong, Singapore, Taiwan, mainland China and Korea as a result of business growthand interest rate rises in the region. Deposit balances grew by 22.3 per cent asthe payments and cash management business successfully completed theimplementation of a record number of domestic and cross-border cash managementmandates. The securities services business performed well, particularly inIndia, Taiwan and Korea. Trade finance revenues grew, notably in Japan andKorea. Net interest income from corporate lending fell by 4.7 per cent as thebenefit of balance sheet growth in Hong Kong was offset by competitive pressureson spreads. Strong growth in advances to corporates in mainland China wasachieved, reflecting investment made in expanding customer relationships andinflow of business into the group's new branches on the Mainland. Net fee income increased by HK$1,549 million, or 28.7 per cent. In GlobalTransaction Banking, fees rose by HK$1,294 million, or 34.2 per cent. Thesecurities services business continued to broaden capabilities across theregion, and was strengthened by the acquisition of the sub-custody business inAustralia and New Zealand from Westpac. Volumes benefited from buoyant localstock markets, particularly in Hong Kong, Korea and India. Fee income from theasset management business increased by 48.1 per cent, reflecting higher fundadvisory and distribution fees and growth in funds under management. Investmentbanking revenues were higher as the division arranged a number of structuredfinance transactions in Hong Kong, but underwriting income declined althoughseveral mandates for mid-tier IPOs were won. Net trading income rose by 20.3 per cent to HK$8,682 million. Foreign exchangeand interest rate derivatives revenues were higher as currency volatilityprovided good trading opportunities, particularly in regional currencies, andcustomer volumes increased reflecting HSBC's focus on capturing emerging marketflows from heightened client interest in emerging markets, particularly in Indiaand mainland China. Strong results were achieved from equities and equityderivatives trading, reflecting business expansion in these areas and buoyantregional stock markets. Private equity investments also performed strongly.Tighter credit spreads in the corporate bond market created fewer tradingopportunities compared to previous years, and there was a reduced contributionfrom the structured interest rate derivatives business as investors focused onshorter-dated interest rate products and other asset classes. Gains on the disposal of financial investments were HK$207 million higher thanin 2005 and largely comprised profits made on the sale of Philippine governmentsecurities in 2006, together with the non-recurrence of losses on disposals ofsecurities sold in 2005, following strategic decisions to reduce interest raterisk in certain portfolios. There was a net release of loan impairment provisions of HK$250 million,compared with a release of HK$165 million in 2005, as the corporate creditenvironment throughout the region remained benign. Operating expenses increased by 16.4 per cent compared with 2005, reflectingheadcount increases and IT investment to support business expansion in all areasand higher performance-related remuneration in the investment banking divisionand in Global Markets. The transfer to the group of HSBC Securities Japan fromanother HSBC Group company in the second quarter of 2005 also contributed to theincrease in expenses as a full period of costs was reflected this year. Income from associates of HK$671 million includes improved results from Bank ofCommunications and Industrial Bank. Other includes income and expenses relating to certain funding, investment,property and other activities that are not allocated to other customer groups. Gains from financial investments largely comprise profit on the disposal of partof the group's stake in UTI Bank, and other operating income includes profitsmade on property sales. These gains were partially offset by lower revaluationgains on investment property. Consolidated Income Statement Year ended Year endedFigures in HK$m 31Dec06 31Dec05 Interest income 115,928 80,199Interest expense (64,829) (36,708)Net interest income 51,099 43,491Fee income 26,554 21,671Fee expense (4,150) (3,574)Net fee income 22,404 18,097Net trading income 8,918 7,180Net income from financial instruments designated at fair value 2,670 384Gains less losses from financial investments 1,466 756Dividend income 749 368Net earned insurance premiums 21,846 19,340Other operating income 5,653 4,897Total operating income 114,805 94,513Net insurance claims incurred and movement in policyholders' liabilities (22,480) (17,291)Net operating income before loan impairment charges and other credit risk provisions 92,325 77,222Loan impairment charges and other credit risk provisions (4,809) (2,064)Net operating income 87,516 75,158Employee compensation and benefits (21,042) (17,736)General and administrative expenses (14,949) (12,095)Depreciation of property, plant and equipment (1,905) (1,825)Amortisation of intangible assets (343) (158)Total operating expenses (38,239) (31,814)Operating profit 49,277 43,344Share of profit in associates and joint venture 2,739 1,905Profit before tax 52,016 45,249Tax expense (9,411) (8,051)Profit for the year 42,605 37,198 Profit attributable to shareholders 37,709 32,873Profit attributable to minority interests 4,896 4,325 Extract from the Consolidated Balance Sheet Figures in HK$m At 31Dec06 At 31Dec05 ASSETSCash and short-term funds 518,022 502,730Items in the course of collection from other banks 46,519 17,782Placings with banks maturing after one month 104,037 69,554Certificates of deposit 73,200 53,831Hong Kong SAR Government certificates of indebtedness 102,374 97,344Trading assets 338,792 215,681Financial assets designated at fair value 50,514 37,073Derivatives 99,167 72,039Advances to customers 1,043,782 999,326Financial investments 484,841 394,497Amounts due from group companies 161,118 101,173Investments in associates and joint venture 25,534 23,061Goodwill and intangible assets 10,428 7,252Property, plant and equipment 29,159 29,805Deferred tax assets 1,245 1,272Retirement benefit assets 2,191 1,788Other assets 59,917 48,324Total assets 3,150,840 2,672,532 LIABILITIESHong Kong SAR currency notes in circulation 102,374 97,344Items in the course of transmission to other banks 57,226 20,927Deposits by banks 108,125 83,802Customer accounts 1,989,467 1,735,110Trading liabilities 272,545 250,198Financial liabilities designated at fair value 36,554 33,291Derivatives 98,659 72,009Debt securities in issue 69,195 61,468Retirement benefit liabilities 465 394Amounts due to group companies 31,356 24,777Other liabilities 56,478 46,628Liabilities under insurance contracts issued 61,350 41,845Current tax liabilities 4,500 2,044Deferred tax liabilities 4,284 3,729Subordinated liabilities 16,353 12,561Preference shares 76,464 71,980Total liabilities 2,985,395 2,558,107 EQUITYShare capital 22,494 22,494Other reserves 35,514 6,037Retained profits 80,942 64,303Proposed fourth interim dividend 6,500 4,500Total shareholders' equity 145,450 97,334Minority interests 19,995 17,091 165,445 114,425Total equity and liabilities 3,150,840 2,672,532 Consolidated Statement of Recognised Income and Expense Year ended Year endedFigures in HK$m 31Dec06 31Dec05 Available-for-sale investments:- fair value changes taken to equity 25,115 (1,885)- fair value changes transferred to the income statement on disposal or impairment (1,464) (787)- fair value changes transferred to the income statement on hedged items due to hedged risk (105) 1,077 Cash flow hedges:- fair value changes taken to equity (165) (2,743)- fair value changes transferred to the income statement 2,277 538 Property revaluation:- fair value changes taken to equity 1,977 2,448 Share of changes in equity of associates and joint venture (186) 1,098Exchange differences 2,779 (782)Actuarial gains on post-employment benefits 93 144 30,321 (892)Net deferred tax on items taken directly to equity (738) 253Total income and expense taken to equity during the year 29,583 (639)Profit for the year 42,605 37,198Total recognised income and expense for the year 72,188 36,559 Total recognised income and expense for the year attributable to:- shareholders 66,448 32,594- minority interests 5,740 3,965 72,188 36,559 Consolidated Cash Flow Statement Year ended Year endedFigures in HK$m 31Dec06 31Dec05 Operating activitiesCash generated from operations 88,942 31,009Interest received on financial investments 17,527 14,759Dividends received on financial investments 711 339Dividends received from associates 766 108Taxation paid (6,159) (7,313)Net cash inflow from operating activities 101,787 38,902 Investing activitiesPurchase of financial investments (402,459) (335,668)Proceeds from sale or redemption of financial investments 361,794 366,294Purchase of property, plant and equipment (2,085) (1,749)Proceeds from sale of property, plant and equipment 2,697 1,153Purchase of other intangible assets (1,142) (670)Proceeds from sale of assets held for sale 1,479 -Net cash outflow in respect of the acquisition of and increased shareholding in subsidiary companies (22) (1,644)Net cash inflow in respect of the sale of subsidiary companies 409 151Net cash outflow in respect of the purchase of interests in business portfolios (775) -Net cash outflow in respect of the purchase of interests in associates and joint venture (462) (3,358)Proceeds from the sale of interests in business portfolios 16,501 -Proceeds from the sale of interests in associates - 10Net cash (outflow)/inflow from investing activities (24,065) 24,519 Net cash inflow before financing 77,722 63,421 FinancingIssue of preference share capital 4,277 16,567Change in minority interest stake 976 362Repayment of subordinated liabilities (1,018) -Issue of subordinated liabilities 4,661 2,500Ordinary dividends paid (18,757) (20,600)Dividends paid to minority interests (3,841) (3,983)Interest paid on preference shares (3,935) (1,574)Interest paid on subordinated liabilities (946) (555)Net cash outflow from financing (18,583) (7,283) Increase in cash and cash equivalents 59,139 56,138 This information is provided by RNS The company news service from the London Stock Exchange