• February 21, 2017
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Hang Seng Bank releases full year results for 2016

• Operating profit excluding loan impairment charges and other credit risk provisions down 1% to HK$20,347m (HK$20,547m in 2015).
• Operating profit down 2% to HK$19,034m (HK$19,439m in 2015).
• Profit before tax down 37% to HK$19,090m (HK$30,488m in 2015). Excluding the gain on partial disposal of Industrial Bank in 2015, profit before tax down 4%.
• Attributable profit down 41% to HK$16,212m (HK$27,494m in 2015). Excluding the gain on partial disposal of Industrial Bank in 2015, attributable profit down 4%.
• Return on average ordinary shareholders’ equity of 12.1% (20.7% in 2015).
• Excluding the gain on partial disposal of Industrial Bank in 2015, return on average ordinary shareholders’ equity of 12.6% for 2015.
• Earnings per share down 42% to HK$8.30 per share (HK$14.22 per share in 2015). Excluding the gain on partial disposal of Industrial Bank in 2015, earnings per share down 4%.
• Fourth interim dividend of HK$2.80 per share; total dividends of HK$6.10 per share for 2016 (HK$5.70 per share in 2015, excluding the special interim dividend of HK$3.00 per share that was issued in 2015).
• Common Equity Tier 1 (‘CET1’) capital ratio of 16.6%, Tier 1 (‘T1’) capital ratio of 17.9% and Total capital ratio of 20.8% at 31 December 2016. (CET1 capital ratio of 17.7%, T1 capital ratio of 19.1% and Total capital ratio of 22.1% at 31 December 2015.)
• Cost efficiency ratio of 33.5% (33.8% in 2015).

Comment by Raymond Ch’ien, Chairman
International uncertainties and economic deleveraging on the Mainland continued to present challenging operating conditions. Investor caution resulted in subdued investment market activity and soft demand for loans during the year.

Against this backdrop, Hang Seng Bank leveraged its competitive strengths to record respectable results for 2016 and strengthen its platform for achieving long-term growth.

Excluding the impact of the HK$10.6bn gain on the partial disposal of our holding in Industrial Bank in the first half of 2015, profit attributable to shareholders fell by 4% to HK$16,212m and earnings per share declined by 4% to HK$8.30. On a reported basis, attributable profit and earnings per share were down 41% and 42% respectively.

The Directors have declared a fourth interim dividend of HK$2.80 per share. This brings the total distribution for 2016 to HK$6.10 per share, compared with HK$5.70 per share in the previous year, excluding the HK$3.00 special dividend that was issued in 2015.

Economic Environment
Growth has been reported in advanced economies following steps by major central banks to act against economic and financial market risks. In the US, growth averaged 2.7% in the second half of 2016, up from 1.1% in the first half. Second-half growth in the eurozone was 1.8%, a small increase from 1.7% in the first half.

Economic growth on the Mainland was within the Central Government’s target range last year, due in part to the success of policy measures designed to support economic stability and longterm economic transition. While full-year GDP growth for 2016 was 6.7%, its slowest rate in 26 years, growth in the fourth quarter accelerated for the first time in two years to 6.8%. We expect the Mainland economy to maintain a similar pace of annual expansion in 2017.

The US is on track to tighten monetary policy, but the gradual pace of interest rate rises suggests that its impact on Hong Kong should be moderate. While potential changes in international trade policies are clouding the outlook for Sino-US trade relations, growth in Hong Kong’s domestic service sector has remained steady. Our forecast is for annual GDP growth in Hong Kong to rise to 1.8% in 2017 from an estimated 1.4% in 2016.

Uncertainties over global trade, the evolving credit conditions and economic adjustment on the Mainland will continue to create challenges for business. Supported by our strong market position, large client base and sustainable growth strategy, we will invest resources in enhancing efficiency, acting swiftly on new business opportunities and deepening customer relationships to increase value for shareholders.

Review by Rose Lee, Vice-Chairman and Chief Executive
In challenging operating conditions, Hang Seng Bank maintained good business momentum by recognising and responding swiftly to changes in the market and the evolving needs of customers.

We embraced the use of technology and data analytics to improve our understanding of and engagement with clients. Supported by enhancements to our physical network, digital platforms and all-weather portfolio of wealth-and-health offerings, we deepened customer relationships.

This enabled us to deliver a more personalised service experience.

We invested in infrastructure and technology that support closer cross-border and cross-business connectivity in order to capitalise on new opportunities and position ourselves for growth. The Hang Seng China H-Share Index Fund was among the first batch of northbound funds offered to Mainland investors in February 2016 under the Mainland-Hong Kong Mutual Recognition of Funds initiative. In September, we established Hang Seng Qianhai Fund Management Company Limited, the first Mainland-domiciled, foreign-majority-owned joint venture fund management company under CEPA. In December, we launched Shenzhen-Hong Kong Stock Connect Northbound Trading services.

We achieved solid growth in net interest income and achieved increases in operating income and profit in Commercial Banking and Global Banking and Markets. Retail Banking and Wealth Management recorded continuous growth in net interest income. We deepened our customer segmentation strategy, resulting in increased numbers of Prestige and Preferred Banking customers. Subdued investment sentiment, particularly during the first half of 2016, compared with the buoyant investment environment in 2015 had a significant impact on wealth management income. With improved investment conditions in the second half of 2016 and our
continuing drive to enrich our portfolio of wealth management products, we achieved sustainable growth in investment services revenue in the second half when compared with the first half of the year.

Net interest margin improved to 1.85% through effective assets and liabilities management despite narrowing spreads on customer lending. Our strong capital base and healthy liquidity position enabled us to respond rapidly to new business opportunities and changing regulatory requirements.

We upheld our prudent credit risk management principles to maintain satisfactory asset quality in our lending and investment portfolios.

Financial Performance
Operating profit excluding loan impairment charges declined by 1% to HK$20,347m. Operating profit was down 2% at HK$19,034m.

Excluding the impact of the HK$10.6bn gain on our partial disposal of our holding in Industrial Bank in the first half of 2015, underlying attributable profit and earnings per share both declined by 4% to HK$16,212m and HK$8.30 respectively. On the same basis, profit before tax was down 4% at HK$19,090m. On a reported basis, attributable profit, earnings per share and profit before tax fell by 41%, 42% and 37% respectively, reflecting the impact of the Industrial Bank disposal gain.

Net interest income grew by 5% to HK$22,254m, driven mainly by the 4% rise in average interest-earning assets and successful efforts to enhance the deposit mix. Targeted client and deposit acquisition strategies helped support a 3% increase in average customer deposits.

Average customer lending rose by 1%. Net interest margin improved by two basis points to 1.85%.

Non-interest income declined by 16% to HK$8,345m, due mainly to the impact of the subdued investment environment, particularly in the first half of the year.

Our cost efficiency ratio was 33.5%, compared with 33.8% in 2015.

At 31 December 2016, our common equity tier 1 capital ratio was 16.6% and our tier 1 capital ratio was 17.9%, compared with 17.7% and 19.1% respectively at the end of 2015. Our total capital ratio was 20.8%, compared with 22.1% a year earlier.

Recognising Challenges, Responding to Change
The uncertain global environment, economic deleveraging on the Mainland and strong competition in the banking sector will continue to create challenging operating conditions.

At the same time, the Mainland’s commitment to open up its financial sector and strengthen regional and international economic ties, particularly as part of the ‘One Belt, One Road’ initiative, will drive demand for innovative financial services and generate new business opportunities.

Hong Kong is among the most competitive economies in the world. Its success as an international finance and trade hub and the primary gateway for cross-border business activities between the Mainland and the overseas markets is built on making the best of its competitive strengths. These include comprehensive financial and investor protection frameworks, openness to new opportunities and ideas, and the ability to rapidly adapt to new situations.

As Hong Kong’s leading domestic bank, we will pursue our sustainable growth strategy by further leveraging our strong financial fundamentals, unique market positioning and service excellence culture. We will strengthen our competitive advantages that cannot be easily replicated.

We will continue to refine our customer segmentation strategy and strengthen client engagement by developing products and services that align with their evolving lifestyles and needs.

We will further enhance our industry sector knowledge and closely monitor market developments to support SME customers in a dynamic operating environment.

Investments in our digital platforms will be stepped up to create additional service ‘touch-points’ to deliver greater wealth management convenience and choice. This will deepen our relationships with existing clients and drive new customer acquisitions. We will also embrace smart use of technology to realise further efficiency gains.

The close integration of our well-developed cross-border infrastructure supports our strong market position for core banking services and provides an excellent framework for capitalising on new business opportunities.

We will continue to actively manage our capital and liquidity to ensure we remain well prepared to respond to changes in the regulatory landscape and market conditions.

In recognition of our role and responsibilities as a good corporate citizen, we actively support a variety of programmes that promote social and environmental well-being in our community, focusing particularly on youth development.

As we move forward in a rapidly evolving operating environment, I wish to recognise the invaluable contributions of my colleagues in working to achieve the strategic initiatives that will ensure we continue to deliver service excellence for customers and increase value for shareholders.

Results Summary
In challenging operating conditions, Hang Seng Bank Limited (‘the Bank’) and its subsidiaries (‘the Group’) returned solid results for 2016. Operating profit excluding loan impairment charges and other credit risk provisions was HK$20,347m, down 1% compared with 2015, due mainly to a reduction in wealth management income in the subdued investment environment, particularly as compared with the buoyant conditions in 2015. The decline in wealth management income was partially offset by robust growth in net interest income and efforts to contain operating expenses at a lower level than in 2015. Operating profit was HK$19,034m,
down 2% compared with 2015, reflecting higher loan impairment charges. The HK$10,636m gain on the partial disposal of Industrial Bank in 2015 saw profit attributable to shareholders fall by 41% to HK$16,212m in 2016. Excluding this gain and after taking into account the property revaluation deficit compared with a revaluation surplus for 2015, attributable profit was down 4%.

Net interest income increased by HK$1,089m, or 5%, to HK$22,254m, underpinned by the 4% rise in average interest-earning assets. The growth in average interest-earning assets was mainly supported by the 3% increase in average customer deposits. Net interest margin improved by two basis points to 1.85%, while net interest spread widened by five basis points. Average loan spreads remained under pressure. Customer deposit spreads improved, with an increase in lowcost savings and current deposit accounts resulting in a more favourable deposit mix. Treasury’s active management of interest rate risk and efforts to enhance returns on the increased commercial surplus led to an increase in balance sheet management income.

Net fee income decreased by HK$1,099m, or 16%, to HK$5,939m, reflecting the decline in investment market activity, particularly in the first half of the year, which led to a reduction in wealth management income. Income from securities broking and retail investment fund sales fell by 37% and 11% respectively.

Insurance commission increased by 43%, reflecting higher distribution fees received from our exclusive partnership arrangement with Bupa due to the Group achieving its cumulative value contribution target as well as commission originating from life reinsurance business solutions.

Credit card fee income rose by 5%, benefiting from increased cardholder spending and merchant-acquiring business in Hong Kong. Fees from account services and remittances increased by 6% and 8% respectively.
Net trading income decreased by HK$345m, or 17%, to HK$1,685m. Foreign exchange income was down by HK$536m, or 26%, as increased revenue from higher customer activity was more than offset by reduced demand for foreign-exchange-linked structured treasury products – particularly renminbi-linked structured products – and lower income from funding swaps.

Income from interest rate derivatives, debt securities, equities and other trading activities recorded a gain of HK$100m compared with a loss of HK$67m in 2015, mainly reflecting the favourable fair value movement of equity-linked derivatives products in the life insurance business investment portfolio.

Income from insurance business (included under ‘net interest income’, ‘net fee income’, ‘net trading income’, ‘net income/(loss) from financial instruments designated at fair value’, ‘net insurance premium income’, ‘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 and benefits paid and movement in liabilities to policyholders’) increased by HK$74m, or 2%, to HK$3,456m. Net interest income and fee income from life insurance business grew by 11%, as the size of the life insurance funds investment portfolio grew, reflecting a net inflow from new and renewal business. The investment return on life insurance business was, however, affected by unfavourable movements in the equities markets. To the extent that these investment returns were attributable to policyholders, there was an offsetting movement in net insurance claims and benefits paid and movement in liabilities to policyholders or present value of in-force long-term insurance business (‘PVIF’).

Net insurance premium income increased by 12% as a result of higher premiums received from successful sales initiatives for annuity and endowment products. The rise in insurance premiums resulted in a corresponding increase in net insurance claims and benefits paid and movement in liabilities to policyholders. The movement in PVIF decreased by 30%, reflecting the net result of an unfavourable change in market conditions from discount rate updates and new business written throughout the year.

General insurance income increased by 37%, with our efforts to further leverage our exclusive partnership arrangement with Bupa resulting in higher distribution commission.

Operating expenses decreased by HK$230m, or 2%, to HK$10,252m, reflecting careful cost control. Staff costs were down by 2%, due mainly to the annual salary increment being more than offset by lower performance-related pay expenses and lower headcount.

Depreciation charges were up 16%, reflecting higher depreciation charges on business premises following the upward commercial property revaluation last year and the increased depreciation on a bank property as a result of the change in property usage to support back-office functions. This was partly offset by the 7% decrease in general and administrative expenses.

The Group continued to focus on enhancing operational efficiency while maintaining growth momentum. The cost efficiency ratio was 30 basis points lower at 33.5% compared with 2015.

Loan impairment charges and other credit risk provisions increased by HK$205m, or 19%, to HK$1,313m, reflecting the more challenging credit environment. Gross impaired loans and advances increased by HK$498m, or 18%, to HK$3,235m against 2015 year-end, due mainly to certain corporate exposures on the Mainland. Gross impaired loans and advances as a percentage of gross loans and advances to customers stood at 0.46% at the end of December 2016, compared with 0.55% at the end of June 2016 and 0.40% at the end of December 2015. Overall credit quality remained sound.

Individually assessed impairment charges were broadly unchanged, as the increase in new impairment charges were almost offset by higher release and recoveries from corporate and commercial customers during the year. Collectively assessed impairment charges increased by HK$194m, or 33%, to HK$774m, mainly reflecting the increase in the collectively assessed impairment charges on the credit card and personal loan portfolios. Impairment allowances for loans not individually identified as impaired recorded a net charge compared with a net release in 2015, mainly due to a higher net release for Hong Kong loan portfolios in 2015. The Group maintains a cautious outlook on the credit environment and will proactively enhance asset quality by maintaining a prudent approach in growing the loan portfolio.

Profit before tax decreased by HK$11,398m, or 37%, to HK$19,090m (down 4% after excluding the gain on the partial disposal of Industrial Bank in 2015) after taking the following major items into account:

• the gain on partial disposal of Industrial Bank of HK$10,636m in the first half of 2015;
• a revaluation deficit of HK$37m compared with a revaluation surplus of HK$261m in 2015 in net surplus on property revaluation; and
• a HK$59m decrease in share of profits from associates, mainly from a property investment company.

Second half of 2016 compared with first half of 2016
Against the first half of 2016, the Group continued to make good progress and achieved sustainable growth in revenues to return solid results for the second half. Attributable profit grew by HK$202m, or 3%, driven by increases in net interest income and net fee income and a reduction in loan impairment charges.

Net interest income grew by HK$248m, or 2%, due mainly to the increase in average interest-earning assets, more calendar days in the second half and a stable net interest margin despite continuous downward pressure in the challenging operating environment. Non-interest income decreased by HK$83m, or 2%. There was an improvement in investment income, with higher income from retail investment funds, cards, brokerage and structured investment products. These were more than offset by lower insurance income, reflecting an unfavourable change in market conditions from discount rate update.

Operating expenses increased by 6%, mainly reflecting an increase in general and administrative expenses that was partly offset by reduced staff costs. Loan impairment charges decreased by 18%, reflecting lower individually assessed impairment charges.