HANG SENG BANK LIMITED HANG SENG BANK ANNUAL REPORT 2019 ANNUAL REPORT 2019 REPORT ANNUAL 83 Des Voeux Road Central, Hong Kong www.hangseng.com Our day-to-day lives are moving faster. From smart cities initiatives to AI in our mobile phones, the ways in which we interact with the world around us are evolving every day. Hang Seng’s goal is to make it easy for our customers to manage their finances. We create smart solutions that allow us to deliver fast, simple and convenient banking services for a diverse range of financial needs. Using human-centric design and technology, we enable customers to manage their finances on their own terms – anywhere, anytime. Smart living… through intelligent banking. Founded in 1933, Hang Seng is one of Hong Kong’s largest listed companies. Our market capitalisation as at 31 December 2019 was HK$307.8 billion. We serve over half the adult residents of Hong Kong – more than 3.5 million people – through about 290 service outlets. We also maintain branches in Macau and Singapore and a representative office in Taipei. Established in May 2007, wholly owned subsidiary Hang Seng Bank (China) Limited is headquartered in Pudong, Shanghai, and operates a mainland China network with outlets in the Pearl River Delta, the Yangtze River Delta, the Bohai Rim Region and midwest China. Hang Seng is a principal member of the HSBC Group, one of the world’s largest banking and financial services organisations. RATINGS Moody’s Standard & Poor’s Long-term Bank Deposit Long-term Issuer Credit (local/foreign currency) (local and foreign currency) Aa2/Aa3 AA- Short-term Bank Deposit Short-term Issuer Credit (local and foreign currency) (local and foreign currency) Prime-1 A-1+ Outlook Outlook Negative(m)* Stable *Outlook on long-term foreign currency bank deposit rating is Stable ANNUAL REPORT 2019 1 CONTENTS 01 Corporate Profile 03 Results in Brief* 04 Five-Year Financial Summary 06 Chairman’s Statement* 08 Chief Executive’s Report* 12 Management Discussion and Analysis 22 Business Review* 28 Financial Review* 40 Risk 105 Capital Management 110 Corporate Governance Report 140 Biographical Details of Directors and Senior Management 154 Report of the Directors 161 2019 Financial Statements 242 Independent Auditor’s Report 248 Analysis of Shareholders 249 Subsidiaries 250 Directors of Subsidiaries 251 Corporate Information and Calendar * Where possible, percentages in this section have been rounded to the nearest percentage point to facilitate easy reading. Percentage-based indicators remain at 1 or 2 decimal places as appropriate. The abbreviations ’HK$m’ and ’HK$bn’ represent millions and billions of Hong Kong dollars respectively. RESULTS IN BRIEF For the Year Attributable profit to shareholders Profit before tax Operating profit 24,840 HK$m 28,813 HK$m 28,610 HK$m 2018 24,211 HK$m 2018 28,432 HK$m 2018 27,947 HK$m Net operating income before change Operating profit before change in Return on average ordinary in expected credit losses and other expected credit losses and other shareholders’ equity credit impairment charges credit impairment charges 43,514 HK$m 30,447 HK$m 15.2% 2018 41,215 HK$m 2018 28,943 HK$m 2018 16.0% Cost efficiency ratio Earnings per share Dividends per share 30.0% 12.77 HK$ 8.20 HK$ 2018 29.5% 2018 12.48 HK$ 2018 7.50 HK$ At Year-end (at 31 December) Shareholders’ equity Total assets 178,810 HK$m 1,676,991 HK$m 2018 162,082 HK$m 2018 1,571,297 HK$m Capital ratios Common Equity Tier 1 (“CET1”) Tier 1 Capital Ratio Total Capital Ratio Capital Ratio 16.9% 18.7% 20.8% 2018 16.6% 2018 17.8% 2018 20.2% Liquidity ratios Liquidity Coverage Ratio Net Stable Funding Ratio 205.9% 149.1% 2018 214.7% 2018 154.0% ANNUAL REPORT 2019 3 FIVE-YEAR FINANCIAL SUMMARY 2015 2016 2017 2018 2019 For the Year HK$bn HK$bn HK$bn HK$bn HK$bn Operating profit 19.4 19.0 23.5 27.9 28.6 Profit before tax 30.5 19.1 23.7 28.4 28.8 Attributable profit to shareholders 27.5 16.2 20.0 24.2 24.8 At Year-end HK$bn HK$bn HK$bn HK$bn HK$bn Shareholders’ equity 142.0 140.6 152.0 162.1 178.8 Issued and paid-up capital 9.7 9.7 9.7 9.7 9.7 Total assets 1,334.4 1,377.2 1,478.4 1,571.3 1,677.0 Total liabilities 1,192.4 1,236.6 1,326.3 1,409.2 1,498.1 Per Share HK$ HK$ HK$ HK$ HK$ Earnings per share 14.22 8.30 10.30 12.48 12.77 Dividends per share – 1st to 4th interim dividends 5.70 6.10 6.70 7.50 8.20 – special interim dividend 3.00 – – – – Ratios %%%% % Return on average ordinary shareholders’ equity 20.7 12.1 14.2 16.0 15.2 Post-tax return on average total assets 2.1 1.2 1.4 1.6 1.5 Capital ratios – Common Equity Tier 1 (“CET1”) Capital Ratio 17.7 16.6 16.5 16.6 16.9 – Tier 1 Capital Ratio 19.1 17.9 17.7 17.8 18.7 – Total Capital Ratio 22.1 20.8 20.1 20.2 20.8 Cost efficiency ratio 33.8 33.5 30.5 29.5 30.0 4 HANG SENG BANK Attributable Profit and Results Earnings per Share Dividends per Share HK$bn HK$bn HK$ HK$ 30 30 15 10 28 9 26 25 24 8 22 7 20 20 10 18 6 16 15 5 14 12 4 10 10 5 3 8 6 2 5 4 1 2 0 0 0 0 15 16 17 18 19 15 16 17 18 19 15 16 17 18 19 Operating profit Attributable profit Dividends per share Earnings per share Total Assets and Shareholders’ Equity and Return on Return on Average Total Assets Average Ordinary Shareholders’ Equity Total Capital Ratio HK$bn % HK$bn % % 1,800 2.6 200 30 24 180 28 22 1,600 2.4 20 160 26 2.2 18 1,400 140 24 16 2.0 120 22 1,200 14 1.8 100 20 12 1,000 80 18 10 1.6 8 800 60 16 1.4 6 40 14 4 600 1.2 20 12 2 400 1.0 0 10 0 15 16 17 18 19 15 16 17 18 19 15 16 17 18 19 Total assets Shareholders’ equity Total capital ratio Return on average total assets Return on average ordinary shareholders’ equity ANNUAL REPORT 2019 5 CHAIRMAN’S STATEMENT 2019 was a challenging year for Hong Kong. Externally, ongoing uncertainties regarding the future of the international trade order and other geopolitical factors weighed on the global economy. On the domestic front, business sentiment and the economy were adversely affected by social unrest. In this fluid operating environment, Hang Seng abided by its customer- centric principles in conducting business. We continued to deliver best-in- class services and experiences. Our investments in people and technology enabled us to achieve better user friendliness at all customer touchpoints across all channels, physical and digital, and deliver continuously improving economic efficiencies for customers and the Bank. Our enhanced capabilities underpinned the resilience of our financial performance. 6 HANG SENG BANK Attributable profit to shareholders increased by 3% to The Mainland economy expanded by 6.1% in 2019, down HK$24,840m. Earnings per share rose by 2% to HK$12.77. from a growth rate of 6.7% in the previous year, reflecting the softening of trade activity and a drop in exports Return on average ordinary shareholders’ equity was 15.2%, demand, which held down growth in industrial production compared with 16.0% for 2018. Return on average total and manufacturing investment. These economic headwinds assets was 1.5%, compared with 1.6% for the previous year. may become stronger in the months ahead, exacerbated by the impact of the novel coronavirus outbreak. The The Directors have declared a fourth interim dividend of government’s ongoing initiatives to support growth HK$4.00 per share, bringing the total distribution for 2019 through new fiscal and monetary policy measures may to HK$8.20 per share, compared with HK$7.50 per share in help moderate the adverse effects of these challenges. We 2018. expect to see a slowdown in full-year GDP growth for 2020 compared with 2019. Economic Outlook Our actions to build a more agile and resilient organisation The various external and domestic factors that affected have improved our ability to thrive in all types of market the Hong Kong economy last year look set to continue to conditions and act quickly on new opportunities. influence economic performance during 2020. Backed by our well-established competitive strengths, our Hong Kong’s economic output shrank by 1.2% in 2019 drive to stay ahead of the curve of the rapid expansion and after expanding by 2.9% in 2018. Businesses operating in diversification of the financial needs and preferences of retail, trade and other related sectors have been tested customers will allow us to grow market share. This will by the slowdown in the global economy as well as weaker underpin our long-term sustainability and ensure our ability consumer sentiment. An uptick in the unemployment to deliver value for shareholders. rate in recent months is another indicator of the potential challenges facing the city’s economy.