Q3 2019 Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference calls I hate to SPC Holdings plc earnings release for Three Q2 019 information. This conference is being recorded today at this time I will hand, the call Dave. It's your host Mr. No Quinn good chief executive.
Good morning to everyone in London, and good afternoon in Hong Kong welcome to our third quarter results cool.
As you noted this is my first quarterly results update since taking over as group's CEO in August .
I want to provide you with my views on business performance on the areas that are performing well.
But also on those so why do you have performance issues an action is required.
Yeah. When we'll then take you through the detail about Q3 performance.
Reported profit before tax for the nine months was up 4%.
On the adjusted profits were broadly flat at $17.9 billion.
Adjusted revenue for the same period was up 4.8%.
Which reflected strong performances in all BW M. A C N b.
Adjusted revenue in GBM them for the nine months was down 7%.
And the nine month group I realize road C was 9.5 cents.
As a standalone quarter Q3 was reassuring in some areas, but disappointing you know those.
Reported profits were down 18% to $4.8 billion.
On an adjusted profits were down 12%.
To $5.3 billion compared with last year's third quarter.
Adjusted revenue was down 2%, so it seemed point $3 billion.
Well regime businesses will once again, the driving force contributing 87 cents a group adjusted profit before tax in the quarter.
Commercial banking continues to grow revenue unbalances, particularly in Hong Kong and the UK.
Retail banking held up well in Hong Kong, Despite the current situation the.
Hi, customer redress charges of skilled strong lending and deposit growth from our UK ring fenced bank.
Oh transaction banking businesses showed good resilience and global private banking continue to attract good levels of net new money.
It was also good to see a continuation of the cost discipline from the early parts of 2009 scene.
However, we are clearly facing more challenging revenue environment not in the first half of 2009, saying on the outlook for revenue growth is softer than we anticipated or the whole here.
For this reason, we no longer believe it possible to achieve a return on tangible equity of greater than 11% in 2020 .
Looking got saw a portfolio of businesses and geographies. It is clear, but what we have many parts of our portfolio that all performing well. We also have pockets where the performance is not acceptable.
Well I Continental European business, and the known ring fenced bank in the UK, well not producing acceptable returns, particularly in global banking Americas.
Given current market conditions, they are unlikely to do so unless we take decisive action.
Well all U.S. commercial business grew revenue in the third quarter.
Oh U.S. business as a whole.
As an annualized return on tangible equity for the year to date of 1.9%.
This is clearly well schultz about 2020 target of 6%.
Which we have previously said, we no longer expect to reach.
Having a strong presence in both continental Europe in the U.S. is important.
Well, we need to reshape our presence in both.
It is not clear they're all previous plans for both businesses are no longer sufficient given the softer revenue I look, though we now face.
The returns needs to be improved on the capital allocated so those geographies needs to be reduced.
We need to rebalance our capital away from low return business in so higher gross higher return opportunities in other parts of our footprint.
Hi, I'm determined to do exactly that.
As a consequence of these actions it will be necessary to adjust the cost base of HSBC.
We also need to remodel the organizational structure of HSBC to remove some of the complexity that has I believe been an obstacle to effective execution of our plans.
Also to reduce the cost associated with running the group.
We will provide an update on these clients alongside of full year results in February .
I provide new financial targets at same time.
I'd like to finish with a few words about Hong Kong on the UK.
We are committed to supporting both Hong Kong and the UK through the current challenges they face.
And I would like to acknowledge the exceptional work and dedication of all people in helping our customers. During this current period of uncertainty.
At different times throughout its 154, you history, both Hong Kong and UK have faced significant challenges.
And HSBC has done whatever we can to help them through to the other side.
Hi, HSBC has always taken a long term view and we'll continue to do so.
You wouldn't will not take you through our Q3 performance.
Yeah. Thanks, no morning, or afternoon, no I'm now going into into the slide deck. So on slide three as you can see from today's results and knows commentary is just given it was a mix quarter <unk> five rural with a more subdued outlook.
But we've had substantial set of management actions underway to respond to this.
Reported profit after tax and the third quarter with some $3.8 billion, that's down 16% basis, the third quarter in 2000 or lighting.
Underlying this on the positive side retail commercial in private banking had settled Cortez as did the transaction businesses and global banking and markets.
Where constraining costs well below last year's Grites right, we're managing identity ways actively and results out of Asia remain robust despite current challenges in Hong Kong.
Against that global banking and markets global markets had weaker quarter, particularly compared to a very strong third quarter 2018.
We had a number of one offs, including high remediation costs in the UK ring fenced bank.
Negative market related impacts.
And credit charges were impacted by how high credit charges against the unsecured lending in retail banking and highest specific charges in commercial banking.
Turning to the next slide total adjusted revenues and the third quarter with $13.3 billion, that's down 2% on the third quarter in 2018.
Looking across the full global businesses and retail banking and wealth management overall revenues were broadly stable in retail banking revenues were up 4% threatened by balance growth and buys lending and deposits.
Wealth management revenues were down, 6%, which was affected by $225 million of negative market impacts.
Insurance manufacturing business.
Commercial banking revenues were up 4% largely through balance sheet growth across all regions in credit and lending.
And the benefit of wider margins and grow global liquidity and cash management.
In global banking and markets revenues were down 15%.
Or 10%, if you exclude negative credit and funding valuation adjustments.
Mainly from continuing weakness in global markets.
Private banking had another good quarter revenues were up 11% and total net new money inflows in the third quarter were $5 billion.
$19 billion for the year to date.
In corporate center revenues were $194 million.
On the third quarter of 2018.
Driven by the word joost impact of hyperinflation accounting in Argentina, together with favorable valuation differences on long term debt and associated swaps.
On slide five net interest income was $7.7 billion, that's up 3% on the third quarter in 2018.
This reflects a mix of volume growth up 7% over the last year.
Actually offset by slightly lower margins.
For the third quarter NIM was 156 basis sports.
That's down six basis points on the second quarter.
Customer redress of interest costs of $535 million into UK ring fence bank accounted for three basis points of this.
And the impact of hyper inflation in Argentina accounted for a fair the two basis points.
Overall, despite an expected outlook as interest rates softening, our two largest markets for net interest income Lamely Hong Kong money gay continued to see good volume growth.
For Hong Kong, despite softness in U.S. dollar interest rights CPI bore remain somewhat elevated with an average one month fiber of 203 basis points in the courts that.
That's flat on the second quarter and up 72 basis points on the first quarter.
I would not started a one month high bar is currently about 50 basis points lower on average in the fourth quarter to date.
Turning to slide six I'm pleased with the better discipline, we've been able to instead on costs this year.
Compared to our growth rate of 5.6% and full year 2018.
Weve constrained adjusted cross growth to 2.6% in the first nine months.
Third quarter cost growth was flat led by certain items, including Argentinian hyper inflation and the timing of investment spend.
As I look at cost growth. Excluding these items were running at about 3% cost growth for the first nine months.
And expect to be running at a similar growth rate for the fourth quarter.
Importantly were sharing reduce cost growth, while continuing to invest investment spend. This year is currently at $3.3 billion, that's up 15% phases. The first nine months of last year.
Given the weak a third quarter performance relative to plan and compared to expectations at the second quarter.
We have reduced year to date variable pay accrual by some 190 $880 billion.
We will reduce it again in the fourth quarter, resulting in a full year panelled benefit if around $300 million.
As discussed at the second quarter, we're now on track to take up $650 million to $700 million from the full year 2020 run right.
We've taken a fair the $120 million entitled severance costs and the third quarter.
And as we progress the strategic wed been no has talked about we expect to strip out say the costs as we execute against US and this is likely to result in additional severance costs and full year.
2020.
As a quick reminder, our fourth quarter costs have the full impact of the annual UK Bank Levy, we expect us to be in the order of $950 million broadly in line with the 2018 Chad.
And the fourth quarter will also include a fair the increase in investment spending up around $200 million.
Our reported costs also include customer redress costs of $488 million.
This includes 398 million relating to PPI.
Reflecting exceptionally high information requests and August ahead, if the PPI deadline.
On the next slide we so high credit costs in the third quarter.
$883 million or 54 basis points.
This compares to $545 million or 22 basis points in the previous quarter.
Underlying this a higher credit charges relating to unsecured lending in retail banking in the UK the U.S. in Mexico.
Hi, a charges against specific clients in commercial banking and by the Guy in Hong Kong.
And moving on from stage, one just phase two lines, particularly in Hong Kong given changes in models and the updating a forward economic guidance.
Credit costs in the third quarter included an additional $90 million charged to reflect the economic outlook in Hong Kong.
We continue to sector, our guidance of 30 to 40 basis points of credit costs through the cycle and based on the current economic outlook, we expect to be at the low end of this range sharing this financial year.
The outlook for credit remains more uncertain, the unusual or anybody else, who remain sensitive to forward economic guidance.
Hong Kong in the UK in particular subject to a broad array of credit outcomes.
On slide eight core tier one at the end of the third quarter was stable at 14.3%.
With profits and reductions and not that many ways offset by dividends and the billion dollar share buyback.
We continue to actively manage identity ways across the group they were down $21 billion in the third quarter.
W.A. growth of 8 billion from lending growth in credit migration was outweighed by a 14 billion dollar reduction from methodology and policy changes and the $13 billion rejection due to FX.
We expect W.I. is at year end to be broadly similar to the end of 2018.
We've now completed a billion dollar buyback program for the year. The average price of the program was a six pounds and two pence per share, resulting in 136 million shares being bought back and cancer.
So to conclude on slide nine if you strip back our third quarter performance I think we had a decent quarter in Hong Kong in Asia, as well as the Middle East and Mexico. These businesses continue to generate attractive returns.
Oh areas of weakness were Argentina, the UK ring fence bank, the non ring fence bank in the U.S.
Container in the UK ring fence banquet, both negatively affected largely by one offs.
And Argentina due to the macro situation.
And then the UK ring fence bank.
Due to $606 million of combined redress judges.
For the non ring fence bank and a U.S. business combined these are around $290 billion over 32% to title I definitely wise.
Affects approximately 85% of these I'd be rise Irene global banking and markets and commercial banking.
The bulk of global banking and markets, our Wi Fi is being in the non or unfenced back.
And both businesses also have loss, making retail banking operations.
As part of the wed point now doing we expect to materially repositioned both funding non ring fence bank and argue as business.
With a view to both improving currently on acceptable returns and to release capital through material W.I.E. reductions.
Looking ahead to the fourth quarter, the UK and Hong Kong continued to have large delta is around the Hong Kong as somewhat flat said by the continued strengthen high Bowl.
Although the underlying Hong Kong macro data is weak.
And the situation in the UK depends on Brexit outcomes.
Also note that we could see significant charges in the fourth quarter and beyond including the possible impairment of goodwill and additional restructuring charges.
So to conclude a tough quarter, the headline level, but masking some good underlying country and regional performance.
Continue to grow and produce attractive returns retail commission on private banking had solid solid quarters, Ed did the transaction businesses and global banking in markets, where constraining costs well below last year's Grice right. We're managing not everywhere is actively.
But with a week our outlook, we need to accelerate action to redeploy capital into higher returns and this will always say support our current capital plans.
We intend to sustain the dividends, while maintaining our 41 about 14%.
And with that Sharon if we could please open up for questions.
Thank you Mr. Stevenson she would like to ask a question state. Please press star one on your telephone keypad presidential that do meet function on your telephone is switched off.
Final question has been on said you may will need yourself from the key by pressing star on team once again to ask a question. Please press Star then one please ensure that the need function on your telephone is switched off.
We will now take off first question today.
Tom Wayne.
Numis. Please go ahead your line is a pan.
Hi, Thanks, very much higher than what I know.
Good luck.
Two questions. Please firstly just.
Okay. So at any color to the restructuring plan that sounds from what you and.
As Jeff said, the focus is going to be and then the U.S. and possibly parts of.
GBM.
Non loan funds bank I'm, assuming that doesn't mean that.
PNM and I just wonder if you can help us scale the size of potential RW lays that maybe with Houston any sort of associated puppets linked to those out WH. Just so we can start to get a bit more of a field, but what maybe maybe coming in this linked to that first question I mean, we often see material restructuring charges.
I guess is sensible to assume that the sort of buyback commitments become that they develop and in that scenario. So we probably should start thinking about the buyback. We now can be trying to scale restructuring on how to second question on Hong Kong base that these once the deal with the first one pesto.
So let me tell you. The first question first part of the first question, then I'll hand off to you and I mean.
We acknowledge that the returns in continental Europe , including the loan ring fenced bank on the U.S. on where they need to be the.
So first we need to try and improve those returns.
But also we need to reduce the amount of capital associated with both of those geographies and try and redeploy some of the capital into higher growth higher return opportunities elsewhere in our portfolio.
Exact quantification of that redeployment on those actions, we will be updates in the time of all Q4 results. So we're not able to give you detail today on the exact quantification of the but it's fair to say taking capital out of a region will take revenue and if we say revenue, we gonzales to adjust the call space.
Supported that revenue.
And that's where the potential for restructuring charges comes from but the detail will be provided at the Q full time, but I'll, let you on some more color to that.
Yes.
Tom and then we have been deliberately vague at this point because yes, we have kicked off a piece of work, but it's not sufficiently advanced to enable us to announce this at this point I mean, they I think I would now we've got a new management team and the U.S. that I need started in any ROE just over three weeks ago.
And they need time.
The.
I mean I did use the word material deliberately so think about it in that context.
Typically I mean intensive timeframe, yeah, I would expect that will take us a couple of years to execute the bulk of that restructuring the.
And the other thing I would note as part of the announcement to is.
No. It has always sizing loaded a desire to go live to the sort of complexity if the group at the center.
So there's quite a bit of cost complexity associated with that as well that we're trying to on pet.
And then you can go into the back of the slide presentation, we've set out.
Yeah, what the nine month performance was of the U.S. and bought the.
No interim fence both for the non ring fenced bank in the U.S. you can see had $290 billion outside of the ways not making a lot of money.
You can see yet broadly have that sits across the businesses I say, 95% of was global banking and markets in commercial banking.
So you can I think run some approximate masks on the back of that and I'm sure a rich and team in IOC in Tokyo after the call as well.
On buybacks I don't think we've made any comment about rolling out buybacks you should imply on what I've said that we're going to.
C.
A significant I'd have to re reduction coming out some of that will get absorbed.
By restructuring charges.
But I would still expected to be a material amount of.
W.A. release, some of which will use to redeploy into.
Hi, a growth regions, where we can.
Some of which will use to continue to support the dividend and I would expect to have some buyback capacity out of that as well I mean, we recognize the fact that the man to scrip dividend that gets paid out year each year as relatively diluted.
So we will continue to actively manage that three buybacks with an overarching.
Hi, good of keeping our core tier one ratio of about 14%.
And then Tom is just one of the just one other point of clarification.
You shouldn't assume that the corrective action that is appropriate for continental Europe is necessarily the same corrective action for the US the market dynamics as you know of Europe is very different so the market dynamics of the us and therefore, a remediation program could be different in the us to that which we have in Europe .
Okay.
Thank you.
As quite a long long said about your Tom. This is the second one was just on Hong Kong.
A lot of noise around the.
Tail charge I guess I wonder if you could just helps down what you're seeing in terms of the underlying where the position of you'll books in Hong Kong versus the charge taken in Q3, which is obviously a big step up on Q2 didn't buy that is assumption changes and so the buyer for us nine related things I Wonder if you could help us.
Get a sense, what's happening to the actual underlying credit.
Performance in the region.
The first comment I'll make these Hong Kong has had a very resilient performance in in the first nine months of this year and particularly in Q3 I don't silicon in totality. Its revenue physician the size of the balance sheet. The deposit book level being very resilient, but all handoff to you into common specifically about the Seattle physician yeah. They want.
Well you can say in a number is quite a significant step up and stage one to say stay.
About half of that just due to modeling changes the forward economic guidance has changed into generated which led to the 90 million dollar additional charge.
Yes, there's obviously two things hitting Hong Kong at the moment, one as the U.S., China tried to speed, where you can see trade numbers down materially in Hong Kong and the second is the ongoing purchase which is impacting things like tourism numbers hotel occupancy rates retail.
That said a bit of the bulk of a nice focused on is the small end of phase amazed at the moment, that's where yes, we do see emerging signs of distress.
As you know the Hong Kong mortgage book is very low LTV, we're feeling good about that so the any area that was sort of slightly courses on at the moment is.
Yes, the smaller end of estimates.
And yeah, I think the outlook for credit depends very much on base to agenuss events that were not in controller, which is when does the trade dispute and how does it get resolved.
And similarly for the purchased.
Okay. Okay. Thank you very much.
Thank you.
We will now take our next question from the line of Benjamin Toms from RBC. Please go ahead. Your line is open.
Hi, Thanks for taking my questions. This morning morning, Divestments, just really about the announcement of a new CEO do you expect that announcements, we made before giving the new targets and market.
At the end of year.
Secondly on the Seattle, So I can better I think you said that the space.
We HP and the lower end to the range of fetched 40 bed.
Is it fair site and you expect the sale charge to be higher in Q4, and Q3 or would you expect is flattish quarter on quarter eventually description.
Thank you.
I'll take the first question then hand back to you in the second.
As as Mark said at the time of.
Of the announcement of the change earlier this year.
We expected the process to take between six and 12 months.
The process is underway. It's a decision the board will take when they feel it's appropriate based and also make I'm able to give any more detail on today.
On part of the process.
And I'm sure, we'll make a statement as and when they're ready in the interim a we're running the business trying to make the decisions that are appropriate for the business.
The full support of milk in the board.
To do what we need to do to improve the business in the meantime.
On were operates in on that basis since the announcements we made today on the state as we've given you today.
Yes, just I mean from my perspective clarify that yes, we definitely expect to be coming back to the market as part of full year results with a revised set of financial targets.
Irrespective of where the board sets in the CIA Tom title at that point.
On that yeah, I did say that I expected may at the low end of the 30 to 40 basis point range.
I think we should try and be too precise on this.
Yeah in particular, our denied yes, we've got a very sizeable 400 million dollar plus I realize sitting in the UK, depending on what happens around Brexit in politics, and the next few months, yeah that could either be.
Hi, all too low.
An equally.
Outcomes around Hong Kong concerned about it as well depending on.
Yes, fair is factors, which I mentioned earlier, but as we said that I am based on what we see today.
We expect to be at the very low into that range.
Thank you bye.
Thank you on next question comes from the line of much the allowing us to close of Morgan Stanley . Your line is open imac.
Hello, Hello, Good morning, good afternoon.
Two two questions from me here.
I'm going to I think I'm going into a full round up on the on the on the provisioning side and also then.
Your lending businesses performance so.
We stopped about the provisions in them in Hong Kong, but could you give us a sense of what do you see in.
In can view K in Continental Europe in your commentary you've mentioned the unsecured kind of credit deterioration in the UK, but also.
In commercial as well, so any kind of detailed and with fee would be kind of their useful for us, but also on the back of that and Joe kind of and what you see on the ground and you risk appetite into 2020 , how do you actually see their loan volumes developing both in Hong Kong and UK into 2020 .
Where do you see that demand and kind of where do you see state of the youre kind of business priorities to grow.
Thank you.
Okay. They.
On the UK a few things, yes part of the reason for that growth then.
Credit and payments in the unsecured focused purely the fact, if you look at the credit characteristics were continuing to grow.
Okay.
UK Mexican.
You asked card portfolios, which the way that offer as non modeling which means that.
We will set up provisions against that as we grow it.
Commercial I would say this board.
Yeah. It does feel at the moment that.
Yes, what we saw in the first couple of quarters intensive being quite sector specific and often quite unrelated to Brexit for example.
Trends in high High Street retailing.
Yes, it has become a bit broader based at this point.
But we'll see it Brexit was always going to be slightly bedding and it continues to be slow Ben yeah. The growth outlook for the UK as we look at it.
Is expected to be relatively weak in the first half of next year.
But yeah, but where do we see good credit growth, we continue to like the mortgage sector, we've now fully build top or.
Broken network I think were up to about 88% coverage you can say in today's numbers, we grew flow share in second.
Quarter was 7.6%, which it actually is up this quarter I think this year.
And our stock share is up to about 6.76 0.8 on the back of that and actually the average LTV or the book declined in the quarter. So.
Mortgages would be one area that I think.
We're going to continue to take share and we still continue to have a degree of excess liquidity in the UK.
I think in Hong Kong.
Yeah, we grew the loan book by about 2% in the quarter I.
I think we will become increasingly selective while recognizing the fact that across our end business and hang saying, yeah. We are collectively 40% to 50% of the market in my sectors. So.
To the extent, there's a slight slowdown in the Hong Kong economy, it's hard to see that we wouldn't just slowdown proportionately with that.
And to the extent isn't generation and credit.
It will.
The exposed to that deterioration in credit.
The audio they always say is on top of that is if you look at Asia was a trading book there is still growth within Asia.
China is still growing granted at a slower pace than we've seen in recent times, but it's still a growth market.
On trade within Asia, an intra Asian trade is still a growth market.
So we still believe there were opportunities for growth, but we need to be a little bit more cautious on its hard to predict what our future growth will be.
Yes, we also had a question on Continental Europe , I think there was one single name exposure in France, which.
Contributed to the.
Credit charges in the quarter as well.
Perfect. Thank you very much.
Thank you and your next question comes from the line of Andrew Coombs Citi. Please go ahead. Your line is a pan.
Andy Good morning next couple of follow its just with respect stress Jim plans going into 2020.
The fastest the severance charge fastest savings for 2019 is in one form relationships.
Any reason to think that would be different going forward if any updated strategy.
Second question, but just be anything you could elaborate on with respect to the FSP announcement coming out mid November one G. Sibs in any expectations you have to that because obviously your capital position.
Potentially impact on how many how much restructuring charge you can book.
And then finally, when you talk about GBM.
Taking capital out of that business.
Your first off you.
Average the bulk of the cap too in that business, where this is set for 246 billion of ought to be rice, Idaho is still banking assets.
She AMG RF.
Hi, guys risk intensity equities, which is obviously going more attention depressed quite low to high on leverage but low another jayson I would've thought a lot of you ought to be a fit in fixed income nicely rates in credit, but if you could elaborate a bit more there I'd appreciate it. Thank you.
Okay, what we'll do it will take the third question first and I'll just make a few opening comments and then hand over to you and then he can handle question one question too as well.
On the first question just remember the.
Actually within our Asia franchise, we had a very strong performance from GBM in Asia. So we're focusing in on the deployment of.
I'll do the way.
Ought to be ways in continental Europe , and the U.S. as the areas that requires focus.
And one of the recipients of that refocusing the capital could well be GBM in Asia and elsewhere in the world, particularly in the middle East as well so.
So there are those positives on challenges within the JV Nm results I, just want to draw attention to the.
You know our Asian Heritage you know heritage in the most emerging markets as a wholesale bank thats true in boasts JV and in commercial banking.
I'll handover to know to you in specifically on the composition of the Orthoview ways.
Continental Europe , but it's fair to say, they're all wses tied up in both on markets business and in all bank in business.
We need to look at the efficiency of both of those R.W.A. deployments it isn't walnut video the.
Yeah and the.
Assumption that we don't have a lot of I'd have to eisenach level banking business is not right.
Because that's where all of the lending business and support.
Of both the transaction businesses and parts of the global markets business sets. So the bulk of they ought to be ways actually said within level.
Banking and global markets.
There is relatively limited wses against the transaction businesses.
And then as it.
Recent chunks of upper us there as well.
If you follow up with IR afterwards, we'll get to get you. Some additional color in terms of what I'm just northshore, what we've disclosed to the market sofa, but deal the dealing I'll just reiterate we do intend to continues to have a presence.
In Continental Europe and us after this reshaping after this remotely we already global wholesale bank, serving both the very largest of multinational culprits, but also uniquely for HSBC the middle market entrepreneur owned businesses on a global basis.
We therefore need to be able to be a lender Rene transaction bank.
For those clients across our global footprint. It's a question over the amounts of capital we utilize in each area of the footprint on home, which we deployed in continental Europe relative to elsewhere. So.
Just want to reiterate it will be a global footprint, but the distribution of vessels will change over time.
Before we move on the other two questions. It sounds like Youre more it's more about reshaping the business or reallocating auto varies from one region to another rather than an absolute extraction of all w. Ace is that fair.
Let me start this is too early to assume that I think there'll be an elements of redeployment into other opportunities.
But the may well be or utilization of or freeing up of the odds of the ways to benefit the group as a whole so.
I think that's the detail we will bring forward for you when we do while Q4 updates.
So it could be read it will be redeployment potentially.
Creating greater capacity.
You have any when you look at the business overall, Andy by ranking on markets. It it varies quite significantly depending on which region you're looking at I mean Asia. For example was about 50% of the revenues and over 80% of the profits.
And we are about 160 billion enough. The RW age of the 280 sets across the non ring fence bank in the us.
On your other two questions I think look assuming one for one severance costs faces annual benefit is as good estimate as we would have at this point.
On the FSP, you're right. We I think all are expecting an update on the Jeep said.
Either on the second or third week of November .
Yeah, we up at the cost by think of bouncing between the current bucket and going up a bucket.
A couple of things on that.
That doesn't necessarily mean that.
14%.
Capital target would change we would have to work through the detail on that the having I would say as since.
Year end 2018.
And some of the stuff that we've been talking about today, but I will say some areas that we.
Being able to act on we would expect dodgy sip indicators to becoming down.
Sufficiently says it will be able to get back into the current pocket we said.
The last thing I would say is on top of that the G. SIB into guys are all going to change.
So we need to work through the details of that and 2020 , but I wouldn't assume if that announcement comes out.
And we've moved up a bucket and two to three weeks John that you will see as adjusting up 14% target I think we need to work through a lot of detail before we would get to that so the conclusion and we would actively drawn manage the business so that wasn't the outcome.
Great. Thank you bye.
Thank you and our next question comes from the line of Raul Sinha JP Morgan Your line is a pan.
Hi.
Thanks, very much for taking my questions.
Maybe a couple of please.
Firstly on on the RW a guidance I.
I was wondering if you might be able to on pick a little bit no folks you card.
In order to be as are going to be broadly stable.
How much of that is an expectation of maybe slower loan growth.
This is potentially more benefits.
You are still expecting.
Come through in the fourth quarter.
And then I don't know you and if you have any further discussion or commentary around Basel three into sort of overall impact on it should be see just given all of the commentary of hot today in terms of ought to do raise that seems to be quite an important big part of the puzzle.
With the missing for any further commentary it on both before MPOG afford impact would be helpful. Thanks.
Yeah, so I'm not otherwise.
For the fourth quarter I guess this process and modest has said we yes. We do think we're going to continue to see greater not up the rise as a result of business growth.
Some of the big FX benefit that we got in Q3, we do expect some are hes a reversal of that.
Offsetting that we continue to say, we've always signal that we had a set of Wi mitigation actions that we described and that we thought we're gonna be biased to the second half, we still see a decent amount of those coming through in Q4.
Including model benefits and some recycling of audibly rise out of some.
Corporate relationships.
So yes, we do think that get you broadly to net stable for the quarter.
On Basel 3.1 actually is that regulated as a cooling.
Other than full.
That's sort of two things that buys Basel 3.1, and there's also potentially some impact on Brexit.
Yes, we do I think recognize the fact that we've been short of guidance to the market I would observe that since I've been in my job for the last few quarters is actually the physicians continue to get improve first.
I think relative to where I would've expected when I say this joint.
Yeah, particularly the near term impact from phase to January 22.
If that's where all being asked to assume that Basel is going to get introduced on phase to January 22.
I think for many of US we still think that looks ambitious at that time table could slip I don't think we'll get clarity from Europe and the UK until.
First half of next year on the actual timetable.
One of the complications in the UK is obviously the bank of England, Doesnt know, whether they're having to comply with European directives or whether that independent of Europe at that point and if they're independent of Europe , where they've got the again to seek to achieve full equivalent so partial equivalent so no.
So.
I do expect the bet that impact to be.
At least initially to be a lot lower than.
Walked some commentators have been observing today.
And then you have to model out five years and say at what point to the output flow as then bite.
We do think further out.
In some ways the law or they impact upfront.
Still be a larger impact once the app workflows hit in the future.
But as I think wed sort of I've been told him to Richard I caught our I think we do plan to come back at sort of full year results and provide as much guidance as we can at that point because we appreciate that it is a missing piece of the positive.
Thanks, It sounds like we are going to be talking about this for years.
I was wondering if I can have another one on Hong Kong deposits, particularly funny.
What was interesting for me was commercial banking deposits so bigger downtick.
In Hong Kong compared to retail banking or take a private banking and I guess that chimes in it.
Some of your commentary on small business.
What are you expecting in terms of future trends on the deposit side, you think that we're likely to see any material deposit outflows or do you think about.
Performance, we've seen so far in Q3 sort of broadly reflects the worst.
On the changes no I wouldn't read.
Movement in the commercial bank in deposit book as a function of unrest in Hong Kong.
Fluctuates opened.
On a on a normalized basis, you can fluctuate quite can significantly.
As businesses I remember the commercial banking business covers everything from small smbs through its a very large multinational corporates.
That can move quite quite a bit quarter to quarter based on.
Individual transactions that may or may not be taking place in any one of those clients in that book, So I wouldn't I wouldn't over read the commercial banking deposit movement.
A linkage to.
The situation in Hong Kong, if I now turn to the retail book deposit book.
The quantum of deposits in our balance sheet as the end of Q3.
I think was broadly flat to the end of healthier and saw a slight geophone. The beginning of the it's remained resilience and strong.
Clearly underneath that.
There is the potential movement in and out of of the deposit book.
We've seen relatively small amounts of movement out of the deposit book into other parts of the world very very immaterial movements.
And overall the deposit book has grown so it's proven to be very resilient.
If you if you if you there have been a number of very high net worth ultra high net worth clients, who have contingency plans in place by opening bank accounts elsewhere in the world the as being very little relatively little movement of phones into those bank accounts. The funds have remained in Hong Kong.
Thank you.
Thank you we will now take on next question on the question comes from the line of Christa from Monness Barclays. Please go ahead. Your line is a pan Hi, Chris.
Hi, you in high though.
Yes, just just a couple of questions if I may.
Just one was just on the UK net interest margin thinkers chance, we adjust for the.
Yeah customer address in the NOI line, it looks like as any going down a couple of basis points quarter on quarter and could you maybe just help us until it with the dynamics, what we should be expecting for the next year, maybe just in terms of structural hedge in mortgage competition.
And a bit around that.
And then the second question was just on.
On the outlook fuel associates solvency.
Some highlights losses in Saudi British pound and expenses with the without a wild and I guess when we'd have to web concentrating on a PE and people, obviously a little bit consent.
And to see that.
Could you help us about.
How how we should model that associate income going forward.
I know you talked about goodwill write downs, you still happy with the valuation of both home on the balance sheet as well.
Thanks.
Yes, a on.
The investment in Saudi that Chris.
There was some one offs associated with Amerijet.
That would have appeared in the.
Saudi.
Associate in second quarter that we've picked up in our third quarter results. So they were one offs about 114 million impairments.
Site, you should have why just assume that we got back to normalized associate income out of that stake and that that was just a one off major related impact.
Viacom no change in position you shouldn't read anything into today's announcement as say.
A change in relation to us down some viacom.
I gain.
We had several of these goals now where of is it in the market value is below the.
Thank you in years, but.
The actual amount of capital that we've caught against by column is about 10 or $11 billion, rather than the $18 billion of value in years.
So those goodwill impairments or potential goodwill impairments that were highlighted today.
I think if you go into the annual report in accounts. There is a night. They are on the goodwill that provide some color, but you'll see a material amount of goodwill still sitting against the European business and the global global banking and markets business.
On UK, then you know I don't like forecasting none.
But look I mean that will be a continued mix shift towards.
Mortgage growth.
I think yes, the outlook for the UK rights I think consensus is for a failure right cap at some point in the coming months. So all of that I think is going to impact net.
Negatively overtime.
Right, if you back out they.
Redress costs that were sitting against interest income.
I think that accounts for about 18 basis points, if the 20 basis points of member adoption in UK.
But.
I would think that NIM in the UK continues to gradually reduce over the coming quarters by that can obviously change if suddenly we had at different rates doubts coming out of whatever comes out of Brexit.
Okay.
Just one follow up on your Jules guidance and I think when we were speaking at Q2 that Youd still.
As you can achieve positive jaws each year.
You've got good Joe's guidance.
Tools performance, so far off the 2.2% yesterday and those are in the Q4 last year was quite difficult quota. So is there any reason neves removes that Joe's comment.
Note that read anything into that.
What weve.
Yes, we continue to I mean jaws is an elegant and that relies on.
Yes revenue that we done some revenue line items that we don't control, yes, if you looked at what happened in.
Fourth quarter of last year, we had a very weak.
Set of markets and the final six weeks of the year, we lost about a billion dollars of revenue through no fault of our I am just because of what was happening in the markets, which impacted both global banking and markets in our insurance manufacturing business. So we went from what we thought was going to be positive, 1% George to negative 1% yours.
So assuming nothing untoward happens in the market was sitting at 2.2% I think for the first nine months.
We would expect to have positive jaws for the full year.
But yes, we are managing buys to absolute costs and to Joe's at this point.
As I said, we have listen I'm pleased with the fact that we've taken.
Absolute cost great down this year quite materially relative to last year's run rate and I would expect that absolute cost growth continues to reduce from here.
Well, what I said in the opening statement was we will update all the detail funds. We saw Q4 results I will updates.
Pulling while targets we operate to on a go forward basis, when we do that updates as we think Q4 results.
Okay, and so we might hit sort of dollar billion close talking sort of Joel as one.
Looking to prejudge, what we will say a Q4.
Thank you very much.
Thank you and your next question comes the line of minus Castello Autonomous your line medicine.
Hi, everyone I want to toss please about the paulson fuel capital development over the next 12 to 18 months, you've given us some indication of what you're going to go after all of the ways and some are going to be freed up in some of these cycles, but between here and that is obviously some significant potential charges to come on as you pointed out the.
Outlook in your two core high end markets is is quite uncertain. So my specific question is how much tolerance would you have to go below 14% core tier one ratio because once you put restructuring charges and you're pretty close to it.
Second the what's your tolerance on the dividend payout ratio.
Yes.
Upwards north of 100% potentially during the course of the restructuring period. Thank you.
Yes, just a few things I mean, obviously.
Yeah, the 14% as a.
Number that's.
I have reasonably robust capital target for us based on the fact that we need to be.
Under the bank of England stress testing gross.
Now to survive a global synchronized down too and so in some ways, how where stressed.
Is it more extreme stress test than a UK domestic bank because of the type of event that when modeling is a more stuff.
Is it more severe event tower risk event in return for that he should therefore expect that.
We are more resilient bank through market cycles have better ratings law also funding costs all of what you see.
Yeah in terms of that dividend remember that there is a significant component each year, 2025% that's.
Paid out by way of script so.
Yeah. If you look at last year that was an 80% payout ratio, but the actual cash payout pre buy back was about a 60% payout ratio. So there's a considerable flex and they are I think.
For us to moderate the buyback or stop a buyback.
Which provides significant additional flex I think and therefore.
Why wet.
Able to say that we intend to continue with the current sustainable dividend policy.
You're right that there are a whole bunch of one also I'm not horizon.
Yeah, we're dealing with Brexit credit migration, which can swing both ways frankly.
We've got for example over $400 million device delays.
In the UK for Brexit that if we got to a self division of that some of that could get written back.
We've got Basel on the horizon, but as I said earlier I'd thing.
Yes, as we model that through the upfront impacts I think they're going to be at the lower end of what we might have expected six months ago.
And the timing of when that's going to impact us I think.
Looks on certain.
But overall I think yes walks, probably the thing to flex is probably buybacks.
Yes, the 14% target is a reasonably robust target I think.
We would not want to fall below that for anything other than a very very limited period.
And we do appreciate that the cash dividend is a very important underpinning to the current share for us.
Okay.
Just to follow up and.
The.
But that does go out and you're looking at Delta two M.D.A.
Okay.
On the basis points I think it would be.
Is that do you think that's the right level.
You look at Delta to EMEA is Youre I was wondering were guiding principles or is it more.
What you get it.
The stress test.
Well, it's everything that sort of guides us and.
So, but as I said earlier I'd, just because the GE said indicate as go up I mean, you have increasingly the G. SIB indicators are relatively blunt I.
I would argue outdated till.
And that it's 11 indicate as governing our capital structure far more important I think is.
What sits behind us stress testing analysis.
For the work the guys behind that as to how much capital we need.
I also say that even if I'd Jason.
Profit was to go up.
I think as we said today, we've already mitigated a lot of that.
Increase that we sold during 2018.
We've got a new set of GCIB.
Indicate is coming in price.
And therefore, yes, we would see it as a view it as a relatively temporary uplift in the underlying capital requirements of the bank.
We do expect some Wi increases coming out of Basel reform.
Which again is and other offset to that and I do think in terms of the.
The second a reduction in RW weighs out of the non ring fenced bank in the U.S. will also provide yes, an important source of capital on depending to us.
But it's just to be even if you went below 14 dividends to be for a very brief period is what you just said said, maybe one call yet just below.
Yes.
Got it thank you.
Thank you on next question comes from.
Comes from the line of Jason Napier Hugh.
Hi, guys.
Ladies and gentlemen may one second Sir.
One more.
Jason Your line is now a pan Oh, Thank you very much.
Hey, guys, if I, if I could good morning.
The first just looking at GBM them I Wonder, whether you could give us a sense of what the right you saw within markets as opposed to the rest of this business.
Secondly on on both Paul and I think we're probably all going to be talking about this for an extended period I wonder whether you could just give us a sense as to which areas whether it's by division will kind of rule Todd The bank is most sensitive too.
And then thirdly I appreciate that you're not keen on on for the NIM guidance, but I wonder whether you might give us offensive.
If yieldco stay where they are what the headwind due on net interest income and all this month. The next year because I don't think were offensive parallel shift in the okay disclosures either so if you could just give us a sense of what we're planning assumptions might be if we stay care for 12 months. Thank you.
Yeah on the last one I would even though you don't like adjacent refer you back to our interest rate sensitivity.
I mean, yeah. The fact as we have a relatively short dated book because off.
A combination of though.
The way that buys the assets and liabilities reprice in Hong Kong.
And also the trade book and commercial is relatively short dated.
If you compare us to.
Other banks typically.
You get a second you get most of the five year impact of a shift in the UK of happening in the phase two years.
So to the extent that dollar interest rates declined sharply.
And on the back of that that high vol has some impact as well.
You will see that fly and three the numbers over a couple of quarters.
Pretty quickly I think.
So depending on where we end up on dollar interest rates next year, we do expect.
Some material impact and hence, yes that was probably the biggest core underpinning of why today, we've announced that were not sticking to our out 11% Reggie target for next year.
That together with the fact that we think the outlook for global banking and markets has deteriorated as we look at things today relative to what we would have thought.
A quarter ago.
The righty.
It's a bit simplistic to look a global markets faces global banking because.
Global banking tends to have a very low priority because it has the bulk of the lending book setting there, but that lending book supports by the transaction businesses and the global met markets business.
To some extent.
Within global markets, though the FX business is a fantastic business.
Top three globally makes very good returns.
Yes, very length tend to the underlying customer franchise business far more than some of IP is.
And it would be the other parts of global markets that tend to have lower returns you have a FICC businesses and equities, but it's but.
Even an hour and analysis internal analysis, but simplistic because we couldn't do parts of that business without the lending support have a cool focuses on understanding customer profitability.
And the build out of the total relationship rather than purely measure in profitability at a product level.
So orientation is around the customer profitability.
More so than individual product profitability.
And then the question on Basel 3.1.
Global Bank end markets.
Yes, it does have the disproportion that.
Hit from global banking and.
Basel 3.1 Earth form.
I think in that you have many of the of the markets there may be as longer dated impact from app output floors, but I think you have to speculate about how the goal develops.
But in most markets. The Apple floor is no dramatic impact, but I think partly that will depend on the development of the mortgage franchise in some markets.
Okay.
Thank you thanks, Jason.
Operator, I think we have talked one more question.
Thank you. Your last question comes from the line of guys Stebbins exceeding BMP probably Bob. Please go ahead. Your line is a pan.
Hi, there thanks for taking questions I just have one back construction in two very quick ones, what's computation and especially if appreciate.
You want to wait for the full not takes will give you any more color on the precise details, but when you're talking about unless it's making <unk> signs in certain areas and the current environment is it is at the current environment that you have in mind when youre thinking about how you reshaped the business so.
Are you working towards the target structure that assumes things will improve slightly from here when youre thinking about no runkle space classification et cetera, and then the two points of consultation one was on Hong Kong impairments. I think you said you in response to previous question that about half the move in stage two was one off in nature from from model changes is that right.
And just sold in wholesale get used to exposes jumped from the Threep sense eight cents griep. So should we think about half of that is it reasonable going to underlying station migration or is there something else going on which might be overstating that maybe.
It's at top of up as what I said from like changes, Okay, perfect and then just.
So I agree one other one which is on the GCP for can.
I. Appreciate if you go next month throw something I just wanted to come down next year, such as the complexity scrap is you feel so restaurant changes to the approach itself, which I would've thought would be a net headwind for HSBC is not room to assume thanks.
Yeah look on Monday.
Net headwind costs on the changes to the GCE have indicated is possibly but it's not just.
Potential restructuring, we've also being added to take action.
For example on derivative grice up since the 2018 submission, where our GCIB score today would be.
Lower materially lower than what it would have been at the end of 2018.
So we do you think.
Whatever comes out of GE service is a manageable outcome for us.
Particularly in the context of add up the inflation coming out of Basel 3.1.
You want to answer your question I'll start.
On strategy I mean, clearly there is.
The remodeling that we're talking about in the reshaping of the portfolio.
He is not just the today issue I mean, we've had returned issues for a while in continental Europe in the U.S.
But I think those.
The actions needs to be more urgent know because the economic environment, we face and is very different today than not which we assumed 18 months ago. When we did the strategic plan update I'd say months ago. So I think is appropriate for us to take the action the auction isn't just predicated upon current trading condition.
Funds, we've had challenges in both of those portfolios for awhile, but the ability to turn around those businesses in today's economic conditions.
Is it has been hundred hence the desire to take action. So I don't think we should assume that the economic environment in Continental Europe is going to significantly improve anytime soon.
If we want to take action I did draw attention to the fact the.
The strategy on the way forward for the US maybe different so the continental Europe , because the market circumstances in the us a different to the market circumstances that exist in Europe , and that's why I think as appropriate we give the management seems time to look at the detail between known in the end of the so we can give you a full of.
With the Q4 results.
Okay. Thank you.
If I can.
No just close with a few comments please.
I would like you to remember the following.
We have a global wholesale franchise, a global wholesale business with deep roots in heritage in Asia.
And the world's fastest growing markets.
That remains uniquely placed to connect both large multinationals on mid market entrepreneur owned businesses to the worlds.
We also have powerful unprofitable retail banking and wealth management businesses in our biggest markets.
This combination has demonstrated time and again its ability to provide strong profits and good returns for shareholders.
It is integral to the HSBC history high density and investment case.
However, we also have parts of our portfolios that are not delivering acceptable returns and given the changes to the exelon environment, we need to accelerate so a plans to remodel lease parts of our business portfolios.
Which is exactly what I intend to do.
If you have any further questions. Following this cool then Richard O'connor and the rest of the oil see we'll be pleased to help you.
Thank you for joining us today.
Thank you, ladies and gentlemen that concludes the close of the Hey, just DC Holdings plc and is leased for Three Q2 019, you may now disconnect.