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Louis Beckerling

HSBC Corp, Hong Kong's biggest lender, surprised the market yesterday by unveiling a strong 8.8 per cent gain in net earnings to HK$14.21 billion.

The increase, for the six months ended June 30, came despite a small contraction in the group's total loan book - led downwards by a fall in mortgage loans made in Hong Kong.

Total deposits, however, were up HK$27.98 billion, or 2.13 per cent, at HK$1.34 trillion, and the bank showed no sign of losing depositors as a result of introducing fees and charges in response to the deregulation of interest rates in Hong Kong.

The figures for the Hong Kong operation helped contribute to a 4 per cent rise in interim net profits for the whole HSBC group to US$3.6 billion.

In Hong Kong, average customer deposits, increased by HK$89.2 billion, or 7 per cent, with solid increases in both HSBC and Hang Seng Bank, due to higher average savings accounts, time deposits and current accounts.

HSBC chairman David Eldon said the bank had ensured that it was possible for customers to avoid paying charges by providing fee-free banking.

In addition, managing interest rates paid on those deposits downwards helped insulate the bank from declining yields on its mortgage portfolio.

The upshot was that net interest income for the group was up HK$726 million, or 3.9 per cent, at HK$19.5 billion.

The gain came despite a small contraction in loans to customers during the period ended June 30 to a total of HK$652.4 billion - down HK$3.2 billion or 0.5 per cent.

Leading the decline in the group loan book in Hong Kong (which includes Hang Seng's loans), was a fall of HK$6.37 billion, or 3.5 per cent in residential mortgages, to HK$175.58 billion from HK$181.96 billion previously.

That fall came as a result of the continuing price war for mortgages and the reluctance of HSBC to expand too aggressively in a marketplace which continued to show shrinking margins.

'The mortgage business remains important to us and we are not going to walk away from it,' Mr Eldon said.

'But neither do I think that we should be leading the market downwards into this ever-decreasing spiral that we have got ourselves into.'

Excluding the government home ownership scheme and staff loans, the average yield earned by HSBC Corp on its mortgage portfolio fell to 56 basis points below prime lending rate, versus one basis point below prime in the second half of 2000.

Hang Seng Bank, which competed more aggressively for market share, saw its average yield fall to 65 basis points below prime, compared with five basis points above prime for the first half of 2000.

Cuts in interest rates paid on deposits helped insulate the interest-earning business of the group from the corrosive impact of the mortgage price war.

Other operating income was up HK$1.3 billion, or 4.8 per cent, to HK$28.62 billion - led higher by a rise in net fees and commissions of HK$158 million, or 2.9 per cent.

There was a good increase in fee income from the sale of unit trusts, the bank noted, and fee income from cards grew by HK$132 million, or 11.1 per cent.

On the flip side, the declining activity on the share market saw income from securities and stockbroking business decline by HK$488 million, or 37.8 per cent - mainly from the group's Hong Kong business.

Analyst Anthony Lok said the numbers showed the market had been overly pessimistic about the group's performance.

'Regular banking operations are holding up,' he said.

'They are not great,' he added. 'Margins are under pressure and loan growth is poor.

'But it is not a catastrophic collapse.

'And this is what the market was factoring in when it sold the share price down 20 per cent earlier this year.'

The immediate response of investors to the result yesterday was to bid the HSBC share price higher on the London share market.

In the first two hours of trade on the London market the HSBC share price was up 46 pence, or 5.6 per cent, at 862 pence.



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