Half Year 2020 HSBC Holdings PLC Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference calls the Hatreds busy holdings plc is interim.
She finds its way to GE for your information. This conference is being recorded at this time I will hand, the call if it your host Mr. No Quinn group Chief Executive.
[noise] [noise] like a sharp.
Good morning in London, and good afternoon in Hong Kong and thank you for joining us.
I've got you and with me today.
And he will present the numbers in detail before we then go to Cuba night.
Let me start by saying that it's been another difficult quarter for our customers colleagues some communities.
But I have been pleased with I hate USBC has responded.
[noise], they still I, usually unpredictable environment.
We have conscious of that on both human and financial level.
And we are doing all we can to supports our customers and colleagues through this very difficult period.
Against that backdrop, we are satisfied with our first half performance.
Alright, Asia business held up well.
Not all fixed income businesses delivered strong revenue growth.
This compensate for challenges in parts of the world that have been hard hit by the impact of Covia 19.
The business is the phone less well all those were already changing.
We will be acceleration on transformation in the second half of the year.
And making other necessary changes in light of the new circumstances since February.
That's still a lot of uncertainty around.
Not least from the ebb and flow with Covidien I'd say.
The steps needed to contain it.
Our improved capital position, an excellent funding and liquidity all the whole most of our strength and resilience.
Helping goes to be that for our customers. While also building the future the FA.
Our focus remains on helping our customers.
Through this immediate period.
While making the changes necessary to serve them better over the long term.
The current geopolitical environments, it's clearly complex.
Tensions between China, and the U.S. inevitably create challenging situations for an organization we saw footprints.
But saw businesses in Asia have shown good resilience.
And we will face any political challenges that arise with a focus on the long term needs of our customers and the best interests of our investors.
Turning to our second quarter performance.
Our raise your businesses continue to show good resilience contributing $3.6 billion reported pre tax profit.
Global markets grew adjusted revenue by 55%.
Our profitability was most challenged in the businesses at the sense are about transformation.
Europe, the U.S. and the not a ring fenced bank.
Which were severely impacted by high expected credit losses.
Overall pretax profits of $1.1 billion would die and 82% on.
On an adjusted profits with time, 57% on last year's second quarter.
He sales of 3.8 billion were up on the first quarter, reflecting updates it forward economic guidance in the UK in particular.
We've updated our Twentytwenty range for AG sales, which you and we'll talk about later.
The interest rate cuts made earlier in the year began to impact our revenue from March onwards.
We responded by pulling the cost leave us available to us reducing operating expenses by 7% compared with last year's second quarter.
We continue to attract significant deposits in the quarter.
I'm pleased to say that our capital ratio increased to 15%.
Providing a strong and resilience platform from which to serve our customers and manage the economic environment.
Turning to slide three.
The resilience of our Asia franchise continues to underpin our financial performance.
This was due to the quality and strength of our business and client list.
And so the speed and decisiveness of the coverage response.
Which allied many economies, so restart sooner than others.
The activity underpinning our Asia performance remains robust.
We've increased our trade finance market share.
Clients FX volumes are lower but relatively resilience.
On retail card transaction volumes recovered in June following Dick during the pandemic.
Adjusted revenues in individual markets, how being broadly stable despite the economic slowdown.
And Asia lending is up 1% and deposits up 7% in the last 12 months.
First off expected credit losses of $1.8 billion in Asia included a large single name provision in Singapore in the first quarter.
Look into the second half.
Most of Asia, and Hong Kong in particular have tightened cobiz restrictions in recent days.
This is something that we're all getting used to as Casey's rise and fall.
We are hopeful that the quick response of the authorities will contain any new way for APRA outbreak and minimize the impact.
Looking at slide full.
We remain focused on helping our customers colleagues and communities through the pandemic with high operational resilience in the face of unprecedented volumes and customer interaction.
Around 94% of our branches are currently OCA and.
And all our customer contact centers have been fully operational through lives.
We have now granted around $30 billion of debt relief for our personal lending customers.
Through more than 700000 payment holidays on loans credit cards and mortgages.
More than 172000 wholesale customers have received more than $52 billion of lending support.
$33 billion of that through governments games, and $19 billion true HSBC backed lending.
We arranged more than 1.1 trillion dollars of loan debt and equity financing for wholesale customers in the first off.
Including more than $48 billion of social and coated volumes.
Yeah.
We also retained our number one ranking for sustainable finance falls in a rapidly expanding market.
We've invested heavily in technology driving digital transformation to connect more customers remotely.
An increase digital engagement during lunch.
Downloads of our HSBC net mobile app the business.
We're up 157% on last year's first half.
The value of mobile payments in the second quarter was up more than 200% on the same period last year.
And digital wealth sales rose significantly year on year.
Up 44% in Singapore, 38% in Hong Kong, and 29% in mainland China.
The strength of our coverage response contributed to a sharp increase in customer satisfaction.
With double digit increases in several retail markets.
Records satisfaction scores in trade and global liquidity and cash management.
And global banking, a markets being voted number one stand that FX dealer for global corporates in the recent Greenwich buy side study.
Throughout all this we maintained exceptional balance sheet strength.
And strong funding and liquidity.
With a C one ratio of 15%.
And $133 billion, our first half deposit growth.
Turning to our transformation program.
Well, we slowed progress in some areas in response to the pandemic, we laid good ground work for the rest of the year.
And we'll be accelerating our plans in the second half.
We lifted the polls on redundancies in June I will be moving forward with those plans thoughtfully purposefully.
We've already seen around 300 billion million dollars of cost savings in the first off.
With a further $500 million estimated in the second half from our transformation activities.
This is slightly below the $1 billion of transformation savings, we promise for this year because of the pause on redundancies.
But we expect to make up the difference in Twentytwenty wall.
In the meantime.
We've taken additional action on discretionary startup costs, and we expect to make many of those savings permanent.
On the rest of our transformation.
We've completed the combination of our BWM and global private banking and we're making strong progress in the back office integration of commercial banking and global banking.
As you've seen the areas of weakness in the second quarter, where the areas that were already committed to changing.
We confident that the actions we've identified in February other Reits actions to take.
But we're obviously looking at what more we need to do given the changed economic and monitoring environments.
We have created the structures to reduce our devaluating global banking and markets.
Made a gross R.W. a reduction of $21 billion in GBM in the first half of the year.
In the U.S. lower interest rates pose a challenge to our us retail strategy.
And that's something we're looking at.
For the U.S. business has already closed 80 branches and we're on track to reduce us global markets R.W. ways by around 45% by the year end.
In Europe, we simplified our management structure and have a new team in place so pushed through the transformation.
We remain committed to the Europe R.W. way reduction targets, we announced in February and we'll execute those plans in earnest as the economy starts to recover.
Okay.
I want to finish by talking about one of the most exciting growth businesses and that's wealth.
In 2018 websites a plan to capture the growing global wealth opportunity centered on Asia.
And we've been investing to grow that business ever since.
In the last 12 months, we've grown our jade and premier customer numbers by 6%.
And our wealth balances by 3%.
With around half of this growth coming in Asia.
In our asset management business, we've grown assets under management by 5%.
On private bank client assets by 4% over the same period.
In June we launched pinnacle.
Which is a new platform to significantly step up our wealth business in mainland China.
This allows customers to access a full suite of well services, including insurance.
In one place, which is unique for any Chinese wealth platform.
We're investing to bring our wealth capabilities to new customers in China, and we intend to grow the number of wealth planners in phases over the next four years.
The greater by area wealth management connect program, which was announced in June only in Holland enhances the wealth opportunity.
And we're excited at the chance this gives us to serve more people in the region.
With that I'll pass over to you and to go through the numbers.
Thanks, now all on good morning, or opt in April.
Given the impact of gave at 99 second quarter was tough we hadn't 18% fall and reported profit before tax and a 57% drop and adjusted profit before tax.
There were a couple of bright spots fixed income and global markets was a standout together with a resilient performance by Hong Kong and other parts of our Asian franchise.
Overall, our results were heavily impacted by lower revenues from subdued customer activity in many parts of our business and that building effect of ultra low interest rates.
The second quarter in a row are very high Hcl.
And a $1.2 billion software intangible write off largely as a result at the weak retail and outlook for our non ring fenced bank.
Adjusted revenue was down 4%. This included a 507 million benefit and volatile items.
Which in part Ruggedized reverse some of the negative impacts we saw a mark to market movements in the first quarter.
80 hours were up on the face quarter, or 3.8 billion EUR 148 basis points of Christ lines.
The largest impacts in the UK and commercial banking.
We continue to take action on cost to adjust for the weekend revenue environment, our adjusted operating cost fell by 7%.
Against the second quarter of last year.
Despite the weak macro environment, our balance sheet metrics continue to improve our core tier one ratio was up 40 basis points to 15% on the quarter.
And customer deposits grew by $85 billion.
Our first our return on tangible equity was 3.8%.
That's down from 11.2% for the same period last year.
And our tangible net data asset value per share of $7 84.
Was down 10 cents on buffets quarter give movements anime credit adjustments.
Turning to slide nine looking across the three global businesses and wealth and personal banking revenues were down 12%.
With retail banking revenues falling by $809 million.
Largely to the impact of falling interest rates on liability spreads.
At a headline level wealth management revenues were broadly stable.
But excluding positive market impacts and insurance manufacturing down 17% due to lower sales volumes.
Commercial banking revenues were 14% lower.
Due mainly to the impact of lower margins on global liquidity and cash management.
And lower volumes and trade finance.
And global banking and markets revenues were up 24% global markets grew by $755 million.
Which we achieved while keeping traded value at risk broadly stable.
This included an excellent performance in our fixed income franchises.
GAAP, 79%.
Principal investments revenue grew by $195 million, primarily due to the material reversal of the mark to market losses, we surround the first quarter.
And corporate Santo revenues were $90 million lower with a 157 million of adverse movements and valuation differences on our long term debt and associated swaps.
Just to remind you all that the second half easily sees lower revenues from noninterest income from noninterest income and global banking and markets and wealth.
And given the buoyant tribal markets revenues in the first half, we expect that seasonality to be more pronounced this year.
On slide 10, net interest income was $6.9 billion down 9% against the first quarter. The net interest margin was 133 basis points.
Down 21 basis points on before first quarter of which 20 basis points came from the fall in interest rates.
While we are beginning to see some modest asset repricing, we still expect recent interest rate caps, they have a negative impact of more than $3 billion for twentytwenty.
With a further significant negative impact expected than 2021.
Turning to slide 11, adjusted operating costs were 7% lower than the second quarter in 2019, and down 5% and the fair SAP relative to the first half of 2019.
As a result, if they operational impact of Guy that 19 were spending less on certain discretionary cost line items.
We expect this delayed some permanent benefits in our cost structure relative to previous planning assumptions.
We're being disciplined on variable pay accrual in line with lower expected profits. This yet.
And Weve restarted the cost reduction program that we announced in February.
At the end of Jane headcount, including contractors was down 8300, and the last 12 months.
And down 3800 since the start of the year.
As we signaled that our first quarter results. We're now planning for full year 2020 costs to be below 2019 run right.
As you do your model and that operating costs for the second half. Please don't use the first half run rate as a guide.
Second quarter costs were low key to kind of at 19.
And we expect both a step up in investment in technology spending and the high UK Bank Levy due to strong very than our deposit price.
On the next slide we saw a further substantially C.L. charge and the second quarter.
3.8 billion EUR 148 basis points of Christ lines.
8.3 billion of which was stage one on stage two judges.
This reflected extra forward economic outlook charges across all global businesses and regions.
Typically in respect of the UK and commercial banking.
UK expected credit losses were $1.1 billion higher than in the face quarter, reflecting the worsening economic outlook of which 900 million of age related to our UK ring fenced bank.
Stage three Hcl charges were broadly stable at around $1.5 billion in both the first and second quarters.
Although the first quarter did include a significant charge on a single nine corporate exposure in Singapore.
Recognizing that is generation and the economic outlook in the second quarter, we've updated our range for full year group expected credit losses, so $8 billion to $13 billion.
Given the fair staff, Hcl, chad's or $6.9 billion.
Adding the current run rate of stage three losses for the second half gives a full year hcl charge of around $10 billion.
The range either side of as broadly reflect side disclosed economic sensitivities.
The lower end reflects a pop closer to rock consensus central economic scenario.
Reflecting a strong economic rebound in 2021.
With some on unwinding of the economic adjustments taken to date.
The higher end of the range reflects upon twice as to our downside economic scenario.
With a much more muted economic rebounded in 2021.
Leading to further negative VCSEL adjustments for forward economic guidance and the second half.
I would caution that there is it remains a wide range of potential outcomes, including the risk that the upper end of the range might need to increase further.
And in that respect I would encourage you to read expected credit loss sensitivities in the interim report.
On slide 13, not core tier one ratio at the end of the second quarter was 15% that's up 40 basis points in the quarter.
Okay, one capital increased by $3.2 billion.
This reflected lower regulatory deductions for expected losses.
FX movements.
Fair value gains through other comprehensive income.
And a reduced for it and prudent valuation adjustment.
On the next slide risk weighted assets rise by $11.2 billion in the first half.
Or $33.2 billion, excluding FX movements.
This was mainly due to what $23.3 billion asset side movement, mostly were relating to face quarter lending growth.
And also a 16.8 billion dollar increase from changes in asset quality due to credit rating migration.
100 billion dollar Grace risk weighted asset reduction program is underway with $12 billion, if additional savings on global banking and markets and the second quarter.
We continue to expect credit.
Migration to cause I'd have to inflation on the second half.
Partially offset by progress against our Grace I would that be right reduction program.
So in summary, a difficult quarter overall, I see bright spots Asia resilience and our strong quarter for fixed income.
But overall many parts of the business were hit by very high Seattle's and significant revenue pressures.
As we look out to the second half there remains considerable uncertainty.
That continuing impact of private 19, the ongoing Brexit negotiations.
And you asked John attentions and any impact this has on the Hong Kong franchise.
As such it related to discuss distribution policy or medium term return targets.
And we don't expect to do so until our full year Twentytwenty results in February.
However, we're pleased that we face into this uncertainty whether strengthen core tier one ratio of 15%.
An extra $85 billion and customer deposits continued vigor and managing our cost base.
And the benefit of a diversified portfolio of franchises globally.
No and I remain very committed to the plan we announced in February.
Namely material reduction in our WH, particularly focused on the us.
The non or unfenced bank and global banking markets.
With a reallocation of capital towards our strongly performing Asian franchise.
A significant reduction on the operating cost base of the bank and the material reduction and the operating complexity of for the bank.
With that share on if we could please open up for questions.
Thank you Mr. Stevenson she'd like to ask a question today. Please press star one I know telephone keypad interest is time Youre limited to asking two questions, Italy. Please ensure that the meat solution on your telephone is switched off.
Hi, Joe question has been on said you may lead yourself from the key by pressing star team. Once again to ask your question. Please press star one season showed that didn't need function on your telephone is switched off.
Last question. This morning comes from the line of Matson Light Gap Goldman Sachs. Please go ahead. Your line is a pen.
Hi, good morning, and thank you very much for for the presentation and the remarks and.
My first question I was just wondering in terms. So overall system from a revenue outlook your bonding algorithms just.
Just wondering but let's could potential offsets to the speed.
Is there isn't a difference now how you think about prospects. So some of this more than retail franchise. As you have in different you mentioned obviously the is it didn't look to you at strategy data or could that beyond offsets in terms of volume growth for even more pronounced volume growth like in Ukraine, UK mortgage as little or maybe in change.
Thats in the way you charts for full outcomes would at its current becomes a corporate deposits in order to try to mitigate some of those revenue headwinds and the second question does some coverage.
In terms of.
Quote the one trajectory from here I was just wondering.
So most of the credit migration, you're guiding for sort of mid to high single digit outer wing inflation Dcs. It most of the integration occurred. This year liquidity is also a go well into twentytwenty, while I'm just trying to look at the numbers you into guidance here because it would.
Like giving your.
It means that you're likely to remain well within the wood in the mid to upper range of your 41 target range from Q.
Okay. Martin. Thank you let me, let me do with some of the revenue offsets first and then how students coming on and the capital position.
With respect to our us business, they actually had a very strong Q2.
In the US business a revenue in Q2 of this year was the highest quarterly revenue since Q4 2017.
I'm also pleased with away them a Michael on the team have started to execute on the transformation plan.
I have already closed a Ryan 80 branches retail branches on the East Coast of America.
Which is right about 50% reduction.
Being successful in retaining around about 85 cents of the deposit base, even though they've gone through that reduction program.
We're also one on track on the cost reduction plans as well.
They've already completed 50% to the plan Twentytwenty stuff exits.
On our on track to meet or exceed the goal we set them back in February of this year. So progress on the transformation, we clearly need to.
Understand the full economic impact to the lower interest rate environment.
But we committed to transforming our business and improving the returns.
On a broader basis on revenue, we're clearly looking one other options we have to mitigate some of the revenue shortfall from lower interest rates.
I will we see well.
And growth in our wealth businesses and an opportunity for that.
Our last year into common more on that in detail.
But we're exploring all options to look at revenue mitigation you enjoy a pickup on the and the capital comment.
Martin say on net interest income.
I think.
We are beginning to see some asset side repricing, particularly in Asia.
Relatively modest at this point, but we do you think there is an opportunity.
Secondly, we are seeing particularly in Hong Kong.
A changing mix back towards current accounts and away from 10 deposits, which again I think.
It's not unexpected given the rate environment.
Well help alleviate some of the pressure on liability margins.
Our noninterest income yeah, what we're saying at the moment is very subdued customer activity.
Which we attribute predominantly to the impacts of coated.
I would think coming into 21 equal and should expect to see some recovery in that customer activity.
Yes, where in some of the government related lending activity for example in the K we've been taking.
More of a natural market share and we've taken Nevada, 15% share in the bounce back lines.
A 20% share in some of the other landings games, which is well above our.
Natural market share and commercial.
Okay. Thank contained in the UK mortgage opportunity potentially we will be relatively cautious there given the outlook for the UK economy, I think and until we get a better sensors.
Direction of travel on Brexit.
On and the other area of where obviously, we can help offset revenue losses by doing a better job at costs and I think you saw this quarter some progress on that.
It was an unusual quarter because of.
Hi, David and the fact that no one was flying.
A lot of our head offices were largely shutdown.
But we didn't think coming out of guy that they will be an opportunity to make permanent some of those shifts and business operations that were beginning to say.
On our Wi.
Yes, simulate the easy hours they should peak this year.
And therefore, you should begin to get a reversal and.
Ratings migration into 21, and then to 22 I would think.
Although it will lag I think the trains only sales, but we definitely say a predominantly in the second half of this year.
As being additional ratings migration pressure.
Which is why we're still sticking with that our Wi guidance of.
Mid to high single digit growth and not be rise this year.
Yeah in terms of what that means for capital I think yes second half of this year, obviously, we don't expect on the profitability side.
We don't expect global markets to repeat their first outperformance.
Of just over 4 billion they made.
2.6 billion in the second half of last year.
Yes.
The and also we've got the UK Bank Levy and we do you think given the strength of deposit growth that we've seen that bank Levy my trained up rather than down first this year.
So we do you think that the balance of that and some additional add that Blu ray inflation will mean that core tier one.