REVIEW OF BUSINESS
With the continued recovery in the local economy and an improvement in the economic fundamentals, a more stable operating environment was experienced in the first six months of 2000. The renewed confidence in the local market and a gradual re-rating of the economy's prospects led to increasing competition in the financial services market. However, with the high real rates of interest and sluggish loan demand, many banks, with a large pool of surplus liquidity, resorted to competing aggressively on loan pricing in order to reverse the contraction in their loan books brought about by the recession in the past 2 years.
The Group was able to achieve a stronger performance and profitability improved over the period. Operating profit before provisions was 13.6% higher, mainly resulting from the increased revenue contribution from our banking business.
Net interest income grew by 15.9% in the first six months of the year. Despite the keen pricing competition in the residential mortgage sector, and rises in interest rates, our net interest margin increased to 3.75% which is notably higher than the 3.45% reported for the first half of 1999. The widening in the net interest margin and the increase in net interest income were largely the results of a continued growth in our higher yielding lending and a more effective control in managing the increases in funding costs.
Other operating income was 1.0% higher than the same period in 1999, reflecting growth in fee and commission income in our banking business which was offset in part by the lower revenue contribution from the life assurance business. Our Banking Group posted a 25.4% increase in its other operating income, driven mainly by stronger credit card income and lending related fees. Our life assurance net contribution in the period, using the embedded value accounting treatment, fell to HK$26.4 million which was 40.5% lower relative to the HK$44.4 million profit booked in the first half of 1999.
Operating expenses increased by 9.9% relative to the same period in 1999, but was 4.1% below the second half of 1999. This rise was mainly caused by the increase in our IT investment to support business growth and to deliver e-banking services, higher spending on marketing promotion, and a higher level of staff expenses. With the stronger pace of growth in revenue, our cost to income ratio dropped to 39.4%.
The Group's charge for bad and doubtful debts was 22.4% lower compared to that of the first six months in 1999, reflecting the continued improvement in the asset quality of our loan portfolio and the positive impact of a stabilizing property market amidst the recovery of the local economy. The combined ratio of overdue and rescheduled loans of our Banking Group dropped from 4.93% at the end of 1999 to 4.58% at the end of June 2000.
For our banking business, total loans and advances to customers were flat compared to the total at the end of 1999. The growth in our consumer and commercial lending was offset by the contraction in mortgage loans, reflecting our increased emphasis on higher yielding lending and our more conservative approach in dealing with the pricing competition in the mortgage market. The small increase in our total deposit base relative to the end of 1999 was the result of our proactive asset and liability management that carefully balanced our need to maintain prudent liquidity whilst enhancing profitability.
Relative to the balance sheet at the end of 1999, there was a notable increase in our total assets, and a large increase in other accounts on the liability side of the balance sheet at the end of June 2000, reflecting the more proactive approach in managing our balance sheet. The increase was brought about by utilizing the facilities afforded to Dah Sing Bank as a market maker in Exchange Fund bills and notes which enabled us to access cheaper funding for reinvestment at higher rates of return.
Our life assurance business generated lower profits than the first half of last year with the rise in interest rates during the period resulting in a smaller increase in the embedded value contribution. Whilst the tough economic environment in Hong Kong and increased competition for life business caused a slowdown in the sales of new policies in the market, our new business sales were ahead of last year particularly in the first quarter but the trading result was adversely affected by lower equity values at the half year.
Riding on the investment and initiatives made in 1999, Dah Sing Bank continued to make notable progress in delivering on-line e-banking services and new product launches in the first six months this year. Our e-banking capabilities now include a host of different on-line applications, virtual ATM and on-line balance enquiry, transfer and bill presentment. We plan to offer more e-banking services in the coming few months.
In May 2000, the Hong Kong Monetary Authority issued its guideline governing the authorization of virtual banks in Hong Kong. We are continuing our evaluation and preparation to set up a stand-alone e-bank taking into consideration the key parameters set by the new guideline. We will shortly commence the reorganization of our Hong Kong based D.A.H. Private Bank's business with a transfer of the private banking operation to Dah Sing Bank. Subject to receiving all the required regulatory approvals and completing all the necessary infrastructure development, we are planning to convert our Hong Kong private bank to a stand-alone e-bank and start operating it before the end of 2000.
