3SBio Inc. — Interim / Quarterly Report 2001

Aug 20, 2001

THE HKCB BANK HOLDING COMPANY LIMITED

(Incorporated in Bermuda with limited liability)

ANNOUNCEMENT OF 2001 INTERIM RESULTS

INTERIM RESULTS

The Directors of The HKCB Bank Holding Company Limited (the "Company") are pleased to announce the unaudited consolidated interim results of the Company and its subsidiaries (collectively the "Group") for the six-month period ended 30 June 2001 as follows:

Consolidated Profit and Loss Account

For the six months ended 30 June 2001

		Six-month period ended 30 June
			2001 (unaudited)		2000 (unaudited)	Increase/ (decrease)
	Note		HK$’000		HK$’000	%
Interest income			754,258		849,985
Interest expense			(447,466)		(573,059)
Net interest income			306,792		276,926	+10.8%
Non-interest income	2		101,340		308,297	-67.1%
Total operating income			408,132		585,223	-30.3%
Operating expenses			(213,278)		(189,214)	+12.7%
Operating profit before provisions			194,854		396,009	-50.8%
Charge for bad and doubtful debts			(62,257)		(111,384)	-44.1%
Operating profit after provisions			132,597		284,625	-53.4%
Net loss on disposal of fixed assets			(78)		(835)	-90.7%
Provisions made on held-to-maturity securities			(3,136)		(7,764)	-59.6%
			129,383		276,026	-53.1%
Share of net profits of associates			317		3,159
Profit before taxation			129,700		279,185	-53.5%
Taxation	3		(6,262)		(5,632)
Profit after taxation			123,438		273,553
Minority interests			(258)		(5,320)
Profit attributable to shareholders			123,180		268,233	-54.1%
			HK¢		HK¢
Basic earnings per share	5		9.11		19.87	-54.2%
Diluted earnings per share	5		9.11		19.84	-54.1%
Interim dividend per share	4		1.50		1.75

Consolidated Balance Sheet

As at 30 June 2001

			30 June 2001 (unaudited)		31 December 2000 (Note 1)
	Note		HK$’000		HK$’000
ASSETS
Cash and short-term funds			6,473,452		8,739,852
Placements with banks and other financial institutions maturing between one and twelve months			650,849		783,432
Certificates of deposit held			698,904		606,512
Other investments in securities			235,688		235,035
Held-to-maturity securities and investment securities			319,241		320,338
Advances to customers, banks and other financial institutions, trade bills and other accounts			13,374,989		13,258,329
Investments in associates			55,832		55,515
Fixed assets			1,168,878		1,176,863
Total assets			22,977,833		25,175,876
LIABILITIES
Deposits and balances of banks and other financial institutions			308,174		324,336
Loan from financial institutions			45,000		45,000
Current, fixed, savings and other deposits of customers			15,803,594		18,438,392
Certificates of deposit issued			1,610,508		1,048,890
Other accounts and provisions			827,480		841,854
Total liabilities			18,594,756		20,698,472
CAPITAL RESOURCES
Share capital			1,351,537		1,351,537
Reserves	6		2,932,224		2,893,515
Shareholders’ funds			4,283,761		4,245,052
Minority interests			895		636
Subordinated floating rate notes issued			98,421		231,716
Total capital resources			4,383,077		4,477,404
Total liabilities and capital resources			22,977,833		25,175,876

Notes:

1. Basis of preparation

A number of new or revised Statements of Standard Accounting Practice (“SSAPs”) issued by the Hong Kong Society of Accountants become effective for the first time starting from 1 January 2001. Other than the necessary changes in accounting policies or practices in order to comply with the requirements of the revised SSAP 2.109 “Events after the balance sheet date” as detailed below, the same principal accounting policies as those adopted in the preparation of the Group’s 2000 annual audited accounts have been applied in preparing the unaudited financial information for the six-month period ended 30 June 2001 contained in this interim results announcement.

With effect from 1 January 2001, the Group adopted the revised SSAP 2.109 “Events after the balance sheet date”. This results in a change of accounting treatment in respect of proposed dividends. Previously dividends proposed or declared after the balance sheet date but before the related financial statements were authorised for issue were recognised as a liability at the balance sheet date. Pursuant to the revised SSAP 2.109, such dividends will no longer be recognised as a liability until the time when they are actually being declared.

This change in accounting treatment is applied retrospectively to the year ended 31 December 2000 and reflected in the comparative figures included in the Group's consolidated accounts as at 30 June 2001. The effect was to reduce the balance of “Other accounts and provisions” in the consolidated balance sheet as at 31 December 2000 by the amount of the proposed final dividend for the year ended 31 December 2000 of HK$84,471,000, and to increase the balance of “Distributable reserves” in the consolidated balance sheet and the Group’s net assets as at 31 December 2000 by the same amount.

1. Non-interest income

	Six-month period ended 30 June
		2001 (unaudited)		2000 (unaudited)
		HK$’000		HK$’000
Profit on disposal of investment in an associate (CRC Protective Life Insurance Company Limited)		-		160,923
Unrealised gain arising from revaluation of listed shares of the Hong Kong Exchanges and Clearing Limited		-		54,048
		-		214,971
Other non-interest income		101,340		93,326
		101,340		308,297

1. Taxation

Hong Kong profits tax has been provided at the rate of 16% (2000: 16%) on the estimated assessable profit for the period. Taxation on overseas profits has been calculated on the estimated assessable profits for the period at the rates of taxation prevailing in the countries in which the Group operates.

The amount of taxation charged to the consolidated profit and loss account represents:

	Six-month period ended 30 June
		2001 (unaudited)		2000 (unaudited)
		HK$’000		HK$’000
The Company and its subsidiaries
* Hong Kong profits tax		6,234		5,587
* Overseas taxation		28		45
Taxation charge for the period		6,262		5,632

There are no significant potential deferred taxation liabilities for which provision has not been made.

1. Dividend

Subsequent to 30 June 2001, the Directors declared an interim dividend of HK1.50 cents (2000: HK1.75 cents) per share amounting to HK$20,273,000 (2000: HK$ 23,652,000) for the six-month period ended 30 June 2001, which will be payable on 21 September 2001 to the shareholders whose names appear on the Company’s Register of Members on 14 September 2001.

Such interim dividends have not been accrued as a liability as at 30 June 2001 pursuant to the revised accounting treatment adopted in respect of proposed dividends as set out in note 1.
2. Earnings per share

The calculation of earnings per share is based on the profit attributable to shareholders of HK$123,180,000 for the six-month period ended 30 June 2001 (2000: HK$268,233,000).

For the basic earnings per share, the calculation is also based on the weighted average number of 1,351,537,000 shares (2000: 1,349,962,000 shares) in issue during the period, while for the diluted earnings per share, the calculation is based on the weighted average number of 1,351,706,000 shares (2000: 1,351,686,000 shares) in issue during the period after adjusting for the effects of all dilutive potential shares.
3. Reserves

		30 June 2001 (unaudited)		31 December 2000 (Note 1)
		HK$’000		HK$’000
Share premium		50,988		50,988
Capital redemption reserve		7,052		7,052
Distributable reserves (Note)		2,885,584		2,846,875
Exchange reserve		(11,400)		(11,400)
		2,932,224		2,893,515
Note:
Distributable reserves as at 31 December 2000:
As previously reported				2,762,404
Proposed final dividend restated				84,471
				2,846,875

OTHER FINANCIAL INFORMATION

1. Advances and Other Accounts

		30 June 2001 (unaudited)		31 December 2000 (audited)
		HK$’000		HK$’000
Advances to customers		13,421,310		13,248,632
Provision for bad and doubtful debts:
* General		(155,839)		(179,291)
* Specific		(262,494)		(290,161)
		13,002,977		12,779,180
Advances to banks and other financial institutions		16,709		16,707
Trade bills		132,722		151,736
Provision for bad and doubtful debts:
* General		(510)		(506)
* Specific		-		(137)
		132,212		151,093
Other accounts		137,405		218,501
Provision for bad and doubtful debts:
* Specific		(535)		(535)
		136,870		217,966
Accrued interest		86,221		133,986
Provision for bad and doubtful debts:
* Specific		-		(40,603)
		86,221		93,383
		13,374,989		13,258,329

1. Advances to customers - by industry sector

The Group’s gross advances to customers, analysed according to the industry sector in which the borrower operates, are as follows:

		30 June 2001 (unaudited)		31 December 2000 (unaudited)
		HK$’000		HK$’000
Loans for use in Hong Kong
Industrial, commercial and financial:
* Property development		84,886		171,312
* Property investment		2,462,123		2,167,825
* Financial concerns		564,294		502,168
* Stockbrokers		17,961		18,673
* Wholesale and retail trade		595,753		677,375
* Manufacturing		549,425		624,300
* Transport and transport equipment		1,145,650		1,059,737
* Others		1,175,766		1,071,153
Individuals:
* Loans for the purchase of flats in Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme		41,893		37,737
* Loans for the purchase of other residential properties		4,286,061		4,286,813
* Credit card advances		180,608		191,685
* Others		1,329,713		1,155,398
		12,434,133		11,964,176
Trade finance		788,224		994,927
Loans for use outside Hong Kong		198,953		289,529
		13,421,310		13,248,632

No geographical analysis, based on the location of counterparties, is provided as less than 10% of the gross advances to customers, overdue and non-performing loans are attributable to locations outside Hong Kong.

1. Non-performing loans

Non-performing loans, which represent the gross amount of advances net of suspended interest, on which interest has been placed in suspense or has ceased to accrue, are as follows:

		30 June 2001 (unaudited)		31 December 2000 (audited)
		HK$’000		HK$’000
Gross advances to customers		931,985		1,204,109
Specific provisions		(251,170)		(277,348)
		680,815		926,761
Secured non-performing loans		485,931		694,877
Unsecured non-performing loans		446,054		509,232
		931,985		1,204,109
Percentage of non-performing loans to total advances to customers		6.94%		9.09%
Market value of collateral held		511,446		733,555
Balance of interest suspended on non-performing loans		275,146		312,719

At 30 June 2001 and 31 December 2000, there were no non-performing loans in respect of advances to banks and other financial institutions.

The specific provisions were made after taking into account the value of collateral in respect of such advances.

1. Overdue and rescheduled advances

		As at 30 June 2001 (unaudited)				As at 31 December 2000 (unaudited)
Gross advances to				% of				% of
customers which have been overdue for:		HK$’000		total advances		HK$’000		total advances
Over 3 months but less than 6 months		313,561		2.3%		227,017		1.7%
Over 6 months but less than 1 year		220,913		1.6%		215,552		1.6%
Over 1 year		665,224		5.0%		825,905		6.3%
		1,199,698		8.9%		1,268,474		9.6%
Rescheduled advances to customers (net of those overdue for over 3 months as shown above)		36,102		0.3%		65,405		0.5%
		1,235,800		9.2%		1,333,879		10.1%
Secured overdue advances		784,116				828,910
Unsecured overdue advances		415,582				439,564
		1,199,698				1,268,474
Secured rescheduled advances		20,858				29,411
Unsecured rescheduled advances		15,244				35,994
		36,102				65,405
		1,235,800				1,333,879
Market value of collateral held against:
- overdue advances		886,983				936,632
- rescheduled advances		22,199				29,585
		909,182				966,217
Specific provisions made against:
- overdue advances		217,052				235,848
- rescheduled advances		4,122				10,840
		221,174				246,688

At 30 June 2001 and 31 December 2000, there were no advances to banks and other financial institutions which were overdue for over 3 months, nor were there any rescheduled advances to banks and other financial institutions on these two days.

1. Reconciliation of overdue advances to non-performing loans

		30 June 2001 (unaudited)		31 December 2000 (unaudited)
		HK$’000		HK$’000
Advances to customers which are overdue for more than 3 months		1,199,698		1,268,474
Add: non-performing loans which are not overdue, or overdue for 3 months or less		88,580		112,163
Add: rescheduled advances on which interest is being placed in suspense or on which interest accrual has ceased		36,102		65,405
Less: advances which are overdue for more than 3 months and on which interest is still being accrued		(392,395)		(241,933)
Non-performing loans to customers		931,985		1,204,109

1. Off-Balance Sheet Exposures
2. Contingent liabilities and commitments

The following is a summary of the contract amounts of each significant type of contingent liabilities and commitments outstanding:

		30 June 2001 (unaudited)		31 December 2000 (audited)
		HK$’000		HK$’000
Direct credit substitutes		20,158		40,003
Transaction-related contingencies		41,210		33,903
Trade-related contingencies		233,817		214,997
Forward asset purchases		31,000		31,000
Forward forward deposits		884,513		983,758
Other commitments with an original maturity of:
* Under 1 year or which are unconditionally cancellable		2,613,464		2,809,127
* 1 year and over		17,337		20,398
		3,841,499		4,133,186

1. Derivatives

The following is a summary of the aggregate notional contract amounts of each significant type of derivatives outstanding:

		30 June 2001 (unaudited)						31 December 2000 (audited)
		Trading		Hedging		Total		Trading		Hedging		Total
		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Exchange rate contracts:
* Forward contracts		438,129		-		438,129		179,451		-		179,451
* Currency swaps		70,202		30,889		101,091		35,097		30,885		65,982
Interest rate contracts:
* Interest rate swaps		-		123,907		123,907		-		120,194		120,194
		508,331		154,796		663,127		214,548		151,079		365,627

The contract / notional amounts, credit risk weighted amounts, and replacement costs of the above off-balance sheet exposures are as follows:

		30 June 2001 (unaudited)						31 December 2000 (audited)
		Contract / notional amount		Credit risk weighted amount		Replace-ment cost		Contract / notional amount		Credit risk weighted amount		Replace-ment cost
		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000		HK$’000
Contingent liabilities and commitments		3,841,499		255,621		N/A		4,133,186		259,254		N/A
Derivatives:
* Exchange rate contracts		539,220		2,968		8,086		245,433		1,766		5,149
* Interest rate contracts		123,907		1,865		3,419		120,194		1,217		2,509
		4,504,626		260,454		11,505		4,498,813		262,237		7,658

The contract or notional amounts of off-balance sheet exposures shown above indicate the volume of transactions outstanding as at the balance sheet date, they do not necessarily bear any direct correlation to the underlying risks associated with the exposures.

The Group had not entered into any bilateral netting arrangements, accordingly the above amounts are shown on a gross basis.

The credit risk weighted amounts are the amounts which have been calculated in accordance with the Third Schedule of the Hong Kong Banking Ordinance and guidelines issued by the Hong Kong Monetary Authority. The amounts calculated are dependent upon the status of the counterparty and the maturity characteristics of each type of contract.

Replacement cost is the cost of replacing all contracts which have a positive value when marked to market (should the counterparty default on its obligations) and is arrived at by aggregating all contracts with a positive mark-to-market value. Replacement cost is considered to be a close approximation of the credit risk arising from these contracts at the balance sheet date.

1. Capital Adequacy and Liquidity Ratios

		30 June 2001 (unaudited)		31 December 2000 (unaudited)
		%		%
Capital adequacy ratio – before adjusting for market risk		31.6%		* 32.3%
Capital adequacy ratio – after adjusting for market risk		31.5%		* 32.2%
	Six-month period ended 30 June
		2001		2000
		(unaudited)		(unaudited)
Average liquidity ratio for the period		58.6%		64.9%

The above capital adequacy ratios are computed on a consolidated basis for the Company and its subsidiaries in accordance with the Third Schedule of the Hong Kong Banking Ordinance. The adjusted capital adequacy ratio takes into account the prevailing market risk and the associated credit risk as at the balance sheet date, and is computed in accordance with the Guideline “Maintenance of Adequate Capital Against Market Risks” issued by the Hong Kong Monetary Authority.

The liquidity ratio is the simple average of each calendar month’s average liquidity ratio calculated for The Hongkong Chinese Bank, Limited (“HKCB”), a principal subsidiary of the Company, in accordance with the Fourth Schedule of the Hong Kong Banking Ordinance.

* As a result of the change in accounting treatment for proposed dividends as mentioned in note 1 to this interim results announcement, the consolidated capital base of the Group as at 31 December 2000 had been increased by HK$84,471,000 as detailed in the next section. Accordingly, the capital adequacy ratios of the Group, before and after adjusting for market risk, as at 31 December 2000 had been increased to 32.3% and 32.2% respectively from 31.7% and 31.6% as previously reported.

The consolidated capital base after deductions used in the calculation of the above capital adequacy ratios as at the balance sheet dates is analysed as follows:

		30 June 2001 (unaudited)		31 December 2000 (unaudited)
		HK$’000		HK$’000
Core capital:
Paid up ordinary share capital		1,351,537		1,351,537
Share premium		50,988		50,988
Reserves		2,842,527		2,504,352
Profit and loss account		38,709		* 338,175
Minority interest (in core equity capital)		895		636
		4,284,656		4,245,688
Supplementary capital:
General provision for doubtful debts		156,349		178,374
Term subordinated debt		-		231,716
Eligible value of supplementary capital		156,349		410,090
Total capital base before deductions		4,441,005		4,655,778
Deductions:
Exposures to connected companies		(7,150)		(7,150)
Equity investments of 20% or more in non-subsidiary companies		(35,749)		(35,749)
		(42,899)		(42,899)
Total capital base after deductions		4,398,106		4,612,879

* As a result of the change in accounting treatment for proposed dividends as mentioned in note 1 to this interim results announcement, the balance of the Group’s profit and loss account as at 31 December 2000 had been increased by HK$84,471,000 to HK$338,175,000 from HK$253,704,000 as previously reported.

1. Currency Concentrations

Exposures to US$, expressed in HK$ equivalents:		30 June 2001 (unaudited)		31 December 2000 (unaudited)
		HK$’000		HK$’000
Spot assets		4,685,086		5,463,637
Spot liabilities		(4,911,420)		(5,733,766)
Forward purchases		599,672		844,253
Forward sales		(251,737)		(116,907)
Net long position		121,601		457,217
Net structural position		(98,421)		(231,716)

1. Segmental Information
2. By geographical area

On the basis of the location of the principal operations of the Group, or, in the case of HKCB, the location of the branches responsible for reporting the results or booking the assets, the Group operates predominantly in Hong Kong. Less than 10% of the Group’s revenue or profit before taxation are attributable to locations outside of Hong Kong.

1. By type of business

The Group’s operating income and profit before taxation attributable to each major type of business conducted by the Group are analysed as follows:

		Six-month period ended 30 June
		2001				2000
		Segmental operating income (unaudited)		Segmental profit/(loss) before taxation (unaudited)		Segmental operating income (unaudited)		Segmental profit before taxation (unaudited)
		HK$’000		HK$’000		HK$’000		HK$’000
Commercial and retail banking		252,176		75,479		203,417		10,129
Treasury and investment activities		110,762		49,549		119,031		57,331
Corporate finance and securities brokerage		26,322		8,477		29,388		7,405
Other businesses		18,872		(3,805)		233,387		204,320
		408,132		129,700		585,223		279,185

Commercial banking includes the taking of deposits from and the provision of loans and advances, including trade finance facilities, to commercial, industrial and institutional customers.

Retail banking includes the taking of deposits from individual customers, the extension of residential mortgage loans, personal loans and consumer financing, and the provision of credit card, securities brokerage, nominee and custody services.

Treasury and investment activities include the provision of foreign exchange trading, remittance, foreign currency and asset-linked deposit services to customers, and activities conducted in relation to the overall funding position of the Group.

Corporate finance and securities brokerage include the provision of securities and futures brokerage, investment banking, underwriting and other related advisory services.

Other business activities include property investment, the underwriting of general insurance business, income from disposal of non-core investments held by the Group, and other items which have not been allocated to the above business segments.

CHAIRMAN’S STATEMENT

Business environment

Hong Kong’s economy slowed down considerably during the first half of 2001, following a strong annual GDP growth of 10% in 2000.

Externally, the uncertainty in the global economy has further depressed export trade in Asia. Domestically, an uncertain economic outlook together with the soft labour market continued to weaken consumer confidence, causing stagnation in the property market and contraction in consumer spending.

These factors combined to negate most of the positive effect which the successive interest rate cuts, of 2.75% in aggregate thus far this year, might have had. As a result, Hong Kong’s GDP in the first quarter of 2001 slowed to 2.5%, and the economic forecast for the rest of 2001 is not expected to show much improvements.

During the period, the Hong Kong banking system stayed extremely liquid, while loan demand remained subdued. A general lack of attractive corporate lending opportunities has led to intensified competition in consumer lending, with the price-war among financial institutions extending beyond residential mortgages to other consumer lending products such as credit cards and personal loans. However, on a more positive note, the full deregulation of interest rates which became effective in July has enabled banks to introduce a variety of innovative new deposit products. While it was initially widely anticipated that the deregulation would raise the funding costs of banks, this was largely mitigated by the abundant liquidity in the market. Depositors in general have benefited from the wide range of choices available from different banks, some of which have introduced tiered interest rates on demand deposit accounts and service fees for smaller depositors.

Going forward, the uncertain economic outlook is expected to prevail until new growth impetus can be identified. We believe that the positive effect of the successive interest rate cuts will become more apparent towards the end of 2001, and that China’s imminent entry into the World Trade Organisation will also help to boost Hong Kong’s economy.

Nevertheless, any ultimate economic recovery in Hong Kong will also hinge on the economic performance of our major trade partners, especially the United States, and the resurgence of investor and consumer confidence.

Outlook

While the economic prospects in the near term are still clouded with much uncertainty, the Group will continue to pursue its established business strategies and upgrade its infrastructure. We pride ourselves as a niche financial services group with focused business strategies, sound operational infrastructure and a strong financial position. Despite the unfavorable investment climate and fluctuations in the local economy, we managed to achieve satisfactory operating results for the first half of the year. This, I believe, is clear evidence of our ability to emerge as a stronger niche player in the financial services sector through focusing on the Group’s target market segments and concentrating on the provision of quality services, tailored to the needs of our target customers and at competitive prices.

I wish to take this opportunity to express my sincere gratitude to our customers, shareholders, staff and my fellow Directors for their loyalty and invaluable contributions to the Group during the period.

By Order of the Board

The HKCB Bank Holding Company Limited

Dr Mochtar Riady

Chairman

Hong Kong, 15 August 2001

Financial Performance

Operating results

The unaudited interim consolidated profit of the Group attributable to shareholders in the first half of 2001 amounted to HK$123.2 million. Basic interim earnings per share were HK9.11 cents, compared with HK19.87 cents for 2000.

The 2001 interim profit included no significant non-recurring items, whereas the corresponding 2000 figure included total non-recurring gains of approximately HK$215 million which arose from the disposal of the Group’s investment in a former associate insurance company, and the revaluation of listed shares in The Hong Kong Exchanges and Clearing Limited previously held by the Group. Excluding the effects of these non-recurring gains, the 2001 interim profit would have represented an increase of 131.6% over the same period last year.

Net interest income rose by 10.8% mainly due to an improvement in average net interest margin from 2.22% for the first half of 2000 to 2.55% for the current period. The Group’s net interest margin benefited from the acquisition of Newcourt Credit in June 2000, which resulted in an increase in the proportion of high yield consumer loans within the overall loan portfolio of the Group. The improved margins were however mitigated by the continued downward pressure on the pricing of loans, especially residential mortgages and public transportation vehicle financing.

Non-interest income decreased by HK$207 million mainly as a result of the inclusion of non-recurring items of HK$215 million in the first half of 2000 as mentioned above. Excluding the effect of these non-recurring items, non-interest income showed an 8.6% growth and represented 24.8% of the total operating income for the current period.

Operating expenses increased by 12.7% or HK$24.1 million due to the inclusion for the first time of the interim results of Newcourt Credit, which accounted for operating expenses of HK$29.8 million during the first half of 2001.

During the period the Group continued its effort to reduce the level of non-performing loans, which stood at 6.9% of total loans at 30 June 2001 compared with 9.1% at 31 December 2000. With falling non-performing loans, the charge for bad and doubtful debts for the current period declined by 44.1%, or HK$49.1 million, compared with the first half of 2000. The Group is cautiously optimistic that the level of non-performing loans will continue to decline in the second half of 2001. However, the extent to which this will be achieved will also depend on the future performance of the economy, particularly the property and the labour markets.

Overall, the Group’s profit attributable to shareholders of HK$123 million for the current period represented a growth of 132% over the results for the corresponding period last year, if the non-recurrent exceptional gains were excluded.

Financial position

Against a lackluster economy and a weak loan demand, the Group’s advances to customers increased slightly by 1.3% to HK$13,421 million. However, if adjusted for the reduction of HK$272 million in non-performing loans, the Group’s performing loans actually grew by 3.7%.

To take advantage of its strong liquidity position and in response to the persistently sluggish borrowing appetite in the market, during the period the Group reduced its customer deposits by 14.3%, or HK$2,635 million, to HK$15,804 million at 30 June 2001 in order to widen net interest margins and to optimise its overall funding position. As a result, the Group’s total assets at 30 June 2001 were HK$2,198 million lower than the position six months ago at 31 December 2000.

The adjusted loan to deposit ratio of The Hongkong Chinese Bank, Limited, the principal subsidiary of the Company, was higher at 64.1% as at 30 June 2001, compared with 51.4% as at 31 December 2000, reflecting the Group’s more efficient deployment of funds.

The Group continues to maintain a highly liquid balance sheet, with 34% of its total assets at 30 June 2001, or over HK$7.8 billion, being held in the form of inter-bank placements, certificates of deposit and other highly liquid investments. At 58.6%, the average liquidity ratio of The Hongkong Chinese Bank, Limited during the first half of 2001 was considerably above the statutory minimum requirement of 25%. The Group’s shareholders’ funds amounted to HK$4,284 million at 30 June 2001, which translated into a consolidated capital adequacy ratio of 31.6% (of which the Tier 1 ratio was 30.8%), one of the strongest among banks in Hong Kong. With such strong financial fundamentals, the Group is well positioned to take advantage of future growth opportunities, to be gained either organically or through acquisitions, when the economic environment and credit cycle revive.

Review of Business and Operations

In accordance with the Group’s established strategies of (a) focusing on the provision of quality and innovative banking services to small and medium-sized enterprises (“SME”); (b) expanding the franchise of consumer banking and ancillary financial services; and (c) enhancing the quality and range of our customer services, the Group undertook the following initiatives during the period under review:

• HKCB Insurance Agency Limited, a new wholly-owned subsidiary of Hongkong Chinese Bank, was established in April to broaden the range of general insurance products and services of the Group. By working with strong and quality insurance underwriters, the Group now offers a comprehensive range of insurance products to meet the business and personal needs of our customers at competitive prices.
• The second phase of “e-Chinese Banking”, the internet banking service offered by Hongkong Chinese Bank, was rolled out in May 2001. The enhanced service includes electronic fund transfers to designated bank accounts of local and overseas third parties, and on-line applications for mortgage loans as well as personal loans and credit cards. To add further to the convenience of our customers, transaction hours will be extended for time deposit products offered over the internet.
• Hongkong Chinese Bank opened a new Finance Management Centre in the Tin Hau district in North Point in June. Unlike traditional bank branches, this outlet offers most of its services via electronic channels. The Centre offers personalised securities investment service through its investment consultants as well as electronically via an Internet Corner. It is envisaged that two to three more Finance Management Centres will be opened in the second half of 2001 to further expand the reach and service capacity of our branch network.
• During the period, Hongkong Chinese Bank launched a number of innovative and flexible lending programme, specifically tailored to the needs of SME operating in today’s business and economic environment. To complement these, Hongkong Chinese Bank also sponsored and participated in a number of industry events organised by different organisations, including the Hong Kong Chinese Importers and Exporters Association and the Hong Kong Trade Development Council, which aimed at promoting business opportunities for the SME.
• As part of its overall funding management programme, Hongkong Chinese Bank issued US$72 million (approximately HK$562 million) of floating rate certificates of deposit in June at an interest rate of the London Interbank Offered Rate plus 28 basis points.
• In response to the full deregulation of deposit interest rate which became effective from July 2001, Hongkong Chinese Bank has adopted a uniform savings interest rate structure and has decided not to introduce any new service fees. These new measures are straight forward and do not discriminate against any category of customers, which have been well received by both existing and new customers.
• With respect to recent market rumors in relation to possible merger and acquisition activities concerning the Company, as previously announced, from time to time the Company and its major shareholders have discussions with interested parties who wish to explore, or have expressed interest in, acquisitions or other possible business opportunities involving the Company or its subsidiaries. In this regard, one such party is presently in discussion with the Company. However, no agreements have been reached so far, and no legally binding offer in this connection has been received by the Company or its major shareholders (Please see the note below).

Note:

The Directors of the Company jointly and severally accept full responsibility for the accuracy of the information contained herein under this particular point and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, their opinions expressed in this particular point have been arrived at after due and careful consideration and there are no other facts not contained under this particular point the omission of which would make any of their statements included under this particular point misleading.

Purchase, sale or redemption of securitiesDuring the six-month period ended 30 June 2001, The Hongkong Chinese Bank, Limited, a principal subsidiary of the Company, repurchased and cancelled US$17.2 million (approximately HK$133.3 million) of subordinated floating rate notes due 2007 which were listed on the Luxembourg Stock Exchange. Save for this repurchase, there were no purchase, sale or redemption of the Group’s listed securities by the Company or any of its subsidiaries during the period.

Closure of register of membersThe Register of Members of the Company will be closed from 7 September 2001 to 14 September 2001 (both dates inclusive), during which period no transfer of shares will be registered. In order to qualify for the interim dividend for the six-month period ended 30 June 2001, all transfers of shares accompanied by the relevant share certificates and transfer forms must be lodged with Tengis Limited, the Company’s Branch Registrars in Hong Kong, at 4/F, Hutchison House, 10 Harcourt Road, Central, Hong Kong not later than 4:00 p.m. on 6 September 2001.

compliance with code of best practiceNone of the Directors is aware of information that would reasonably indicate that the Company is not, or was not for any part of the period during the six-month period ended 30 June 2001, in compliance with the Code of Best Practice as set out in Appendix 14 of the Main Board Listing Rules, except that non-executive Directors were not appointed for a specific term but are subject to retirement by rotation at the Company’s annual general meetings in accordance with bye-law 87 of the Company’s Bye-laws.

INTERIM REPORT

The interim report of the Group for the six-month period ended 30 June 2001 containing all the information required by paragraphs 46(1) to 46(6) of Appendix 16 of the Listing Rules will subsequently be published on The Stock Exchange of Hong Kong Limited's web site in due course.