Hang Seng eyes yuan deposits in China

By Kennix Chim

HONG KONG (Reuters) - Hong Kong's third-largest lender, Hang Seng Bank (0011.HK: Quote, Profile, Research, Stock Buzz), said on Tuesday it expects its 18 China outlets will be able to accept local currency deposits from mainland residents by the end of September.

The Hong Kong-based lender, in which global banking giant HSBC (0005.HK: Quote, Profile, Research, Stock Buzz)(HSBA.L: Quote, Profile, Research, Stock Buzz) owns 62 percent, is increasingly focused on expanding in mainland China to drive earnings and diversify beyond Hong Kong's competitive and developed banking sector.

However, the network coverage of foreign banks, including Hang Seng, so far are limited compared with big national banks such as Industrial & Commercial Bank of China (1398.HK: Quote, Profile, Research, Stock Buzz)(601398.SS: Quote, Profile, Research, Stock Buzz), which operates 18,000 outlets in China.

"The priority of our mainland business is to build up our customer and deposit base," Vice Chairman and Chief Executive Raymond Or said at the Reuters China Century Summit.

Hang Seng is also evaluating Beijing's announced pilot program to let individuals invest directly in Hong Kong securities, but Or said the outcome would depend on regulations governing the scheme, which is still taking shape.

Because of the thin yuan deposit base in China, Hang Seng's loan-to-deposit ratio on the mainland reached as high as over 300 percent in the first-half of this year, compared with about 500 percent in the fourth quarter 2006.

Or, who is also chairman of the bank's China subsidiary, expects Hang Seng Bank can lower its loan-to-deposit ratio to fall within the China Banking Regulatory Commission's cap of 75 percent by 2011, assuming it can offer comprehensive local-currency services to mainland residents and absorb deposit from them.

RATE HIKE

Loan demand could be crimped by Beijing's moves to increase interest rates and reserve requirements several times this year as it sought to cool the red-hot economy.

"It will affect the banks' loan growth in China, but the mainland's economic growth remains strong, which can offset the impact from rate hikes," Or said.

Hang Seng now has a network of 18 branches and sub-branches on the mainland, where total operating income grew 86 percent to HK$225 million ($28.86 million) in the first half, driven by a 21.3 percent increase in lending and a 42.7 percent rise in deposits.

Under a plan introduced when Or became CEO in 2005, Hang Seng aims to derive 10 percent of its pre-tax earnings from China operations, versus 5.9 percent in the first-half of this year.

The lender plans to apply for a branch in Tianjin, a wealthy port city near Beijing, after Hangzhou and Ningbo branches open.

Shares in Hang Seng Bank surged to record high at HK$124.4 following a batch of upgrades by investment banks after the Hong Kong-based lender posted a 43 percent jump in first-half earnings.

Shares in Hang Seng have soared 15 percent this year, lagging a 20 percent increase in the benchmark Hang Seng Index .HSI during the same period.

(US$1=HK$7.8)