Q1 2020 Earnings Call
[music].
Welcome to stem the trial its its updates to the FIS quota of Twentytwenty today's call is being hosted by on T. whole such great Chief Financial Officer until Winches quit chief executive what's the opening remarks to finish there'll be an opportunity for questions nonsense at this point I'd like to Hyundai the time due to begin.
Thank you Nicole and good morning, good afternoon, depending on your time, it's I'm still has stalled in remotely and will join me for the Q at night, but before we do that well I will as usual add some color to the key headlines.
You may have notice that we produce more fulsome quarterly report this time because the first time, we have a presentation to accompany it hopefully you have that presentation in front of you. All you can quickly download it from our website. If you don't call because I will be referring to that document pulled the next 20 minutes or so.
So starting on slide wall before moving on to our first quarter performance I will say they won't be as we've been traveling through uncharted territory recently and are likely to remain say for a while certainly through the next couple of courses. So whilst will attempt to give some guidance the usual caveat in the disclaimer about forward looking statements certainly deployed.
This slide gives the financial highlights the courts, but I want to start by paying tribute to my colleagues around the world. So working tirelessly to support our customers in these difficult times.
I've always been confident in our business continuity plans, but it is a massive testaments to the ability of people to implement them as a global banks as complex as as has been running seamlessly without missing a beat with over 70000 of our employees working.
Something we could never had envisaged only a few months because.
Both operational resilience and our brand promise to be here for good have never been more thoroughly tested normal comprehensively proven and I'm extremely proud of the team.
Now cover some of the actions we have taken to protect the welding assays colleagues and to support our customers and communities before getting onto the first quarter results themselves.
Moving on to slide two that this page contains a small selection the many ways. We're responding to the crisis, how we're making sure that we can be that when our colleagues customers concept and the communities in which we operate nieto's.
Starting with our colleagues on the left hand side, we want to ensure they have to space the support and the tools to continue to operate effectively.
Right remote working varies considerably by market for almost 100% in the UK to 1% in Korea, unless some 30% now in China and in adjacent markets such as Vietnam that were among the first two experience.
Related lockdowns, an l., taking the first steps towards Reemerging.
Wherever and however, they will.
Colleagues physical as well as mental welding just top of our mind and we are doing what we can to support both including through actions you can see laid out on this slide.
Moving to the ROI on the slide we have a retail banking presence in around half of all 59 markets that have rolled out a comprehensive range of relief measures for those customers, who are being impacted by the pandemic some of which we have listed here.
Obviously, the nature of our franchise and the local regulations will dictate exactly which of these measures are available in each market.
To give you a sense will take up and our asphalt we have approved around 86% over 190000 also applications for leaf receive say for most of which all from personal loan customers.
Most of the applications received offer mortgage customers, whereas you may recall, we have a very low loan to value portfolio on average and to a payment holidays help customers manage their cash flow through the crisis.
It's early days as you can appreciate so we will give a further updates at the half your results suffice to say, we're determined to provide as much presque Isle support. So this potentially vulnerable segment as we cap.
For corporate and institutional clients main responsibility, we have given our global franchise is to be a constant and consistent partner to support them as they grappled with impact of the pandemic on their businesses and that supply and distribution chains are unique diversity means that we are a powerful source of liquidity not just.
In the usual occurrences and markets, but across Asia Africa, and Middle East, we provided liquidity when they needed. It most in the form of revolving credit facility drawdowns and are now helping them to raise alternative sources of funds as the markets reopened.
We have also set aside up to $1 billion. The funding capacity to support companies that can provide goods that are in high demand supply to the pandemic.
This is basically can be provided cost we intend to make no profit from this activity. We have already received applications to over half of this amount and approved the first disbursements, we will do what we can through initiatives like this to help make a difference the communities we operate it.
And speaking of communities, we have launched a 50 million dollar phone to provide more direct assistance those affected by cobot 19, the Illinois, the rest of the management team and I'm sure. Many of our colleagues around the world will personally contribute to this fall and the bank will match every donation up $25 million.
As you can see here, we are taking a phased approach, but already putting funds to work where it is most needed.
We have teamed up with the Red Cross to fund medical support in Africa, and Asia, and with Union sets to help ensure education and protection to vulnerable children in Africa, and South Asia.
There are just two of the 29 ngs that we have teamed up with so far to implement this initiative and over $4 million has already been allocated across 17 markets.
This bank has always been extremely good of responding in a very practical way to crises as we did journey built Ebola for example that this will be no exception.
So turning now to the results from so starting on slide three for the usual snapshot.
I'm just going to touch briefly on this slide because I'll be turning down into most of the component parts shortly.
Back in February we set as a good momentum we experienced in the fourth quarter at 29 team had continued into the opening weeks of year.
Thank you too and Thats way better than that with strong income growth in January and February before as you would expect tapering off in March as the pandemic initial effected our Norton Asian markets, and then start spread around the world.
So with income growing as a healthy clip overall in the quarter, 6%, excluding Patrick on TV and were tight control of course, we generated a significant improvement in pre provision operating profit.
As for in temp revisions, we have taken a substantial charge in the quarter in large part to reflect the speed and severity the deterioration in the macroeconomic outlook more on that in a minute.
Stepping back it's clear to below me that the hardware that things are putting in recent years is really paying off we remain strongly capitalized and highly liquid and we intend to keep it that way. So we can continue to both support our customers and trial and further improve the underlying business.
So let's start looking in more detail at our income performance in the quarter on page four.
This is the usual view on income by product with currency translation and DTA split out to highlight the underlying momentum.
What is really pleasing and encouraging actually when we think head to the period. After the coast 19 pandemic has receded is that once again the growth was pretty broad based and with our financial markets and wealth management businesses doing, particularly well with nearly all products contributing.
Our financial markets business after having been overhaul in recent years, usually does well in periods of heightened market volatility and that will certainly the case in the first quarter.
While event driven capital market transactions slows down as the pandemic took hold time demand for risk management products, not surprisingly increased significantly across all our markets, including those where we are seeing a seeking to optimize returns such as credit and Indonesia that saw a significant up.
Take in income as a result.
One of the most encouraging thing to me is that the heavy investment in each trading in recent years is really paying off with taunting come from this channel up 35, 34% year on year in the macro trading business. Our wealth management business also saw a very tangible return on its recent investments in digital capabilities with our more.
Fluent customers able to engage with as remotely on an unprecedented scale.
Although sentiment in this area is understandably decline recently, helping our customers protect their wealth and search for yield is a key part of what we're doing to support them through this crisis.
Moving along to slide five now to cover net interest income and margin.
We said in February that lower interest rates would cause significant headwind that within three weeks is presenting those results in the fed the federal reserve had cut his policy right. A further 150 basis point to a range of zero to 0.25%.
While we have reduced the sensitivity of our earnings to a 50 basis point drop in the fed rate considerably in last two years from between three to 400 in the middle of 2017 $220 million more recently in February the sensitivity naturally increases again as rates trend to zero, meaning that the most recent hello.
Our expected to lead in aggregate to approximately 600 million lower net interest income over the remainder of 20 to 20 that would have been expectation when bill I stood up to deliver our full year results in February.
The Hong Kong basically cash liquidity hub, we set up last year is helping in fact some of the standard revenue performances came from China and Korea, partly as a result, and I should also mentioned felt that we may see an income uplift in some respect as we step up to support our clients.
But overall there is no way, we can maintain the same level of growth into an increased headwind at that magnitude.
What we can control of course is our costs in an attempt to neutralize as much as the impact the recent rate cuts at the pre provision operating profit level, as we can which I'll come onto shortly.
Turning to slide six where we show what's been happening with our fee based and other non funded sources of income.
So while our more rate sensitive products were under pressure from the rapidly falling rates some of the non financing products that you can see on this page of clearly benefited from the uptick in volatility.
Most of the income represented by the charts on this slide to generated by activities, where we are particularly well differentiated through serving corporate institutional clients utilizing our unique physical franchise in 59 markets around the world and by helping more are more affluent individual customers grow manage.
Preserve their wealth.
Capital usage tends to be lower to these income streams and whilst they can be more volatile they remain a key strengths and an area strategic focus for the group.
The bottom chart shows contribution from our financial markets business shedding the benefit for product diversification through volatile times.
I will now move on to cover costs on slide seven.
As you know we've kept expenses broadly flat, it's around $10 billion to last couple of years, excluding the bank Levy.
As you also nay by now our costs are often seasonally lowest in the first quarter, but even so it's comforting to know that they are lower in Q1. This year, both on a reported and constant currency basis. As a result for the first time in a very long time, our cost income ratio has dipped below 60%, let's first.
Of course, but it's a significant step into right direction.
However, as I said earlier, given the interest rate environment, even if we maintain cost 10 billion Mark again this year than pre provision operating profit late profit basically our initial loss absorbing lab would likely decline. So we have initiated a series of incremental cost saving measures offset to offset as much as possible or the six.
Hundred million dollar headwind on net interest income that I mentioned earlier.
Creating new hires for a few months, they save costs and enable us to protect existing jobs through the cobot 19 pandemic is pretty easy to implant as is reducing travel expenses of course, although we are reinvesting some of those savings into better remote working services for our employees. The what we're trying to Reprioritize investment.
It's more complicated, but essentially will enable us to continue to invest in the things that will increasingly differentiators over a multi year timeframe.
Things like our virtual bank in Hong Kong that will be launched shortly onto the brand name marks.
Our digital banks in Africa that are doing extremely well with amongst the run rates new clients rising from 16000 in the fourth quarter of last year to 22000 in January 30000 in February and 59000 in March and the new banking as a platform initiative that is currently being set up in Indonesia.
I will caution that executing cost saving initiatives will not be straightforward. During the crisis that is affecting every one of our markets more or less but we hope that we will end the year with cost excluding UK bank Levy starting from Lake with a nine.
Our task, we will then be how to make those savings stick for good, albeit the ease with which colleagues have picked up remote working habits is both impressive and encouraging in that regard.
With that let's turn to risk, where we have three pages dedicated to the topic starting with number eight.
This is usual breakdown that we provide the CNL impairments at the top and what we referred to as the higher risk elements of the balance sheet at the bottom.
Page three catch we were 12 and early learners that in the new quarterly progression for lab.
Same thing to take away our firstly, the most recent economic macroeconomic variables, reflecting the significant deterioration and outlook has resulted in has taken significant provisions in anticipation of further credit losses.
Secondly, that we chose to roughly doubled that modeled outcome with an additional overlay. This is to reflect risks that we don't believe were fully reflected in the mathematical result, the modeling process based in other words on our judgment there has been refined through many crises and recessions thirdly that our stock of riskier loans on the balance.
The bottom of the page increased mainly in the early alert category that designation doesn't mean, they will default necessarily just that we are scrutinizing the much more carefully.
We have placed all our exposures in the aviation sector into either the purely precautionary both non purity precautionary earlier catch rate. The figure we always discos is the non purely precautionary one you see here.
And the final form to notice that our cover and investment grade ratios remained stable asset to key retail banking indicators around states cost you in Q1, although we do expect the retail segment feel more stress can cause, particularly if lockdowns to persist.
There is no data of course is a credit environment deteriorated in the quarter, but we have a strong balance sheet and set a substantially over or hold risk framework that gives us excellent insight into areas of stress.
That's a regional level, we think Asia is well placed to recover from the cobot short our clients in the Africa Middle East region are dealing with both coated related disruption and the rest of the state of the oil price tensions the outlook for this region is a little gloomier and so we remain extremely vigilant that.
On the second of the three risk pages nine on this page we have just drill down deeper to show the process that led to the stage one and two movements given that this is the first time that buyer for US nine has been really tested in anger hopefully the walk here is fairly self explanatory about one third of increase year on year was due to credit Mike.
Ration from stage, one to stage two and the rest driven by significant changes to the latest macroeconomic variable for forecast the main ones for us being listed at the bottom of the page.
We think this is a conservative approach in circumstances, but time will tell whether we have over on the provided a lot will depend on the debt and more importantly duration of the downturn.
And even since we ran this test the oil price tumble again further proof if we need that that we remain in a highly volatile environment, where the range of potential short term economic outcomes is wider than it has been for very very long time.
And now the last slide on risk page number 10 here, we breakdown exposure to four particularly vulnerable industry sectors.
Incidentally, we have relatively low exposure to some other sectors that are being impacted by the coated pandemic such as hotels in tourism, while we have a net novel exposure of around 2 billion, which is why they're not on this slide.
As for represent the biggest restores right now.
We have as you may recall being systematically reducing our exposure to call. It is rate two sectors. Since the main source of credit problems. We had in 2015 as you can see on the bar chart on this slide.
Our total corporate exposures on a net nominal basis around $224 billion. So these four sectors together represent about one quarter of the total.
The equivalent proportion in 2015 was one third and we had substantially less capital than of course, so you can see how far we income.
So we've also worked hard in the meantime to improve the quality of our exposures over holding our approach to subordination and collateral for example, and you can see how far we've come by looking at the deltas in the key ratios here at the top page.
Nevertheless, given cobalt is creating indicates aviation or at least exacerbating the considerable challenges facing companies in these sectors. We have some of the top of our monitoring list.
I won't go through every number here that hopefully you will find additional disclosure helpful and we will revisit them at the interim results.
So let's move to another Taco theme of next slide number 11 liquidity.
We have tried on this slide to demystify what is admittedly a pretty complicated aspect of our published results. We have always deliberately maintain very high levels of liquidity our asset deposit ratio. For example at 62% is one at the lowest amongst our peers at an LCR ratio that remains above 140% is also indicates.
The fact that we kept well during tons with stress and are prepared should further shocks arrive.
As I said earlier this enables us to commit to extend credit constant customers when they need it at very difficult times like this.
As you can see from the table at the top of this slide that was included in full in our recent annual report we had around 140 billion worth of different types Undrawn commitments. We ended the year. This included 50 billion in credit card overdraft facilities for our personal customers at about the same amount in the form of revolving credit facilities for businesses.
As you can see from the type of retail banking customers have not been significantly growing down. So far you can see however, how much of our corporate and institutional clients drew down almost facilities through March as pandemic spreads a good proportion, which was immediately put back on deposit with others incidentally.
The important thing to note is that the rate to drawdown was no protect excessive not as bad as many of the market fit certainly entered slowed to zero by the middle of this month as you can see from the chart at the bottom.
Several of our large corporate clients already starting to consider reversing drawdowns displays are better able to quantify the liquidity requirements and can access other sources of funding, which we can help them tap of course.
Moving now to more familiar slide on capital and other ways and on the 12. The two charts on this slide may be familiar but as I said a minute ago. The operating environment in the latter part of the quarter certainly was not if we take the top chart showing risk weighted assets first as you know theres a seasonality to RW ways. They ordinary.
The decline in the fourth quarter, and then bump back up in the first but these are not ordinary times and this started the sequential increase was almost all attributable to the economic disruption caused by the emergence and rapid spread across the virus.
The middle three boxes, there were mostly higher due to the deteriorating macroeconomic environment, including the market volatility that accompany that.
So it's a 5 billion increase not derivative exposure is due to the heightened volatility approximately half due to volumes and half mark to market pricing.
Credit our days increased due to revolving credit facility drawdown.
And at some clients move down the credit spectrum due to the deteriorating environment.
Forward guidance is particularly tricky in this area currently we do not expertise sorry, we do expect further credit migration that will inflate autoclaves, albeit how much money what shape over the balance of year is tough to predict given Q1 represents just one month or so of the real economic impact for the pandemic.
But we felt in the middle of RCT, one range and have the prospect to the third 40 basis points uplift from the sale for Marta. So we clearly have plenty capacity to absorb a significant further increase is that came to pass.
So turning to seek C. One then the other inflation in the first quarter fit into our CE one movement in the period, but there were also a few other moving parts. There was a 10 basis point reduction as a result was buying back around $240 million worth of shares, but we terminated the program halfway through.
At the same time as we made the difficult decision to withdraw the funded and recommendations 29 team and not pay an interim dividend this year, which together had a roughly 30 basis point positive impact. So stepping back we remain very strongly capitalized in the middle of the median turn range, we set for ourselves and several percentage points of.
The 10% regulatory minimum and with promoter Jude complete sooner than we had initially expected we intend and expect to remain that way.
Let me be clear one thing, though the plan laid out in early 2019 as part of our strategic refreshed return surplus capital as and when we prudently can remains absolutely in place.
Whilst we can't make any ordinary share distributions already initiate the buyback program for the remainder this year. Once the pandemic has receded then we will consider further returns if we do not need some pull CTG won or investment purposes.
So turning to slide before we go back chief questions from the 13. It is unusually difficult given outlook statement currently beyond what I've said already about the interest rate headwind and the possibility of further RW eight inflation and impairments, but I can't promise. However is that we will do what we can't manage our costs.
And stretch every cent used to support our clients and communities through the crisis.
Strategy is working as you can see in the results of some of the most challenged markets and we will keep executing it in these difficult times with also continued to take bold ambitious actions to lead the way on global sustainability issues. We believe economies will start moving towards can gradually in the second half of the year as can.
Payment efforts are lifted but the risk is on the downside and we do not anticipate a rapid recovery globally in any event.
We have recently competent however that our largest and most positive market will be at the forefront VAT recovery and Thats, our unique position straddling Asia and connecting with the rest of the world will enable us to play a key role in it.
So with that I will hand back the operator, so bill and I can take your questions.
Thank you, ladies and gentlemen, if you would like to ask your question. Please press star one.
Keith.
And with your name stand now.
Next question comes that request please press the Heskey.
So one to ask a question.
Your first question comes from the line sites.
Jason. Please go ahead your line is now.
Hi, good morning, and good morning, Thanks for the details I just had last few questions I'll just keeps on the too.
On the on the on slide.
11, the drawdown reversals one of your peers can as quintin something similar out yesterday as well.
How sustainable given that as I mean, it seems like it's in Stark contrast to Europe nine standard geography geographic exposure is quite different thats had because April drawdown reversals suggest that perhaps you've got to the peak of the kind of credit extensions or if it is another way to come on that basically what you can see.
And then my second question was on and I API 600 million X. incremental you have going for the next nine months, how do we see that progressing assuming rates don't change now going into 2021, and 2022 does that can drop off very shortly or do you expect concern the material drags and does option years for those two.
Thank you.
Okay. So let's take those in that order. So on the Rcs drawdown I think what happened here was initial reaction of a lot for corporates early March at the heart of the crisis Wallace roles and have a piece of paper, saying that they could drawdown.
Lets get the money in the bank and let's really drove down and then we can see where we carry too I think thats a month when told when it became clear versus the issue was not going to be warned about the credentials the banks, but more kind to be warm about customer demand for their business or is that a lot of corporate Scott up its more relaxed about where.
They were.
And even though some of the drawdown money has actually been put back on deposit with as we get actually start to see as the chart on slide 11 shows that actually we had a reversal of that trend and have seen a reversal of that trend in April. So I think most businesses now has had a little bit more time to think about the consequence.
It is all of the current situation on their businesses.
Some of that they clearly are looking at alternative ways to raise financing and in many of those instances, we will be working with our clients on that but as far as we can see at the moment that appears to have sort of settled to a level and I think sort of common sense and calm heads are prevailing.
And hopefully we will not see a big disturbance in that as we move forwards on the interest rates.
We have got.
So the impact of the pretty much hundred 50 basis points really coming into our numbers pretty much. The straightforward late today, it's impacted slightly on the first quarter. So to 600 is a balance of year charge that obviously is a roll through effect. So there will be a slightly bigger number that would be the full year.
Our impact on top of that for next year.
As I have said we are can be working on the cost front, obviously provide offsets to that as much as we realistically can do.
Something so within our control some things are not the good thing as I also dropped more than the other charges that we are not heavily on interest rates and the business and those parts of business that we have been focusing pump. The last two three years to increase the proportion of our activity.
It is from other products has manifested itself I think very positively, particularly financial market space over the course of probably the last four or five quarters now and that has proven to be extremely time late in the environment, but we are now in.
Thanks, Andy sorry can I just last one palazzolo is a slightly bigger number in 2001.
So they're going to be a bigger and ion and 600 million in 2021.
Yes.
Yes. It will it will they are in part because the 600 to bounce via number for this year and partly because you just got the role sort of interest rates.
The impact that book is Reprices.
Okay. Thank you very much Jessica.
Your next question comes from the line Manus Costello Autonomous. Please go ahead. Your line is open.
Hi, just to follow up on the pointing that out in the model.
Inflation.
On a night after that.
Surprised by the size of that.
Given the way that you'd spoken about basis.
And the disclosure you gave it.
Can you give us more indication is this.
The U.S. dollar Hong Kong dollar issue or is there something across other currencies that we need to be aware of.
Yes.
Changer dysplasia, perhaps in Peter given the impact of 100 basis points.
People, rather than the 50 basis.
It's a visitor.
Exponential difference between the two say, what's driving that and what should we.
Yes, Thanks, sensitivities and then taken out of the delay inflation.
HSBC yesterday.
Got it is an indication of where they thought.
Could you to through migration effects seen a similar.
In Q1.
In terms of the proportion of the base, which exceeded the way migration.
Isn't mid to high single digits migrations to this was something that you think is closed loop is kind of choppy.
Yes, okay.
So again, let's say days in order.
So the guidance, we have given and clearly you have made deployed has paid about sort of 50 basis point increments and Walt we saw in the period was not 50 basis point, but significantly higher than that the problem with that Dave the near one gets to zero rights the more consequences that all and therefore.
There is a sort of magnified effect as what gets very close to zero, maybe we should have the foresight to realize so that was how to play out but we did your point about whether we should chose sensitive as it is a 100 basis points Robin 50, we can certainly give that some thought.
It is going to minus the across US dollar Hong Kong dosing et cetera. So it is a sort of cross cross currency view that we have taken but the biggest issue is just the effect when you get very near zero as the relative to our liability and asset side or the book.
On the only Orthoview I is zero the logic is that we will see some deterioration in credit rating and therefore, some increase in order delays over the balance of the year now the offset obviously, we've got albeit for different reasons will be with the Malta disposal level type 9 billion.
And also off the books, so I would hope directionally those two will be sort of offsetting although it's not a precise science.
And clearly the other point is that if the on lending opportunities out there and the economics on compelling then we will not feel constrained in going out and making sensible lending decisions. Even if that uses a little bit orthoview by so we do not want to have this as a sort of.
Constraint that is more binding Paul will is economically for the longer term good as the business.
And pantries 9 million 9 billion, yes.
Correct, Yes, it's it's a fraction nine 9.1, yes.
Okay. Thank you very much.
Thank you. Your next question comes from the line of multi.
Please go ahead your line is open.
Good morning.
I would just wondering.
Okay. This is difficult if you just could give us a view on.
Hi, how you're thinking about the credit cycle.
From our house, how CES cycle.
Could there be from Asia and to what extend this is incorporated in your numbers.
Mike I means to the extent possible is it possible to draw some form of GDP combined multiyear minus two GDP or or or whatever the warm bodies would be.
Corporate debt.
And in that in that regard what what impact from your perspective.
Through the various government looms make annabel Columbus teams one of ops.
From from from in some form of helicopter models to loan guarantees and so forth to what extent roofing fills parliament teams can and eventually soft in the cycle and and just on capital, 30% to 40% target range was something.
Some of charter followed very closely brand and be in the Middle office that range should we think about that range going forward beyond change or is that scope for that range to come down on the back office.
On behalf of requirements, having been reduced recently thank you.
Yes, okay.
Okay. Thanks, Martin I think as we look forward. They are all three things that really stand out to my mind that are going to sort of determine how credit impacts our son and this is probably the same for other banks.
The first one is the success and the speed with which the locked down periods are removed.
It goes without saying that the quick has economies can get back into gayla. The less period, we will have Ben when there are constraints on on that product and if we look at what's happening, particularly maybe in China may be in Korea, I guess, there are some sort of grounds for optimism that.
Actually there are ways through the locked down period.
And some of those markets are clearly are more lucrative market as well.
But the Congress equally applies it countryside terms as a resurgence when they come out locked down and.
It's sort of more problematic and the longer. This goal. It's all then obviously the more potentially disruptive fat is the second want to your middle point is government support.
The extent to which governments many of those so to date is around noises putting schemes in place the execution of them probably relatively early stage for the extent, which we do tangibly see add more fragile situations being rescued by government support obviously that will have an impact ultimately on where the exposures said.
And therefore, we have not to new slightly not ask the question, we've not for the specific number or something of a range on the credit impact going forward because those factors appoint difficult to interpret I think.
As being a little bit more positive about it I would say that some of the north Asia markets do seem to be working their way through that a bit more quickly and all the all our other hospitals.
Customers and profitability is sitting there.
As our ability to do you have any sort of thoughts and comments on this.
Yes, Thanks, Andy.
Thanks.
This is obviously the sort of the big question hanging over all of US and we set out in some detail on on page nine what the macroeconomic variables where that went into into the.
The base of our model. We also indicated that we made a material managing overlay on top of that and in other words, we think that things could could be.
Could be more challenging than this economic scenario that we set out in page nine.
And if you look.
In further detail on page 10 to year to year your point about government actions.
We've not assumed that the did the aviation sector is completely eliminated in in the most likely scenario.
And the only reason that wouldn't be eliminated just because of government action.
The aviation industry, you at that close enough to zero income.
Survive without government assistance.
Our expectation is that that would be forthcoming in most wealthier countries and it may not be forthcoming in.
In sum.
Some countries that don't have the same facility or some airlines, we don't have the same back several but when we look at the credit cycle, there's a heavy element of uncertainty.
Around the way the government programs actually play out.
We assumed.
As any indicated in his comments and then in his answer this question and we've assumed a pretty severe economic scenario.
But we provided for four worst scenario than that and we recognize that the government programs. While has been highly impactful first on the monetary side more recently on the fiscal side.
They will be perfect and that does a tiny things that that some policymakers might wish didnt fall to the net may nevertheless onto the net.
We're taking the view that the the government actions will allow the the underlying economy to too.
Continue to function and then to recover albeit in a somewhat in the summer so way so.
Overall, I feel I feel very good about.
The quality of our portfolio as we come into this period.
We obviously had a couple of losses in in Q1, which which are our most regrettable, obviously really maybe not obviously today, we can make it clear related to two separate products in terms of the two larger ones.
The single name concentrations that we're carrying right now.
And the industry concentrations as Andy when it got quite clearly on page 10.
Our just nothing like what we what we had back in 2015.
I think that's is that that realization together with the broader improvement in quality in the portfolio shortening tenor let me get comfortable that we can try to this credit cycle in good shape.
Thanks.
Martin There was another part I think your question 12, 13, 14% right. Let me just Colin I'll pull back and say 13, 14%. We've had is a guiding.
Principal for a period of time, we all as you've just seen buying in the middle of that range at the moment and with the come off the size about come through that will actually put is pretty much talk with the right. So I think in the near term we are actually very well position and we have got capacity that we can selectively.
Use I.
I think whether we carry below the the Boston as the range is the number of fast come into play one what is the opportunity that we use in the funding for.
Secondly would regulated be happy with it and obviously as we more indication the UK regulators would.
Thirdly is as the rating agencies and that's not an important part declaration. Unfortunately for us to be comfortable from a sort of stress point of view that we have store call enough headroom about what could happen in further stress so but that really now that will be very thoughtful about it.
Thank you very much.
Your next question comes from the line of Tom Rayner, namely. Please go ahead. Your line is now open.
Good morning money and they want though.
Two questions. Please one on slide 12, one on slide 10.
Just on slide 12.
The you've made some comments already but I, just wonder where you can on those individual why does which is home and 19 to the end Q1.
One of you could sort of comment on how you think they might play out as we made 70 yeah.
The asset growth from Drawdowns am I thinking.
She said that drill down the now pretty much there that were made they start into it. So I'm just wondering if that's an assumption and we should just focus on the asset class and so that the underlying business.
The derivatives not quite sure outstanding that but I mean, it volatility we tend to normal does that mean sales, which was that just stay.
Stable.
What's in the credit migration I wasn't expecting a huge amount of credit risk.
The quality for instance, in Q1 that becomes a more Leslie yes, I'm just wondering what exactly is in that 2 billion takeout and then the market with is that purely seasonal will that wholesaling SAP as you move forward or could that become a bigger source of fashion. So that last slide 12, and I have another question on slide 10 or that you want to.
On first.
Yes, I mean, my my sense would be that we will see more on asset growth and credit migration.
And we'll see less on derivatives and Rcs drawdown. So the LCR program, we just talked about that seems at the moment to be stabilizing.
So the extend the people look from other sources of financing that can't come through instead in the asset growth line.
Derivatives I mean, it's been through a highly volatile period and unless we go through an even more volatile period I'll take that might sort of settle a little bit as we move forward.
Market risk I mean, there's always going to be an element to that but hopefully not a big warm and I'm not going forward forecast the FX.
I like that like me on that one.
Okay. Thanks for that.
Hi, Ted.
Given that's very good disclosures on the nominal sort of exposure in these risk areas I'm not sure I might've missed it stepped away somewhere but whether we have the same granular detail on the outstanding provisions like setting the stage one tailwind. So they are minimal I was able to find OEM was.
Today with the energy sector, where that sort of things how is given that it's very hard to link back what exactly is in there.
And it certainly doesn't seem to match up with summit.
So if there's somewhere we can find.
Yeah, just sort of exposure, but how what the provisions are.
As of today, and how that split between the different stages and make it may be delighted sort of modeling on.
What we think happens moving forward.
Yes, Tom a fair question. The problem is the more but we get visibility here the more questions, but then sort of bags.
We haven't common split out on the cover with so to that at the half year and you'll get you'll get more detail all that I think it's fair to say that where we have taken provisions. There is more representative in these sectors from surprisingly than in the other sectors.
But also to bear in mind that level of Collateralization sort of plays a part here a lot of the aviation increase is in the expected it sort of nearly alerts type space.
And therefore is more on the watch list, but we will will provide more information at the half yet.
Okay. Thank you.
Thank you. Your next question comes from the line.
Okay Exane. Please go ahead. Your line is now open.
Well, yes on policy of quick last question on slide comments around auto social collateral damage that I talked to are you thinking about that I'm, sorry kind of the kitchen cabinets. He thinks about that typically Q4 ought to be a base of the Q1, Okay. Nice that's just quick clarification.
Q law.
Q1, Okay site around 6% all divisions I should say okay.
Secondly, kind of.
Paul.
Married on cost guidance central banks.
How big of a leases you can turn on intercept to travel investment spend variable pay a co et cetera.
Well I just want should we thinking about here because I mean.
Hello.
Mistake.
This is Juan offset Tonight.
Thanks.
Yes.
Listen they sort of categories that we highlighted for a 15% or total expense by something of that order magnitude, including the include investments and probably little bit more than that what we're trying to do is to get a bounce here.
We have said very clearly that we're going to protect employment and that will not have redundancies as a consequence of coated and we have said the travel will obviously come off it has already come up very significantly we've looked at our investment program to decide which of those offer case, which if they were may you pay to.
We get pushed back a little bit in time would not be crippling to the business the ones that we see as being strategically really important particular digit layer is those are progressing at full steam to the extent that from whom we can make them work as fast as they would have done otherwise.
So.
I didn't know exactly how much the 600 offset it will provide but I think you should be a reasonable proportion of that.
But we will definitely aim to start the number nine I know that gives us a fair amount latitude.
We're mindful that this will be a tougher year, we'll need to to be very thoughtful on the cost structure and eight reinvigorates all sort of focused upon longer term cost structure change within the business digital.
In April and people working more from hiring all things, which I guess most businesses in most segments I'll now, reflecting upon slightly differently to the way they might have done even three months ago.
Okay and indeed.
Morning.
Any reference to you still expected to deliver substantial as for this year.
So the expectation.
I think the topline is the one that is just a little less easy to predict so we will to whatever we can do to either deliver that'll get close to it but I just think we live in a very difficult an interesting times.
And the mixture of those too we will do what we can all the cost front and we'll work our way through as much of the interest headwind as possible.
Thank you.
Thank you. Your next question comes from the line of.
Jefferies. Please go ahead. Your line is now open.
Hi, Thank you for taking my question I guess if you.
But if you consider the early alerts and that a fair amount of that has come from aviation.
Quite a few of the carriers.
Are likely to get government.
Support so I'm, just wondering how that and forms putting those on early alert and what type of charges.
You would expect to take in the future given that government support or whether your assumptions.
On provisioning assumes such.
Port.
And then the other aspect and I think this was asked ones, but I've I've got a question, which is what type of range can we expect on impairments for the full year.
Based on different assumptions one of your competitor it gave a very helpful range for the full year.
Yesterday thanks.
Bill do you want to pick up the warm the on sort of aviation and government support in the light.
Sure. Okay has as I mentioned earlier, there is and there is an assumption.
That's an expectation that governments will support our key parts of the aviation sector. Some countries will be willing and able to do that and others may not.
When it's appropriate from our perspective to put it all on early alert because into those programs or our firmed up we don't know.
So thats a that obviously is one of the big ones that big uncertainties in terms of impairment for this year I'd say the other one is is all prices.
If if oil prices.
Managed to test to sustain a level below $20 for prolonged period of time that would have added an incremental material adverse impact on earnings as would anybody with with a meaningful oil and gas portfolio.
The question, we ask ourselves is in.
In our expected scenarios, where there is some government support and where there is for the aviation sector and there is some.
Some stabilizing as oil price not at high levels, but its levels above where we are right now.
Does that allow us to continue to operate within our our.
Capital guidance range 13, 14% and then the answer is yes, we would expect to be able to operate in that range in a very adverse scenario, but one where nevertheless.
Things are in some cases, you the more clear or better than they are today, obviously, if we if we had a different outcome and the force. This support was not forthcoming deviation sector or the oil price was structurally much lower.
We could have a more material drawdown and and could take a closer to 30%.
I would I would note that.
The we've done pretty well in the recent bank of England stress tests.
With peak to trough drawdowns that are much more substantial than anything that we're looking at here either either.
Certainly looking at where we are right now what we could look at prospectively.
So we had very very few concerns.
We would not be able to continue to operate cequent soundly and fully even in a much more adverse scenario.
Clearly the outcome is going to be a function of something's that we can we can speculate on right now that we that we certainly don't know with any certainty.
That's helpful. Thanks.
I know me impair, but we've not put the guidance range all the way I think it's just a quite complicated water by banks were previous point, if you can tell us how fast lockdowns will.
Recede and how much government support will contain it becomes the question to answer I spoke with wallboard volumes that two thirds of the charge in the first quarter was in the corporate space and a third in the retail space retail tends to be a bit more predictable.
Obviously, there will be some reduction in some elements consumers spend over the next few months was things settle down corporate tenants with more lumpy by its nature.
Economic variables has been quite a big catch up in the first quarter, whether there's a little bit more scared and second quarter time will tell but certainly I think the big apart, but we've been north in the first quarter. So it's a difficult wants an i. I hope as we go through the next warm and two quarters, but beyond that will become clearer.
Great. Thank you.
Your next question comes from the line.
Hi, Keith. Please go ahead your line is Jason.
Hey, Bill going in Andy and just.
The questions actually.
Could you give us.
Regarding the.
Our first not assumptions kind of what are you looking for unemployment in.
Some of your key markets I guess, you have to just call what would you.
Looking for in Hong Kong I guess.
The reason im asking kind of follows on from the last question a lot of the.
Focusing question, so far has been about risk.
Corporate sectors that you guys when you're looking through the remainder of the year.
Are you guys thinking about the risks that manifest from unsecured consumer credit.
And potentially when could that start to materialize.
I guess, specifically in relation to the the overlay that you've taken in Q1.
Presumably it doesn't.
Capture too much of that said, we're not capturing kind of stay migration.
On a reasonable kind of observation inference.
The second is.
Well I stress nine.
So I'm just kind of interest in your expectations for transitional relief and get the she ended the Basel Committee a few weeks ago.
Basically said on thank you could potentially off continues a 100% offers norm transitional relief.
On to kind of offset the effect of the excess provisions are taking into office now I guess, there's not much of that.
Potential benefit realized in Q1, but as you think across the remainder of the year do you do you expect you'll get a 100% on first non transitional relief and.
Initially when do you think you might kind of get confirmation won't.
Thank you.
Yeah Okay.
Let's try to take those in order.
Roughly roughly two thirds of all foundry is corporate third its retail.
On a high proportion 80 plus percent all our retail book is secured.
And that sort of thats largely mortgage secured with good loan to values. So ghansham proportions. The total vote in the unsecured space is relatively quite low in the overall scheme of things.
We always a number of culture is he the allowing for making.
Jose's become available we are clearly very focus to bump that space and we are in the top up that we made managing top we've made some allowance.
For things like that in the first quarter numbers.
In terms of unemployment.
We haven't I think slide nine has given you GDP, we haven't encumbered you too much.
But I think on employed in Hong Kong to the circa 5% level something of that sort of order.
And obviously every country, we could affect with equivalent data.
Through multiple of our markets in terms of all the.
The panels the transitional relief works in fact, we get most of that benefit from the expected loss shortfall only implementation essentially of our first nine the first wife, so we sort of get it but not because of the transitional relief.
Oh, Okay. So we see what's your take additional.
Upfront charges.
Delays in coming quarters because the.
Yeah macroeconomic scenario is deteriorate or youre, you'll you'll judgment.
Declines in chicken.
Do you expect to get material our first on transition early from up because you wouldnt basically of and cut that Darius that mine.
Well, let me put it is otherwise if we have further charges up to a certain level. They will be sheltered from C.T. war, but from other reasons than the transitional relief. So the net effect is that up to a point well see t. want protected.
Okay. Thank you.
Further questions Andrew Please continue.
Okay, just trying to come at a couple of calls for me and then Bill probably just to close I mean, I think all things being equal, but actually the first quarter was quite resilient and that is ready to although things. We've done like lost four five years, let's hope that low nature economists stuff come out at this early.
As of that will be beneficial to us and over the balance of the.
We'll see other parts will hopefully become more optimistic than they are at the moment bill any any thoughts from your existing closing.
Just a day. Thank you for taking the time to understand us and put.
This morning, and Bottomline from my perspective is that operationally, we feel very good about where we are and how we performed an extremely cautious about the environment in the outlook I will continue to be very focused on books.
Thank you all that much.
That does conclude the conference for today. Thank you for participating you may disconnect.
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