Aug. 2 (Bloomberg) -- Hang Seng Bank Ltd., Hong Kong's second-biggest publicly traded lender, said first-half profit rose 24.4 percent as it recovered some of the provisions it previously set aside for bad loans.

Hang Seng Bank's net income in the first six months rose to HK$6.245 billion ($800.7 million) or HK$3.27 from HK$5.02 billion or HK$2.63 a share a year ago. That's more than the HK$4.96 billion median estimate of 12 analysts surveyed by Bloomberg News.

This reflects ``the reduction of credit charge-offs, and an increase in recoveries from mortgages and commercial customers,'' Hang Seng Bank said in a statement. ``This was in line with the benign credit conditions during the first half of the year as the economic recovery continued to take shape, with falling unemployment, reduced levels of bankruptcies, and rising property prices.''

Hong Kong suffered its worst three months in last year's second quarter when the SARS virus caused 299 deaths in the city, triggering job losses and a wave of defaults on bank loans. The economy has since recovered, growing 6.8 percent in the first quarter, helping individuals to repay late loan installments.

Net interest income fell to HK$4.7 billion in the first half from HK$5.2 billion in the year earlier period. Hang Seng's net interest margin narrowed to 2.02 percent from 2.41 percent.

Low Interest

Low interest rates are hurting margins because of Hang Seng's large deposit base in Hong Kong, where it makes 88 percent of pretax profit. The bank lends out its excess cash, and profit on that has fallen as the Hong Kong benchmark one-month interest rate dropped to a January low of 0.07589 percent. The rate reached a year's high of 0.30246 percent on June 15, still below the 1.34598 percent a year earlier.

``The low interest-rate environment and squeezed margins remained a challenge,'' said Chief Executive Vincent Cheng.

The bank wrote back HK$763 million of the money it set aside for bad loans compared with a provision of HK$456 million in the first six months of 2003. The bank released HK$65 million in provisions to reflect the improved economy.

Hang Seng, which is 62 percent owned by HSBC Holdings Plc, cut its bad loan ratio to 1.6 percent, the lowest amongst the city's biggest banks, from 2.3 percent at the end of last year. That means it typically has to set aside less money for soured debts and won't record the gains smaller rivals may make by reducing provisions.

Total lending rose to HK$248.1 billion in the first half from HK$229 billion in the year earlier period. China lending rose 62.4 percent to HK$6.2 billion.

``Loans are still sluggish,'' said Louis Wong, who manages $25 million at Phillip Asset Management (H.K.) Ltd. before the announcement.

Wealth Management

Hang Seng increased income from selling wealth management products by 29.6 percent to HK$1.8 billion or about 54 percent of its other operating income.

The bank's cost to income ratio rose to 24.5 percent from 23.1 percent at June 30, 2003. The number of employees rose to 7,475 from 7,174 a year earlier. The bank paid a dividend of HK$2.20 per share in the first half compared with HK$2.10 in the same period last year.

Profit at Hang Seng's parent HSBC rose more. Europe's biggest bank by market value, said profit in the first half rose 55 percent, helped by the $15.5 billion purchase of Household International Inc.

Hongkong & Shanghai Banking Corp., the Asian arm of HSBC, said first-half profit rose 44 percent as it recovered provisions it previously made against bad loans.

Net income for the first six months rose to HK$18 billion from HK$12.4 billion a year earlier, Hong Kong's biggest bank said in a press release.

To contact the reporter on this story: Michele Batchelor in Hong Kong mbatchelor@bloomberg.net

Last Updated: August 2, 2004 06:51 EDT