Hang Seng Bank, Hong Kong's second-largest commercial lender, yesterday posted a sharp fall in second-half 2008 earnings and predicted more challenges ahead in 2009 amid falling exports and shrinking domestic demand.

The bank, controlled by HSBC Holdings of the UK, said net profit for the six months ended Dec 31, 2008 fell to $645 million, down 46 percent from a year earlier period.

Its worse-than-expected performance dragged the price of its shares down 3.16 percent to close at HK$84.25 apiece, in line with the decline in the benchmark index.

Hang Seng Bank trades at a hefty premium to its peers, at 2.8 times book value. By comparison, Bank of East Asia trades at about 0.85 times book and Bank of China (Hong Kong) at 0.88 times book.

Full-year profit fell to HK$14.09 billion from HK$18.24 billion in 2007. Projecting further economic downturn in Hong Kong in 2009, the bank has increased its charges and provisions for non-performing loans and potential investment losses by nearly 500 times from a year before to HK$2.78 billion.

With much of its business tied to the domestic marketplace, Hang Seng's exposure to the variety of toxic securities issued by US investment banks has remained small, other than its holdings of bonds in failed US lender Washington Mutual (WM).

In a statement, Hang Seng said its capital adequacy ratio rose to 12.5 percent at the end of 2008, up from 11.2 percent a year earlier, while its core capital ratio improved to 9.5 percent from 8.4 percent.

The bank wrote down a HK$2.77 billion loan impairment and other credit risk provisions, which surged by 381.9 percent year-on-year.

The bank's Vice-Chairman and Chief Executive Raymond Or yesterday refused to reveal how much of the provision is related to the troubled assets issued by WM.

"In compliance with the bank's prudent policy, it will not make the exact figure related with WM public. But I believe the bank doesn't need to make further provision for WM in the future," Or said.

Analysts said the bank's performance in the second half was largely hit by the sharp fall in loan demand, especially in trading financing and mortgage lending, which are the mainstay of its business.

Net fee income skidded nearly 28 percent as customers were shying from investments in the securities and other more exotic debt instruments after the outbreak of the US sub-prime mortgage loan crisis. In wealth management, for example, income fell 37.6 percent for the year despite rising 2.2 percent in the first half.

Hang Seng also said that HSBC executive Margaret Leung would become chief executive officer and vice chairman of the bank starting in May, replacing the retiring Or. Leung is group general manager and global co-head of commercial banking at HSBC.

"I worked with Ms Leung for many years in HSBC. I believe she is able to complete the five-year plan I laid down when I assumed the post in 2005," Or said.

(China Daily March 3, 2009)