Hang Seng Bank, which is about 62 percent owned by HSBC, yesterday posted a 6.2 percent drop in its net earnings in 2009, as reduced deposit spreads depressed the bank's net interest income.

Net profit for the twelve months ended December 31 last year fell to HK$13.32 billion from HK$13.73 billion in 2008, which is at the low end of market forecasts. Market experts had earlier predicted the bank would post a 3 to 8 percent slump in its 2009 net earnings.

Shares in Hang Seng Bank yesterday finished up 1.23 percent, or HK$1.40, at HK$114.9, moving in line with the 2.17 percent jump in the benchmark Hang Seng Index.

The bank will pay a fourth interim dividend of HK$1.90 per share to its shareholders, bringing the total dividends of HK$5.2 per share for 2009 to slightly below HK$6.30 per share in 2008.

The continuing low interest rate environment had a significant adverse impact on Hang Seng's net interest income.

Net interest income of the bank slumped 13.6 percent to HK$14.02 billion, as net interest spread dropped by 31 basis points to 1.84 percent in 2009.

The bank said markedly reduced deposit spreads and the reduction in contribution from net free funds in the near-zero interest rate environment outweighed the benefits of improved loan spreads.

Sluggish investment sentiment also dented the bank's non-interest income. Net fees and commission dropped 13 percent to HK$4.32 billion, as demand for wealth management products was lower than in 2008.

However, the more buoyant stock market, improving economic conditions and the improvement in investor outlook towards the end of the year helped support the 24.4 percent growth in net fees and commissions in the second half compared with the first half.

Hang Seng, the city's second largest provider of home loans, has cut its mortgage rate to the lowest level in at least 20 years.

Margaret Leung, vice-chairman and chief executive of Hang Seng Bank, said yesterday that mortgage rates in Hong Kong are already "at a very low level", while any further cuts will make it difficult for the banks to make profits.

Media earlier reported that the Hong Kong Monetary Authority may propose a given reference interest rate for local lenders to price their mortgage products.

William Leung, executive director and head of personal banking of Hang Seng Bank, said mortgages are always the bank's main business, adding that it has never initiated a price war.

"But at the same time we have to adjust our price to match rivals, in order to maintain our market leading position," he noted.

Conita Hung, head of equity markets at Delta Asia Financial, said narrow net interest margin and subdued investment sentiment will continue impacting Hang Seng's net earnings in the first half of 2010.

"The bank may run with profits this year, if lenders in Hong Kong refrain from cutting their mortgages rates further," Hung said.

The bank's loan impairment charges and other credit risk provisions significantly improved in 2009 by falling 70.7 percent to HK$812 million, benefiting from better economic conditions.

The capital adequacy ratio in 2009 also improved to 15.8 percent from 12.5 percent in 2008, while the core capital ratio also increased to 12.8 percent from 9.5 percent.

Looking ahead, the bank expects low interest rates are likely to persist until at least the second half of this year, while keen competition in the financial sector will continue to put pressure on margins.

(HK Edition 03/02/2010 page2)