HSBC Holdings Regulatory News (HSBA)

6 Mar 2006 08:15

HSBC Holdings PLC06 March 2006 Other liabilities At 31Dec05 At 31Dec04Figures in HK$m restated Items in the course of transmission to other banks 6,517 6,136Accruals 1,653 2,303Acceptances and endorsements 2,371 -Other 3,597 3,301 14,138 11,740 Subordinated liabilities During the year, the group issued subordinated notes amounting to HK$2,500million and obtained a subordinated loan of US$260 million from its immediateholding company. Details of the transactions are as follows: Figures in HK$m At 31Dec05 At 31Dec04 Nominal value Description Amount owed to third parties HK$1,500 million Callable floating rate subordinated notes due June 2015 1,495 - HK$1,000 million 4.125 per cent callable fixed rate subordinated notes due June 2015 967 - Amount owed to HSBC Group undertakings US$260 million Callable floating rate subordinated loan debt due December 2015 2,016 - 4,478 - Representing:- measured at amortised cost 3,511 -- designated at fair value 967 - 4,478 - The above subordinated notes and loan each carries a one-time call optionexercisable by the group on a day falling five years plus one day after therelevant date of issue/drawdown. The floating rate notes of HK$1,500 million bear interest at the rate ofthree-month HIBOR plus 0.35 per cent, payable quarterly from the issue date tothe call option date. Thereafter, if the notes are not redeemed on the calloption date, the interest rate will be reset to three-month HIBOR plus 0.85 per cent, payable quarterly. The fixed rate notes of HK$1,000 million bear interest at the rate of 4.125 per cent per annum, payable semi-annually from the issue date to the call option date. The notes, if not redeemed on the call option date, will become floating rate notes bearing interest at the rate of three-monthHIBOR plus 0.825 per cent payable quarterly. The fixed rate notes are reported as financial liabilities designated at fairvalue together with the interest rate swap transacted to manage the interestrate risk. The floating rate subordinated loan debt of US$260 million bears interest at therate of three-month LIBOR plus 0.31 per cent, payable quarterly from the issuedate to the call option date. Thereafter, if the loan is not repaid on the calloption date, the interest rate will be reset to three-month LIBOR plus0.81 per cent, payable quarterly. Shareholders' funds At 31Dec05 At 31Dec04Figures in HK$m restated Share capital 9,559 9,559Retained profits 26,052 23,856Property revaluation reserve 3,543 2,778Long-term equity investment revaluation reserve - 935Cash flow hedges reserve (483) -Available-for-sale investment reserve (17) -Capital redemption reserve 99 99Other reserves 185 69Total reserves 29,379 27,737 38,938 37,296Proposed dividends 3,633 3,633Shareholders' funds 42,571 40,929 Return on average shareholders' funds 27.5% 28.5% Save for the issuance of subordinated notes in June 2005, there was no purchase,sale or redemption of the group's listed securities by the bank or any of itssubsidiaries during 2005. Shareholders' funds (excluding proposed dividends) rose by HK$1,642 million, or4.4 per cent, to HK$38,938 million at 31 December 2005. Retained profitsincreased by HK$2,196 million, and the property revaluation reserve rose byHK$765 million reflecting the improved property market. These were partiallyoffset by the HK$500 million revaluation loss on available-for-sale investmentsecurities, and on interest rate swaps designated as cash flow hedges. The return on average shareholders' funds was 27.5 per cent, compared with 28.5per cent in 2004. Capital resources management Analysis of capital base and risk-weighted assets Figures in HK$m At 31Dec05 At 31Dec04 Capital baseTier 1 capital- Share capital 9,559 9,559- Retained profits 21,439 20,560- Classified as regulatory reserve (510) -- Capital redemption reserve 99 99- Less: goodwill (318) (302)- Total 30,269 29,916Tier 2 capital- Property revaluation reserve 5,114 5,322- Available-for-sale investment and equity revaluation reserve (5) 625- Collective impairment allowances 510 289- Regulatory reserve 510 -- Term subordinated debt 4,479 -- Total 10,608 6,236Unconsolidated investments and other deductions (3,444) (2,829)Total capital base after deductions 37,433 33,323 Risk-weighted assetsOn-balance sheet 277,617 259,429Off-balance sheet 14,739 16,577Total risk-weighted assets 292,356 276,006Total risk-weighted assets adjusted for market risk 291,570 277,029 At 31Dec05 At 31Dec04 Capital adequacy ratiosAfter adjusting for market risk- Tier 1^ 10.4% 10.8%- Total^ 12.8% 12.0% Before adjusting for market risk- Tier 1 10.4% 10.8%- Total 12.8% 12.1% ^ The capital ratios take into account market risks in accordance with therelevant HKMA guideline under the Supervisory Policy Manual. In accordance with the HKMA guideline Impact of the New Hong Kong AccountingStandards on Authorised Institutions' Capital Base and Regulatory Reporting, the Group has earmarked a 'regulatory reserve' from retained profits. Thisregulatory reserve is included as tier 2 capital together with the group'scollective impairment allowances. The total capital ratio rose by 0.8 percentage points over 2004 to reach 12.8per cent at 31 December 2005. The capital base increased by HK$4,110 million toHK$37,433 million. During the year, the group issued HK$2,500 million insubordinated notes and obtained a subordinated loan of US$260 million, bothqualified as tier 2 capital, to achieve a more balanced capital structure and tosupport business growth. Risk-weighted assets adjusted for market risk grew by5.2 per cent, attributable mainly to the increase in advances to customers andfinancial investments. Liquidity ratio The average liquidity ratio for the year, calculated in accordance with theFourth Schedule of the Hong Kong Banking Ordinance, is as follows: 2005 2004 The bank and its major banking subsidiaries 45.1% 47.2% Reconciliation of cash flow statement (a)Reconciliation of operating profit to net cash flow from operating activities 2005 2004Figures in HK$m restated Operating profit 11,068 12,598Net interest income (11,068) (10,005)Dividend income (60) (89)Loan impairment charges/(releases) and other credit risk provisions 618 (777)Depreciation 280 256Amortisation of intangible assets 9 8Amortisation of available-for- sale investments 12 -Amortisation of held-to-maturity debt securities - 426Advances written off net of recoveries (575) (577)Interest received 13,578 9,369Interest paid (7,443) (2,646)Operating profit before changes in working capital 6,419 8,563Change in placings with and advances to banks maturing after one month 2,534 2,658Change in trading assets 3,983 (2,541)Change in financial assets designated at fair value 1,060 -Change in derivative financial instruments (395) (88)Change in advances to customers (8,857) (21,244)Change in available-for-sale investments 8,113 -Change in held-to-maturity debt securities - (1,590)Change in other assets (11,929) (4,000)Change in current, savings and other deposit accounts (9,189) 15,307Change in deposits from banks 110 8,938Change in trading liabilities 29,263 4,326Change in certificates of deposit and other debt securities in issue (2,589) 8,168Change in other liabilities 9,423 4,955Elimination of exchange differences and other non-cash items 315 (4,904)Cash generated from operating activities 28,261 18,548Taxation paid (1,421) (925)Net cash inflow from operating activities 26,840 17,623 (b) Analysis of the balances of cash and cash equivalents At 31Dec05 At 31Dec04Figures in HK$m restated Cash and balances with banks and other financial institutions 9,201 7,248Placings with and advances to banks and other financial institutions maturing within one month 53,294 57,071Treasury bills 3,018 47Certificates of deposit - 2,685 65,513 67,051 Credit Risk- Contract equivalent weightedFigures in HK$m amount amount amount At 31Dec05 Contingent liabilities:Guarantees 4,133 3,907 3,131 Commitments:Documentary credits and short-term trade-related transactions 7,402 1,480 1,480Undrawn formal standby facilities, credit lines and other commitments to lend:- under one year 109,369 - -- one year and over 20,385 10,193 9,158Other 220 220 220 137,376 11,893 10,858 Exchange rate contracts:Spot and forward foreign exchange 188,088 1,426 333Other exchange rate contracts 15,176 193 48 203,264 1,619 381 Interest rate contracts:Interest rate swaps 161,083 1,472 308Other interest rate contracts 4,255 20 4 165,338 1,492 312 Other derivative contracts 1,194 86 17 Credit Risk- Contract equivalent weightedFigures in HK$m amount amount amount At 31Dec04 Contingent liabilities:Guarantees 7,039 6,764 3,429 Commitments:Documentary credits and short-term trade-related transactions 9,020 1,844 1,805Undrawn formal standby facilities, credit lines and other commitments to lend:- under one year 86,714 - -- one year and over 23,677 11,839 10,460Other 38 38 38 119,449 13,721 12,303 Exchange rate contracts:Spot and forward foreign exchange 138,269 1,066 298Other exchange rate contracts 23,158 323 106 161,427 1,389 404 Interest rate contracts:Interest rate swaps 120,603 1,421 347Other interest rate contracts 5,067 15 6 125,670 1,436 353 Other derivative contracts 1,373 46 23 The tables above give the nominal contract, credit equivalent and risk-weightedamounts of off-balance sheet transactions. The credit equivalent amounts arecalculated for the purposes of deriving the risk-weighted amounts. These areassessed in accordance with the Third Schedule of the Hong Kong BankingOrdinance on capital adequacy and depend on the status of the counterparty andthe maturity characteristics. The risk weights used range from 0 per cent to 100 per cent for contingent liabilities and commitments, and from 0 per cent to 50 per cent for exchange rate, interest rate and other derivatives contracts. Contingent liabilities and commitments are credit-related instruments whichinclude acceptances, letters of credit, guarantees and commitments to extendcredit. The risk involved is essentially the same as the credit risk involved inextending loan facilities to customers. These transactions are, therefore,subject to the same credit origination, portfolio maintenance and collateralrequirements as for customers applying for loans. As the facilities may expirewithout being drawn upon, the total of the contract amounts is notrepresentative of future liquidity requirements. Off-balance sheet financial instruments arise from futures, forward, swap andoption transactions undertaken in the foreign exchange, interest rate and equitymarkets. The contract amounts of these instruments indicate the volume of transactionsoutstanding at the balance sheet date and do not represent amounts at risk. Thecredit equivalent amount of these instruments is measured as the sum of positivemarked-to-market values and the potential future credit exposure in accordancewith the Third Schedule of the Hong Kong Banking Ordinance. Derivative financial instruments are held for trading, as financial instrumentsdesignated at fair value, or designated as either fair value hedge or cash flowhedges. The accounting policies for each class of derivatives on adoption ofHKAS 39 are set out in the appendix. The following table shows the nominal valueand marked-to-market value of assets and liabilities of each class ofderivatives. At31Dec05 At31Dec04 Trading/ designated at fair Non-Figures in HK$m value Hedging Trading trading Contract amounts:Interest rate contracts 102,233 63,105 54,755 70,915Exchange rate contracts 203,264 - 161,117 310Other derivative contracts 1,194 - 1,373 - 306,691 63,105 217,245 71,225 Derivative assets:Interest rate contracts 481 454 519 -Exchange rate contracts 776 - 1,160 -Other derivative contracts 4 - 5 - 1,261 454 1,684 - Derivative liabilities:Interest rate contracts 998 457 477 -Exchange rate contracts 310 - 796 -Other derivative contracts 27 - - - 1,335 457 1,273 - The above derivative assets and liabilities, being the positive or negativemarked-to-market value of the respective derivative contracts, represent grossreplacement costs, as none of these contracts are subject to any bilateralnetting arrangements. Cross-border claims Cross-border claims include receivables and loans and advances, and balances duefrom banks and holdings of certificates of deposit, bills, promissory notes,commercial paper and other negotiable debt instruments, as well as accruedinterest and overdue interest on these assets. Claims are classified accordingto the location of the counterparties after taking into account the transfer ofrisk. For a claim guaranteed by a party situated in a country different from thecounterparty, the risk will be transferred to the country of the guarantor. Fora claim on the branch of a bank or other financial institution, the risk will betransferred to the country where its head office is situated. Claims onindividual countries or areas, after risk transfer, amounting to 10 per cent ormore of the aggregate cross-border claims are shown as follows: Banks Sovereign & other & public financial sectorFigures in HK$m institutions entities Other Total At31Dec05 Asia-Pacific excluding Hong Kong:- Australia 23,961 144 712 24,817- other 38,140 1,447 6,882 46,469 62,101 1,591 7,594 71,286The Americas:- Canada 16,229 3,976 1,677 21,882- other 13,182 2,460 10,712 26,354 29,411 6,436 12,389 48,236Western Europe:- United Kingdom 23,008 - 7,842 30,850- other 81,089 1,430 6,207 88,726 104,097 1,430 14,049 119,576 At31Dec04 Asia-Pacific excluding Hong Kong:- Australia 21,429 62 1,223 22,714- other 26,222 1,530 5,432 33,184 47,651 1,592 6,655 55,898The Americas:- Canada 19,748 4,957 1,556 26,261- other 11,320 2,744 10,252 24,316 31,068 7,701 11,808 50,577Western Europe:- United Kingdom 23,794 16 5,945 29,755- other 76,926 2,063 5,711 84,700 100,720 2,079 11,656 114,455 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 thestatutory accounts for the year ended 31 December 2005 ('2005 accounts'), whichwill be delivered to the Registrar of Companies and the HKMA. The statutoryaccounts comply with the module on 'Financial Disclosure by Locally IncorporatedAuthorised Institutions' under the Supervisory Policy Manual issued by the HKMA.The auditors expressed an unqualified opinion on those statutory accounts intheir report dated 6 March 2006. The 2005 accounts and this news release have been prepared on a basis consistentwith the accounting policies adopted in the 2004 accounts except for the changesin accounting policies following the adoption of the new and revised Hong KongFinancial Reporting Standards and Hong Kong Accounting Standards ('HKFRSs')issued by The Hong Kong Institute of Certified Public Accountants, which becameeffective for accounting periods beginning on or after 1 January 2005. The significant changes in accounting policies on adoption of the new HKFRSs andthe financial impacts on the current and prior accounting periods are set out inthe appendix to this news release. Comparative figures have been restated to conform with the new accountingpolicies except for those applying to financial instruments under HKAS 39'Financial instruments: recognition and measurement'. 2. Comparative figures Certain comparative figures have been reclassified to conform with the currentyear's presentation. 3. Property revaluation On 30 September 2005, the group's premises and investment properties wererevalued by DTZ Debenham Tie Leung Limited who confirmed that there had been nomaterial change in valuation at 31 December 2005. The valuation was carried outby qualified persons who are members of the Hong Kong Institute of Surveyors.The basis of the valuation of premises was open market for existing use and thebasis of valuation for investment properties was open market value. Therevaluation surplus for group premises amounted to HK$1,199 million of whichHK$153 million was a reversal of revaluation deficits previously charged to theincome statement. The balance of HK$1,046 million was credited to the propertyrevaluation reserve. Revaluation gains on investment properties of HK$1,160million were recognised through the income statement on adoption of HKAS 40. Therelated deferred tax provisions for group premises and investment propertieswere HK$210 million and HK$203 million respectively. Market risk is the risk that foreign exchange rates, interest rates or equityand commodity prices will move and result in profits or losses for the group.The group's market risk arises from customer-related business and from positiontaking. Market risk is managed within risk limits approved by the Board of Directors.Risk limits are set by product and risk type with market liquidity being aprincipal factor in determining the level of limits set. Limits are set using acombination of risk measurement techniques, including position limits,sensitivity limits, as well as value at risk ('VAR') limits at a portfoliolevel. The group adopts the risk management policies and risk measurement techniquesdeveloped by the HSBC Group. The daily risk monitoring process measures actualrisk exposures against approved limits and triggers specific action to ensurethe overall market risk is managed within an acceptable level. VAR is a technique which estimates the potential losses that could occur on riskpositions taken due to movements in market rates and prices over a specifiedtime horizon and to a given level of confidence. In line with the HSBC Group,Hang Seng refined its basis of calculating VAR from one predominantly based onvariance/co-variance ('VCV') to one predominantly based on historical simulation('HS'), effective 3 May 2005. This latter calculation was introduced because itbetter captures the non-linear characteristics of certain market risk positions.HS uses scenarios derived from historical market rates, and takes account of therelationships between different markets and rates, for example, interest ratesand foreign exchange rates. Movements in market prices are calculated byreference to market data from the last two years. The group has changed theassumed holding period from a 10-day period to a one-day period as this reflectsthe way the risk positions are managed. Comparative VAR numbers have beenre-stated to reflect this change. Aggregation of VAR from different risk typesis based upon the assumption of independence between risk types. In recognitionof the inherent limitations of VAR methodology, stress testing is performed toassess the impact of extreme events on market risk exposures. The group has obtained approval from the HKMA to change the VAR model from VCVto HS for calculating market risk in capital adequacy reporting and the HKMA hasexpressed itself satisfied with the group's market risk management process. The group's VAR for all interest rate risk and foreign exchange risk positionsand on individual risk portfolios during 2005 and 2004 are shown in the tablesbelow. The VAR figures for 2005 are based on four months' VCV and eight months'HS. VAR Minimum Maximum Average during during for the the theFigures in HK$m At31Dec05 year year year VAR for all interest rate risk and foreign exchange risk 113 111 264 181VAR for foreign exchange risk (trading) 3 - 6 2VAR for interest rate risk- trading 3 1 21 4- non-trading 118 117 260 180 Minimum Maximum Average during during for At31Dec04 the the theFigures in HK$m (restated) year year year VAR for all interest rateriskand foreign exchange risk 125 79 191 118VAR for foreign exchange risk (trading) 1 - 18 11VAR for interest rate risk- trading 1 - 5 1- non-trading 125 77 191 117 The average daily revenue earned from market risk-related treasury activities in2005, including non-trading book net interest income and funding related todealing positions, was HK$5 million (HK$10 million for 2004). The standarddeviation of these daily revenues was HK$8 million (HK$5 million for 2004). Ananalysis of the frequency distribution of daily revenues shows that out of 247trading days in 2005, losses were recorded on 15 days and the maximum daily losswas HK$84 million. The most frequent result was a daily revenue of between HK$2million and HK$6 million, with 127 occurrences. The highest daily revenue wasHK$23 million. Interest rate risk arises in both the treasury dealing portfolio and accrualbooks, which are managed by Treasury under limits approved by the Board ofDirectors. The average daily revenue earned from treasury-related interest rateactivities for 2005 was HK$3 million (HK$6 million for 2004). The group's foreign exchange exposures mainly comprise foreign exchange dealingby Treasury and currency exposures originated by its banking business. Thelatter are transferred to Treasury where they are centrally managed withinforeign exchange position limits approved by the Board of Directors. The averageone-day foreign exchange profit for 2005 was HK$2 million (HK$4 million for 2004). Structural foreign exchange positions arising from capital investment insubsidiaries and branches outside Hong Kong, mainly in US dollar and renminbi asset out in Note 5, are managed by the Asset and Liability Management Committee. 5. Foreign currency positions Foreign currency exposures include those arising from dealing, non-dealing andstructural positions. At 31 December 2005, the US dollar (US$) was the onlycurrency in which the group had a non-structural foreign currency position whichexceeded 10 per cent of the total net position in all foreign currencies. Figures in HK$m At31Dec05 At31Dec04 US$ RMB US$ RMBNon-structural positionSpot assets 193,149 5,955 173,071 2,664Spot liabilities (168,513) (6,008) (171,698) (2,400)Forward purchases 84,026 439 68,726 207Forward sales (104,960) (300) (69,795) (192)Net options position (77) - (37) -Net long non-structural position 3,625 86 267 279 At 31 December 2005, the group's major structural foreign currency positionswere US dollar and renminbi. At31Dec05 At31Dec04 % of % of total net total net structural structural HK$m position HK$m positionStructural positionsUS dollar 1,035 32.5 850 28.8Renminbi 2,043 64.1 1,998 67.6 6. Ultimate holding company Hang Seng Bank is an indirectly held, 62.14 per cent-owned subsidiary of HSBCHoldings plc. 7. Register of shareholders The register of shareholders of Hang Seng Bank will be closed on Tuesday,21 March 2006, during which no transfer of shares can be registered. In order toqualify for the fourth interim dividend, all transfers, accompanied by therelevant share certificates, must be lodged with the bank's registrars,Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor,Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong, for registration notlater than 4:00 pm on Thursday, 16 March 2006. The fourth interim dividend willbe payable on 31 March 2006 to shareholders on the register of shareholders ofthe bank on 21 March 2006. 8. Proposed timetable for 2006 quarterly dividends First Second Third Fourth interim interim interim interim dividend dividend dividend dividend Announcement 2 May 2006 31 July 2006 6 November 2006 5 March 2007Book close date 26 May 2006 23 August 2006 20 December 2006 20 March 2007Payment date 6 June 2006 31 August 2006 3 January 2007 30 March 2007 9. News release Copies of this news release may be obtained from Legal and Company SecretarialServices Department, Level 10, 83 Des Voeux Road Central, Hong Kong; or fromHang Seng's website http://www.hangseng.com. The 2005 Annual Report and Accounts will be available from the same website onMonday, 6 March 2006 and will also be published on the website of The StockExchange of Hong Kong Limited in due course. Printed copies of the 2005 AnnualReport will be sent to shareholders in late March 2006. This information is provided by RNS The company news service from the London Stock Exchange