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15ReviewofOperationsDahSingFinancialHoldingsLimitedHighlightsofGroupFinancialPerformanceHK$Million20022001VarianceOperatingprofitbeforeprovisions1,587.61,300.422.1%Operatingprofitafterprovisions883.4875.50.9%Profitattributabletoshareholders829.0868.2-4.5%Totalassets60,12954,43210.5%Totalliabilities53,01247,96110.5%Shareholders’funds6,0945,41712.5%Netinterestincome/operatingincome74.1%75.4%Costtoincomeratio35.7%41.6%Returnonaveragetotalassets1.4%1.7%Returnonaverageshareholders’funds14.4%17.0%FinancialReviewTheGroup’soperatingprofitbeforeprovisionswas22.1%higherthan2001,largelyduetoastrongerrevenuecontributionfromourbankingbusiness.Ourlifeassurancebusinessgeneratedalowerprofitrelativeto2001.Withasubstantialincreaseinbaddebtcharges,ouroperatingprofitafterprovisionswasupmarginallyby0.9%fromtheprioryear.Netinterestincomegrewby8.8%fortheyear.Interestratefallsduringtheyearresultedinlowerfundingcostsandassistedinachievinganetinterestmarginof3.74%,similarto2001’s3.76%.Weexperiencedamildcontractioninourloanbookandacontinuedtighteninginloanmarginsformostloanproducts.However,ahigherspreadwasearnedonfixedrateassets.Otheroperatingincomewas17.0%higherthan2001.Thegrowthwaslargelyattributabletohigherfeeandcommissionincome,drivenbywealthmanagement,includingfeeincomederivedfromunittrustdistributionandinvestmentservices,creditcards,treasuryandinsurancesales.Operatingexpensesdecreasedby5.0%whencomparedwith2001.Thelowercostbasewasachievedbyageneralreductioninallmajortypesofexpenses.Ourcosttoincomeratiofellfrom41.6%in2001to35.7%in2002.16ReviewofOperationsDahSingFinancialHoldingsLimitedFinancialReview(Continued)TheGroup’schargeforbadanddoubtfuldebtsrose65.7%whencomparedwith2001,reflectingadifficultlocaleconomy,continuinghighunemploymentandanincreasingnumberofpersonalbankruptcies.Almostalloftheincreaseinbaddebtchargein2002relatedtothecreditcardandconsumerloanportfolio.Inlinewiththemarket,ahighercharge-offrateforourcreditcardportfoliowasrecorded.Theassetqualityofourresidentialmortgageloans,commercialbankingandhirepurchasefinanceloanportfolioscontinuedtoholdupwell.Attheendof2002,ournon-performingloanratiowas1.67%,downfrom2.07%at2001yearend.Wecontinuedtoactivelymanageourportfolioofsurplusfundsinvestmentsbyinvestinginawidevarietyofdebtsecuritiesandmoneymarketassetswiththeobjectivesofsustainingprudentliquidity,generatingsolidaccrualincomeinalowinterestrateenvironment,andcapturingmarketopportunitiestorealizedisposalgains.Inresponsetomarketconditionsinthesecondhalfof2002,wemadesomedisposalsofbondsandrepositionedpartofourportfolio,havingtakenintoconsiderationourassessmentofinterestratetrendsandmarketchanges.ThedisposalofbondsproducedatotalnetgainofHK$82.4millionfortheyear.Asaresultofourannualrevaluationofinvestmentproperties,arevaluationdeficitchargeofHK$39.5millionwasrecognizedinour2002profitandlossaccount.DuetoweakloandemandandthedeflationaryenvironmentinHongKong,morestringentcreditunderwritingstandardswereadopted,andwithamorecautiousapproachtomanagingretailcredit,ourbankingbusiness’totalloansandadvancestocustomerswere3.9%lowerthanthoseattheendof2001.Thecontractionwascausedmainlybyareductioninourretailloanbook,whichexperiencedageneraldeclineinmostloanproducts.Thecommerciallendingandhirepurchaseloanbooksremainedflat.Weachieveda14.2%growthinthetotaldepositbase,whichcomprisescustomers’depositsandcertificatesofdeposits.Inlightofthelowlevelofinterestrates,westeppedupourdepositacquisitioneffortswiththeobjectivesofgrowingthecustomerbase,crosssellingwealthmanagementservicesandlockinginadditionaltermfundingtosupportmoreactivesurplusfundsinvestment.Inadditiontoraisingwholesalecertificatesofdeposits,welaunchedaseriesofretailcertificatesofdepositduring2002,bookingatotalofHK$1.6billionnewretailcertificatesofdepositsduring2002.Thisnewdeposittakingavenueenabledustodiversifyourfundingbase,strengthenourtermdepositmixandmaintaincontroloverthecostoffunding.17ReviewofOperationsDahSingFinancialHoldingsLimitedBankingBusiness20022001VarianceNetinterestmargin3.74%3.76%(HK$Million)Advancestocustomerslessprovisions27,63628,703-3.7%Depositsfromcustomers37,28733,03112.9%Certificatesofdepositissued6,8885,65221.9%Totaldeposits44,17538,68314.2%Loantodepositratio(excludingloancapital)62.6%74.2%Averageliquidityratio54.9%46.2%FinancialReview(Continued)Ourlifeassurancebusiness’netcontribution,usingtheembeddedvalueaccountingtreatment,wasHK$79.4million,down11.8%relativetotheHK$90.0millionearnedin2001.Thelowerprofitgeneration,despitehighersales,wascausedbyalowerembeddedvalueincreasemainlyasaresultofaloweringintherateoflong-terminvestmentreturnassumedbyourexternalactuary.Thecontinueddeclineinmediumtolong-terminterestrateswaspositiveforbondsinourlifebusiness’investmentportfoliobuthadanadverseeffectontheactuarialreservingcostandembeddedvalueassumptionsandsohadamixedimpactonourlifeassurancebusiness’overallprofitability.2002wasaverydifficultyearfortheHongKongbankingindustry.TheglobalmarketwasaffectedbytheaccountingscandalsintheUS,adeclineinglobalequitypricesandthechallengesbrough