Q1 2021 HSBC Holdings PLC Earnings Call
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[music].
Yeah.
Yes.
Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference call for HSBC Holdings Plc's earnings release for the first quarter 2021 for the information. This conference is being recorded.
At this time I will hand, the call over to your host Mr. Noel Quinn group Chief Executive.
Thank you. Thank you John.
Good morning in London, and good afternoon in Hong Kong, while I've got you and with me today.
I wanted to start by sharing the old screen all purpose ambition on all four strategic pillars.
The focus on Australia.
Digitize the scale.
To energize the growth and to lead the transition to net zero.
I will return to the use in a moment.
But first of all run through some highlights before you and takes you through our financial performance.
We've had a good start to the year.
<unk> seen excellent energy within the business strong collaboration and the determination to get things done for our customers.
I'm very grateful to all of my colleagues for the way they've managed grubbing demands thinks of the turn of the year and for the single minded way they've helped our customers the.
Capture both present and future opportunities.
There are many parts of the world, where the pandemic remains a very very real part of People's lives.
Our thoughts are with the people of India in particular.
And we're working hard to support our colleagues and customers.
In India through this very tough time.
In terms of our financial performance.
A good business performance supported by a net release of expected credit losses delivered reported pretax profits of $5 $8 billion.
Which were up 79% of last year's first quarter.
We strengthened our lending pipelines across all of personal and commercial banking businesses.
Which bodes well for our future revenue.
Of course, the law there'll be white programs remain on track.
With $443 million of quarterly cost program savings.
$9 billion of gross at the view I savings in the quarter.
And we retained a strong capital ratio of 15, 9%.
With further growth in both deposits and lending.
Pulling out of few highlights on slide three.
The combination of all of digital campaigns and grubbing customer confidence.
So a strong credit card sales growth in Hong Kong.
We saw good mortgage growth withdraw guidance up 60% in the U K and 37% in Hong Kong.
Our wealth strategy got off to a strong start.
With 23% growth in overall wealth balances.
We attracted $13 billion of net new money into private banking in the quarter.
And the 11 billion of net new money into asset management.
We saw good loan volume growth in commercial banking.
And month by month increases in London approvals.
Nearly double the approvals in March of any one month in 'twenty two 'twenty.
Global banking of markets had a good quarter.
Supported by strong customer activity in capital markets.
We'll add more than $567 billion of capital markets financing.
Across global debt and equity markets and syndicated loans.
Including the Orion $40 billion of social and COVID-19 response bonds.
Which is around 29% of the total market.
This was a global performance with good profitability in all the regions.
And growth of $3.2 billion in profit booked outside of Asia, compared with last year's first quarter.
Moving to slide four.
I said in February that our growth and transformation plans were already in motion.
And you can see the evidence of that here.
On the focusing all of our strengths.
We've already grown wealth balances in Asia by 18% year on year.
We've grown our Asia wealth of Ftes by more than 600 <unk>.
Including the Orion 100, new client facing wealth planners in mainland China.
Okay.
And we've grown in trade finance lending in Asia by around $3 billion.
Mainly in China, and Hong Kong.
On the digitize at scale.
We started to integrate to our market leading pay me off the in Hong Kong.
Thanks, so much and checkout.
And officially launched H S. P C kinetic for rest of knees in the U K.
With the right 6000 customers already signed up.
Underwriting of choice for growth.
We're applying all of that we've learned through lock day combined with all the digital investment to improve the way we work.
We're moving to a hybrid model wherever possible given all the people the flexibility to work in a way the suits both of them and their customers.
We will need less office space as a result.
And we have a plan to reduce our global office footprint by more than $3 6 million square feet.
Or around 20% by the end of 2021.
We're also relocating three of our global business Ceos to Asia on a permanent basis.
<unk> taken them closer to our customers and to the core of our business.
On the transition to net zero, we publish details of the climate resolution that will put the shareholders at our AGM in may.
Well one of the filing of the members of the global net zero of banking of lives that launch last week.
We maintained our leadership position in sustainable finance following a record quarter for global ESG bond issuance.
With policy and the new told in the U K.
Help her sami's better understand their ESG performance.
And to prepare to take action.
It's early days, but we're carrying good momentum into the second quarter.
Ewen will take you through our results.
Thanks, Noel and good morning, or afternoon, all we had a good quarter against the backdrop of ultra low rights.
Reported price tax profits of $4 $6 billion, that's up 82% on last year's first quarter.
And an annualized return on tangible equity of 10, 2%.
Adjusted revenues were down 3% on last year's first quarter.
Largely due to the impact of ultra low interest rates.
But there were notably good performances in some segments, including Asia wealth and wealth and personal banking.
Asia trade finance, and commercial banking and capital markets and advisory debt trading and equities and global banking and markets.
Relative to the first quarter of 2000 of 'twenty. Adjusted revenues also benefited from the reversal of negative of insurance market impacts and global banking of market valuation adjustments.
The expected credit losses had of $435 million net release.
This reflects spice and improved economic outlook for our central scenario is at.
In the U K and the U S now of probabilities of attached to the downside scenarios.
Operating expenses were up 3%. This was due to a shift in variable pay accruals to reflect quarterly profitability.
Remain on track to deliver our target of broadly stable costs for the year ex the bank Levy subject to final decisions on the variable pay pool later in the year.
Lending and deposit balances, whereby the top 1% with confidence and higher line growth in the remainder of the year.
Our core tier one ratio remained stable at 15, 9% and a tangible net asset value per share of $7 78 was up three cents on the fourth quarter, whereas the retained profits more than offsetting negative reserve movements.
Turning to slide six and looking at the first quarter adjusted revenue was across the three global business says.
Whilst the in personal banking revenues were down 1% on a year of Guy.
Wealth management revenues grew by just under $1 billion to each of the turnaround in insurance market impacts from the big loss last year.
And the good performance in the equity mutual fund sales in Hong Kong.
Personal banking revenues fell by $819 million to each of the impact of low interest rates on deposit margins.
Commercial banking revenues were 14% lower due mainly to the impact of low interest rates on global liquidity and cash management.
But with a good bounce back in trade balances in the quarter and growing confidence in the lending pipeline for the coming quarters.
And global banking and markets revenues were up 10% with strong performances in global debt markets and equities up 52 per cent and 55% respectively.
And in capital markets and advisory up more than 100%.
Just to remind you we are not a significant exposure to the specs, where some peer banks benefited from exceptionally high activity levels in the first quarter.
On slide seven net interest income was $6.5 billion down 14% against the first quarter of 2020 on a reported basis.
The rights the net interest margin was 121 basis points down one basis point on the fourth quarter.
Primarily reflecting the fall in high board during the first quarter.
On the volumes, we still continued good volume growth in mortgages and by the Hong Kong and the U K.
<unk> strong commercial applications that we expect to translate into volumes in the coming quarters.
Looking forward to the remainder of the year. Despite some continuing rolling impact of last year's shift in interest rates.
We expect volume growth to support net interest income at the levels broadly in line with the first quarter.
On the next slide net interest income was $6 $8 billion up 15% against last year's first quarter.
But now saying last year was negatively impacted by the volatile items due to COVID-19.
Overall net interest income stabilized in the quarter compared with holes over the previous three quarters.
Wealth and personal banking and global banking and markets benefited from higher volumes.
That's of equity and mutual fund sales and strong debt capital market activity.
F ex revenues were down year on year, but this was still a good performance again, its an exceptional first quarter of 2020.
Commercial banking was down slightly reflecting low I tried in payment volumes due to the continuing impact of COVID-19 on activity levels.
Looking forward, we expect customer activity and fee income to continue to recover as economic activity recovers.
Although that's obviously remains subject to the impact of new COVID-19 variance.
And the continuing success, we've seen to date and the rollout of the global vaccination program.
On the next slide we had a net release of $435 million of expected credit losses in the quarter.
This compares with a three point of $1 billion charge in the first quarter of 2020.
The net release was across all global businesses and.
Reflecting an improvement in the economic capital up notably in the U K, including the reduction in downside probabilities.
Last year's first quarter included a large charge related to one single name corporate exposure in Singapore.
But this year's first quarter was still very benign for stage III charges, particularly on the wholesale side.
We retained E C. Atlanta series G. I the lives of one $5 billion broadly the same as the fourth quarter recognizing the rest of the still exists from the pandemic.
But based on the current economic outlook, we now expect the ECL charge for the full year to be below our medium term three of the cycle planning range of 30 to 40 basis points.
Turning to slide 10 first quarter adjusted operating costs were $220 million higher than the same period last year.
This was driven by higher performance related pay accrual of $474 million price.
Primarily due to a shift in a career and a higher percentage of variable pay this quarter relative to the first quarter of 2020.
We made a further $443 million of cost program savings in the quarter with an associated costs to achieve of $319 million.
To date, our cost programs have achieved annualized saves of some $2.2 billion against a target of five to five 5 billion.
With the cumulative cost of Ritchie spend of $2 $2 billion.
We're not softening of vigorous approach on costs, we continue to expect our 2021 cost to be broadly in line with 2020, excluding the benefit from a reduced bank levy.
This is subject to final decisions on our variable pay per call later in the year, which will be primarily driven by the pretax profitability of the group.
Turning to capital on Slide 11, the impact of profit generation in the quarter was offset by fair value movements in other deductions and.
Clothing of around 10 basis points for foreseeable dividends as.
As a result, our core tier one ratio was unchanged at 15.9%.
In line with our shift to a payout ratio of approach going forward, but the <unk>.
<unk> for the foreseeable dividends was based on one quarter of the 2000 2015, saying dividend.
We expect to make the same capital the action of the next two quarters based on the same trailing dividend assumption.
But to be clear, we're not signaling with the aside 2021 dividend intentions.
Excluding FX movements risk weighted assets fell by $6 billion in the first quarter due to changes in two of our portfolio of mix and methodology and model updates.
To remind you we do accept expect some core tier one headwinds going forward from regulatory changes.
These haven't changed from the full year.
So in summary against the backdrop of ultra low interest rates. This was the strong quarter for us our best in reported profit since the onset of COVID-19, and an annualized return on tangible equity of 10.2%.
While the results were flattered by a net release of Ecl's, we saw strong performances across fair of various parts of the bank.
With continued strength in Asia, despite the impact of of very low highball.
And I'm the chair of recovery in profitability outside of Asia.
As we look out there remains heightened levels of uncertainty.
Particularly driven by the continuing emergence of COVID-19 variants.
So I would expect us to retain a conservative position on capital funding and liquidity for the time being.
However, based on the first quarter performance and the strength of the economic outlook NOLA and I am more optimistic about this year, albeit cautiously than we were at our full year results in mid February.
With that Sharon if we could please open up the questions.
Thank you Mr Stevens and she would like to ask a question stay. Please press star one on your telephone keypad and please limit yourself to two questions. Only please ensure that to me it function on your telephone is switched off if you find your question has been answered you may remove yourself from the queue by pressing star on to once again to ask a question.
Jim Please press star one of them. Please limit yourselves to two questions only please ensure that the mi function on your telephone is switched off.
Your first question today comes from the line of at fast Kb There'll be. Please go ahead. Your line is open.
Right.
Yeah, good morning, everybody.
I just wanted.
I guess, one well two questions actually if that's okay.
I didn't expect to get all the first of its a bit of a surprise.
The first question was on capital I was sort of surprised that the the capital ratio of wasn't stronger given the the earnings beat and risk weighted assets falling and I just wondered if you could give us some simple.
Some more color around I think there's the minus 400 basis mortgage 40 basis points.
Hitting the chart exactly what's driving that and how we might expect that to progress going forward.
I guess that was the first question and then the second question was the restructuring charge you seem to be running some way lower than you were perhaps in formally guiding to anyway at the.
Full year should we expect those to pick up during the rest of the year. I mean can you give us sort of any color on how that might that might end up.
Yeah look on the restructuring charges, we're not changing our full year guidance. We gave the full year results you're right Q1 was unusually low. So yes, you should expect price to pick up as the year progresses.
On capital Yeah, a few things that wed deductions for fair value reserve movements.
On cash flow of negative FX movements.
There was the high deduction for the phone call them as its profit increased and again note that we took about a 10 basis point deduction for.
The foreseeable dividend, which is new for us that really represents the change in policy, because we've shifted to a payout ratio policy.
Okay, so, but I mean.
Based on what we can see the bulk of the thought it sounds to me like that that accumulate to this quarter. That's not it does not as the the underlying yes, yeah clearly after this quarter.
Okay. Thanks very much.
Thank you. Your next question comes from the line of <unk> Kumar from Redburn. Please go ahead. Your line is open.
Alright.
Morning.
Couple of questions. The first one is of margins and you gave the color on this during the call, but the gist of Dougherty and all your major regions, just just to understand how much of that is.
I'm kind of lower rates feeding through previously low rates and slightly lower hard work and is there anything on the competitive pressure. That's just from those margins down the deal or is it all about the background yield kind of in rates and the second question is just from the white box actually so it does look like a lot of the white box from the U K, particularly you get.
So a is that right, where they mainly use of commercial and B. What did you see that was driving that was in the outlook on the vaccine rolled out with the street.
The data points that you were seeing on the UK Corporate school U K personal that was the case. Thank you.
Yeah on on NIM that was I think all of my sick exclusively driven by the shift in the yield curves I mean, what what we're actually saying yeah, we've broadly repriced.
All of our liabilities now.
Oh now on the asset side actually we're seeing some opportunity for margin expansion. So for example in the U K, we increased margins to try and slow down some of the employees that we were saying.
And we have for several quarters seen some opportunity to reprice in Asia on the commercial side.
So we do think that we are now close to trough ing on NIM I mean, obviously highball.
Slipped a little bit further in the Q1, but as you know if that translates very rapidly into the.
The books, given the share what type of nature of assets and liabilities in the Hong Kong.
And for net interest income.
Yeah. The line growth in Q1 was sort of.
<unk> two per cent and we're signaling that we expect mid single digit growth over the full year, so that does imply.
The much higher growth rates and lending volumes in the in the remaining three quarters.
Which we've got confidence in getting the pipelines that we can see which should help support net interest income out of the remainder of the year, even if there is.
There were some residual NIM pressure coming from the roll off the books as a result of last year's interest rate shift.
Hum.
Write backs are youre right that there was.
The a larger write back and the commercial particularly in U K commercial I think in part that reflected the very large reserve build.
Buildup that we had last year.
Look overall, there were sort of various things going on which made this an unusual quarter for us Firstly, we had very low.
Stage three losses, yeah of round about a 300 million also in the quarter.
Which was unusually low we think.
And secondly on stage, one and stage two two things really an improvement in our economic forecast for the central scenarios in most places that we do business coupled with.
As you know we went into the full year with.
The very large probabilities, particularly in the U K against downside scenarios, which we have reduced on the back of the very successful vaccination program here.
And we would expect borough side of saying that in the U S and we would expect to see that in other market. It says the vaccine programs ramp up elsewhere.
That's great. Thank you.
Thank you. Your next question comes from the line of aim of Keenan from Credit Suisse. Please go ahead. Your line is open.
Good morning.
You hear me okay.
Got it.
Great and my question is the thank you for the questions. My question is the with the wells from the personal banking rationalization.
The controls from the U S. So I was just wondering what the ex till it might be to use released risk weighted assets and potentially excess capital.
Portfolio as you know and you're all of the markets, where it makes sense.
Noting here that a large group of bankers pickup.
The balance of sales and about 30.
Go to market.
I was just wondering where you know.
Yeah, Mark it's Mike.
Book, which is one of H S. P. C might think of it makes sense to be a bigger role in the small though.
Hello, Thank you.
Our primary focus in the total U P. P business used to grow all well part of that business and therefore, we are looking at opportunities for both the organic.
And bolt on inorganic opportunities, but it's primarily focused on the wealth businesses, either requiring products or distribution capability in wealth management insurance and private banking.
The primary focus rather than just the geographic expansion of retail banking capability.
So we're more focused on that book.
Sure opportunity.
Ali will be Asia based largely.
Great.
Actually the.
The way that we should read that too that the there's going to be net balance sheet bolt on M&A that would confuse many excess capital its really just you're focused on the organic strategy, we would use capital to do an M&A deal, but it would be the it would be what what we're buying is the less retail banking also had small wealth.
Management capabilities. So we will we use of free we will use freed up capital if we see bolt on acquisition opportunities.
But as I say, it's more around wealth management capabilities.
Capability of Sun. It is retail banking capabilities, we will look at opportunities as I sort of emerge.
Yeah, and I would use the make sure you listened to the word bolt on whatnot instead of planning anything substantive so yeah, well at the Eaton to some of the excess capital yes.
But it will be relatively modest if we choose to do anything.
Maybe just a quick follow up on the.
Having said that and just bearing in mind your comments from last quarter.
From the not to expect buybacks this year.
Could you, perhaps the paint the pole sort of rush towards returning excess capital, which HSBC is clearly building.
John.
Yeah. So I mean, I think we've been clear on our distribution.
Policy suddenly out of dividend policy, we say, but we're gonna shaft two of 40% to 55% payout ratio from next year.
That's gonna be old cash our cash yeah, we'll go on to the transition towards that.
Yeah, we were close to an 80% payout ratio last year.
We do expect yeah subject of seeing how the second quarter guy used to be in a position to pay an interim dividend.
In the middle of the year.
And then reevaluate whether or not we'll shift the quarterly dividends from at the end of this year.
On buybacks are look we continue to have no current intention to do buybacks. This year you know that we've used buybacks in the past. So they are certainly something that we do and do actively consider or is a total of capital management.
And we are committed to active capital management, Yeah, we do think at the moment that.
Yeah, when we look at consensus versus where we are we do see a W. I agree, it's probably being a tad higher than Ah is a nice people with models.
We see life growth being fuller than I think of them. All of you. Currently are currently modeling yeah. That's on the back I think of.
Yeah, very strong growth that we continue to see in mortgages across the U K and Hong Kong.
Yeah, the a commercial pipeline that is building nicely and just in context and.
And one of the slide you'll see that are the national pipeline is running price of 50% higher than it was in Q4.
In Q1.
And we do think other segments like can see in the credit will bounce back as we recover out of COVID-19.
Yeah, there were about $20 billion of regulatory headwinds that we see this year.
Offsetting that is the sort of $30 billion or so of our W. I run down, but we expect we're making good progress on that we did about 9 billion in the first quarter.
The last thing is we're still cautious of sound credit rating migration.
Particularly as some of the government support packages roll off yeah for here in the U. K. For example is fairly of raw was off from what impact that has on credit later in the year.
Yeah, we are probably slightly more cautious on the.
Capital in the excess capital then would be in your numbers at the moment.
That's one of the cool thank you very much.
Thank you your next your.
Your next question comes from.
The line of Tom Rayner Numis. Please go ahead your line of Saipem.
Yes, good morning, and both of them going on just some questions.
Question, the safest on credit quality and you'll see released <unk> 7 billion from stage one to reserves in Q1, I think we like $6 $8 billion still left.
On balance sheet and.
Your guidance and if I think that most of the delayed and now you're saying because the bill I would suggest it's sort of a weird challenge of some of them.
They didn't tell those of Aloha.
As of that guidance in itself, what does that imply in terms of the stage one two when he sees for the rest of 2021 and then I know you've already touched on this I was going to ask you to then just to expand on your thoughts about when the government programs actually do and what's your thoughts on the sort of released these days.
The two to three year period that was the first question of the second one of them cost space.
Okay, well look on an E sales out of Manhattan.
I said in my opening.
Remarks that we retained uncertainty I realize of about $1.5 billion.
The way, we think we're retaining currently about 70% of the reserve build up in stage one stage two.
If we went to the stick to the central economic scenario I would think you would see some of that get released this year, maybe some of it you get released in the first half of next year I think we're going to continue to be pretty cautious about how we do release.
We're not expecting a repeat of Q1 in terms of say the receipt outperformance during the remainder of the year.
And the stellar as I, a pretty broad array of outcomes I think depending on yeah.
Yeah, how we progress out of COVID-19 and obviously there are a few risks on the horizon, particularly around.
The variance and whether any of those become vaccine resistant the.
Yeah, where we land, but I 30 basis points, we will see but you should assume that the within that the way of confident that we will end up below the 30 basis points.
Good day.
I mean, you know as well is important the way we had talked to a cautiously optimistic approach to reserves and the way. The economy will develop you know we're optimistic we're seeing good signs.
But it's still relatively early days of the vaccination program.
That's why we wanted to retain a range 70% of the provisions that were created last year.
We've had a very good stage three quarter in Q1 with only 300 million of of stage three are charges.
That's below the normal trend line, the one would expect.
So I think it's right to be cautiously optimistic.
<unk> to position the balance sheet cautiously.
Yeah, I mean, I think I was supposed to be the eating to all of you being too cautious now, but I completely get the point about the uncertainty over the.
The government of Pink.
Kind of just you know as the as the year develops we look just on a quarterly basis all of you of what the future of holes.
Okay that'd be thanks.
<unk> costs.
The.
Your comments on book with the stable for the.
The food yeah, Bobby the woman's related issues.
I mean, it relative to last year of not just you know to Q1. It was very neat 25 per cent of the full year total ex the levy and if I annualize Q1. This year I'm looking at sort of 3% price I'm, just trying to get a filter.
The way of constantly is coming from the you know is this just the incremental cost savings or.
Oh, you're really building in an expectation that this performance related pay is going to push the shifts away from that broadly stable I mean, if the A's performance related that's not a bad thing all of it than necessarily but just trying to get a feel for how confident you all the ideal in that pool of the stable I'm talking.
Yeah, So look on in the first quarter of.
The.
There was about a.
Three to 400 million dollar adjustment due to the.
Uh huh.
Taking a higher.
A higher accrual for variable pay compared to Q1 last year.
I think if you back that number out.
What you'll see is the yeah, we were broadly flat costs in the quarter of and you would expect the variable pay of accrual, but other things being equal to be a few hundred million dollars low for the remaining quarters of the year.
So I think gives you confidence in that stay.
Statement of.
The second thing on the variable pay accrual I think what we saw.
In as part of the full year results as you. All know are there was a very different approach across the sector in terms of.
Performance pay we took out of pulled down by close to 20 per cent for the full year, but we saw some payers, particularly U S peers, and particularly some European peers. They were concentrated on the wealth and investment banking space pay in very different places so I would just.
Since of the fact that for competitive reasons, we may need to top off of our current total.
The assumptions as the year progresses, but that would only be down on the context of improved profitability.
But absent that change and again in context, we paid about $2.8 billion in variable pay last year.
So you can do your own mass and size what that risk is but absent that we're very confident that we're on track to deliver a broadly flat cost this year.
And I would stress there's no change at all in the internal management focus on the cost program.
Okay. Thanks, a lot.
Yeah.
Thank you and your next question comes from the line of Guy Stebbins Exxon. Please go ahead. Your line is open.
Good morning, all of sudden everyone.
Thanks for taking the questions. So firstly on the other guys and then just briefly to come back on costs I just want to check on the other day, you'll you'll commentary you see all of the rates being higher than consensus is the other reference the old 22 inches that's true.
I'm just.
The Q1 quite encouraging cooled. So you can take the FX of course saves so given where we start Q2 sort of the gross saves to come of didn't strike me the consensus Phillips 60 line.
The <unk> 2021 of them.
Perhaps you're more cautious in terms of credit migration and then the volume price I just want to check if it's the 'twenty one will be on the sort of story the.
And then the second question is don't costs come back to your commentary on the performance of Cool I think you said it would be driven by P. B T. So interested was that more weighted to pre provision profit with the impairments were materially below our medium term cost of risk that.
That could be of factor was is it more sort of competitive pressures that you just talked to that would drive the thank you.
Yeah, I mean, the variable pay is set on yeah, largely on bottom line profitability, but we do take some of them.
For example last year.
Think profit fell by around the third and we took the variable people down by 20%. If we sold the reverse guy the reverse Guy who this year and it was largely driven by ECL outperformance.
It's like we would take all of that outperformance in two of change in variable price correct.
You've got remember we.
What we what we're managing to is leaving the piece of one side, we're on track and confidence of our ability to deliver the transformation cost savings that we talked about.
In February on the February before the so the underlying cost position of the bank is well positioned.
And on track to meet those expectations.
We've had a strong profit performance in Q1.
And therefore, you know we've we've talked up the V. P for the Q1 performance we'll.
We'll have to see what happens in Q2, Q3 and Q4.
But the most important message for you is we're on track for all of our underlying transformation cost savings.
On the question on that revenue is.
Yeah, just in terms of 'twenty two.
Again I think.
Yeah, we would be confident of achieving mid single digit loan growth.
We've probably got another 20 or so billion to go and our other blue I reduction program next year.
But then you will have yeah the boswell.
Pre reform coming through which will probably lead to a 4% to 5% uplift in the blue eyes next year. So.
I don't know how that compares with consensus but broadly that's what's and I head up the line.
Okay. Thank you.
Thank you. Your next question comes from the line of Manus Costello from Autonomous. Please go ahead. Your line is open.
Hi, Matt US 10 minutes.
Am I supposed to come back on the the point on cost. Please I just wanted to understand the more.
How it will evolve going forward because from what youre, saying it sounds as if to the extent that.
Revenues of being led by areas like wealth markets that will drive potentially higher.
The variable compensation, and therefore higher expenses than you'd been guiding fool, but am I right to say if revenue growth of hands off to more balance sheets led the type of NII and commercial banking.
We wouldn't see that.
Yeah look I had the.
Madison is always going to be.
The mix of.
Our internal metrics of what we think yeah, we can't afford based on the profitability of the group, but we can never be cognizant of what's going on on the market and so if we are seeing competitive pressure in areas like Asia wealth and.
The investment banking more broadly.
Yeah, we have to be in a position to respond to those competitive pressures, but I think the statement is right to the extent of what where do you see as a rebalancing of.
Profitability being driven out of the commercial bank in the retail bank are that won't necessarily drive the same.
Competitive pressure on the performance by the amount of the only other thing I'll say is when we talked about our future growth plans in February.
We assumed a growth in revenue coming.
In tracking back to 10% ROE to the plus.
We had a rebound of knee sales we had for the performance on cost take out and we had a reboot of revenue from a reboot of the economy and incremental activity that we're investing in so we had assumed revenue growth.
Going forward.
In 'twenty, 'twenty, one and 'twenty two and beyond.
Therefore, we had assumed a growth and profit.
Therefore, we had assumed the growth in variable pay too much of that not the path.
That was all the inherent in the cost statements we made back in February.
So we have put into all future forecasts a growth N V P too much the growth in the P&L that we expect to see.
Colin I think you saw in Q1 is.
He is a particularly strong performance in Q1.
The well was over and above the underlying cause of that.
So to that 10% rote.
If.
Over the performance continues in future quarters than maybe a lot of assumes grossing V P.
It will be higher in the future of then was in the original assumption, but so too would be the P. B T and so two would be the revenue.
Oh I don't assume the reason I grossing V P inherent in the plans the underpinned the journey two of 10% ROE to the that makes sense. It does.
Yes. Thank you that's great. Thank you very much.
Yeah.
Thank you.
Your next question comes from the line of Yeah, five T N from Citigroup. Please go ahead. Your line is open.
One of them.
Question I have a question related to the top line really trying to understand at the peak of four of non interest income I forgot wealth is particularly the strong on the slide four you mentioned that the the net.
The money for private banking you see of very strong growth in the school today as well just trying to separate some of the internal changes.
Well, it's that you'll have done the from the sustainable basis from this volume.
Volatile market trends would you be able to give us some more detailed guidance in terms of how much well it should be like a revenue growth you're expecting for this year and probably for the company.
Yeah. It planning thank you.
It was hard to hear you book I think what you were looking for was more of an indication of where the growth in wealth is coming from them.
And let me also be clear when we started that journey of investing in our wealth business is last year.
And that was invested in <unk>.
The build out of our product capabilities to make sure we had a good product capability on the shelf in Asia.
And in the investment in distribution. So we launched the Pinnacle initiative in China as an example, but we're also investing in private banking and our insurance business. We were investing in both physical non palo to drive that growth and the wealth managers, but we're also investing in digital infrastructure.
So our insurance business in Hong Kong, particularly low.
So a lot of new initiatives last year, a new product.
<unk> digital base supported by extra sales people and that's what's been driving the growth of our wealth revenues.
In Asia.
I would it's the it's not just market sentiments of marquee valuations that are driving that growth is actual underlying growth is coming through now we still have more to do we recruited an extra 600 wealth managers in Asia in the first quarter alone 100 of those in <unk>.
China is part of an expansion of all of pinnacle opportunities.
The conversion where are we getting the business, where how are we sourcing the wealth opportunity.
Well I'm pleased to say, we're sourcing a lot of it from our existing client base.
Around about 60% of the net new money that goes into our private bank comes from commercial banking clients and global banking clients the owners of those businesses.
Putting the personal wealth with us.
The same is true of asset management of around 75 per cent. So the net new money for asset management is coming from internal H S. P C clients.
So it's true organic growth out of an underlying level not just growth in assets.
The consequence of market revaluation of those assets. There is an element of that in Q1 as mark each revalued, but.
There's a lot of it coming from underlying growth.
Thank you it would be possible to give us some the guidance.
Guidance in terms of they're well revenue growth outlook.
Outlook from you and we we talked about our revenue growth I look at the in February.
Were assuming for Asian wealth, we're assuming close the double digit growth in assets as we said in February.
And mid single digit growth in other regions outside of Asia.
And that's.
With the resulting probably Asia wealth revenues to grow at around about 10% CAGR over the next few years.
Thank you.
If I remember correctly.
I think you if you look of market sentiment of market stats, you're probably looking at the end of the line marketing as you'll probably growing.
The 678% so we're trying to outperform the market by the organic investment program that we're putting in place.
Okay. Thank you.
Thank you. Your next question comes from the line of my House and at J P. Morgan. Please go ahead. Your line is open.
Hi.
Good morning, good morning, Thanks, so much for taking my questions the.
The first one is just on on loan book loan demand.
I was trying to understand.
Couple of points Firstly, how sustainable do you think the current activity spike in the UK mortgage market is obviously you know you along with all of the U K bags of benefited from price drove mortgage pipe long of yours.
Hum on pricing.
Just wondering tying that into your overall comments on loan demand from what gives you the mi to go out to the rest of the year.
And then just related to that I think I suspect of the element of pent up demand in other areas of.
The loans in the U K is going to be.
The across your footprint as well.
Bulk of that out if you could talk a little bit about where you see pent up demand and loan growth.
Yeah, Let me do with the consumer book first of the retail the retail banking business for us.
Well I think in the U K.
It's true that there is the strong activity at the moment the.
Undoubtedly be in elements of the which is driven by the stomach jutzi of holidays that were put in place that are likely to come to an end shortly.
But I also believe there is some structural changes taking place in the U K in the the the housing market in the U K I think will remain active for quite a period of time as the housing stock has continued to be built out. So I think there's there's an underlying growth.
Of that and there's a potential temporary growth curve as a consequence of the stomach jutzi of holiday.
We I think we will see a pickup in activity all consumer lending unsecured lending and credit card activity in the second half of the year not just in the U K, but across the world you know of.
If you just take all of our own balance sheet. We grew last year of deposit balances by around about 170 billion last year.
And elements of the 170 billion will turn into cash spend by consumers and businesses in the second half of this year. We'll start you know already sources, but we will continue to pick up.
So I think you're going to see traditional unsecured lending and credit card activity. The an increase in the second half of this year.
Hong Kong remains strong demands on mortgage growth and we're pleased on the.
More broadly into the wholesale business what I saw at the end of last year, particularly in Q4 was a lot of activity from corporate borrowers.
He can facility renewals of facility extensions to get ready to get the balance sheet ready for the upturn in the economy as they started to see vaccines come on stream, but I didn't see the trends life into loans loans roll does in Q4 of last year.
I have started to see that take place in Q1 of this year.
So for example.
The trade balance sheets in Asia grew by 3 billion in the first quarter of this year.
That's an indication of underlying economic growth.
If the vaccine programs continue as they currently all of you could assume that that trend will continue and could well pick up.
And then more generally there was a group of starting to see a drawdown in those facilities that were negotiated at the end of last year.
The in place in Q1, so overall, our commercial banking balance sheet grew by 2 billion in Q1 of this year.
And all of personal banking loan book grew as well.
I think its early stage of growth.
I could expect the trend to pick up.
Over the next three quarters.
Thank you very much that's really helpful. I was wondering if I kind of one.
One more on capital just a very quick clarification I was wondering if you have any further thoughts on the stress testing time line this year.
Is there any scope for the regulatory restrictions in the U K to come off from here for yourselves.
Well I mean, I think you know the there's a sort of a power many of the stress tests being done by the bank of England and the PRA.
And and that was in the absence of the same having done the annual cyclical scenario of the back end of last year.
But as we sit here today I guess, we're not expecting any surprises out of that given.
Yeah, we've been extensively ER stress testing our books through the pandemic and in recent months, obviously outlook has improved so.
What we're not.
Not expecting them.
The bank of England at this point to be it we're expecting us to be the driver of five distribution policy I guess is the better way of describing it.
Got it thank you.
Thank you we will now take our last question and the question comes from the line of Martin Light get from Goldman Sachs. Please go ahead. Your line is open.
Hi, Martin Hi, Mark.
How are you doing.
Thank you for taking my question I, just sort of follow up on an earlier comment on margin outlook from here and I was just wondering.
If you could maybe shed a little bit of light and how we should think of a progression here for the for the main business lines. So so H bumps of Hong Kong.
The Shanghai Banking Corporation, and then because of the U K ring fenced bank.
Just wondering if it's fair to assume debt the bank corporate kind of the 80 Buck is by now the true.
In Hong Kong and from here, we should see stability and the finishing at some points from God was low and if anything some of the remaining margin pressures coming through from.
Structural hedge were low.
In the U K and I was just wondering should we assume margins to remain broadly flat in terms of lung could you elaborate of what you have seen.
Hum always there it is the guidance. So I think you said earlier that the Bronx U N I used broadly representative of the full year, sorry, if I missed the right does that imply that combined with loan growth you would expect some sort of margin compression heading into 2021 of them and then.
Just a follow up on the capital that was just wondering if you put the update us on how much progress you made the in Nebraska and conflict of inefficiencies within the group.
But of you could let us know how big the principal investment book since the stage.
And.
What portion of the holes from throws into Asia.
Thank you.
Okay and on the NIM question I mean, you know the mountain debt not all of our.
Interest rate sensitivity is in the first year I mean, there was a degree we talked about previously about a billion dollars of.
Interest rate pressure coming from the law of rights into 'twenty, One and then obviously highball.
It did drop a meaningfully in the first quarter has remained broadly stable in the second quarter of the levels of the first quarter of so far.
So we do think yeah, we are getting towards the trough of.
NIM pressure.
But it would be of big Cold decided that Q1 most of the trough I still think there will be an element of.
An element of pressure into the second quarter, and then obviously volume growth there and provides us confidence that the impact on net interest income is negligible. Yeah, I think I would say about the guidance that will be back end loaded as we go progressively through the year and as confidence builds during the year.
And therefore, you wont get much as much of that benefit into 'twenty, one, but you won't get all of that benefit into 'twenty two.
Yeah, I talked about earlier of saving that the the one net interest income was a good guide to the annualized net interest income for the full year.
Oh, you should take away from that therefore, the we're also confident about decent net interest income growth into 'twenty two.
On the Hong Kong are most of the impact of law of high book gets translated into our books within three months.
So the equally the reverse is true if we were to get back to I.
That's the short term high book is we would see that very rapidly translate into improved net interest income and non call.
I'm, sorry, I didn't quite catch the second question.
Yeah I was just wondering on on top of the lean efficiencies so previous gas book.
Thank you.
The multi year program of work.
Yeah. We've got for example of probably $5 billion plus of excess capital in the U S.
That will come out we expect over several of CCAR cycles.
As far as capital optimization opportunities that were working on Asia of which will take a few years to effect.
So I would say, it's a sort of multi year program of work we.
We know what that program of work is and we're just progressively working on it and some of it is driven by.
By sort of ongoing discussions with regulators.
And I think the confidence and regulators to seek capital release coming out of places will obviously improve as we say a stronger path out of COVID-19.
Very clear thank you very much.
Thank you I will now hand, the call back over to know for any closing remarks. Thanks.
Sharp.
So to summarize we've heard of good start to the year with good business growth and an improved lending pipeline moving into the rest of the 2021.
We're making good progress on our growth and transformation plans.
And remain on track to deliver what we promised day in February.
We remain absolutely committed to our cost of transformation plans.
We're feeling more optimistic about the rest of the year than we did in February.
But we remain cautious around the uncertainties that remain.
If you have any further questions. Please do pick them up with Richard and the team.
Thank you once again for joining us today.
Thank you, ladies and gentlemen that concludes the call for the H S. P. C Holdings Plc's earnings release for the first quarter 'twenty 'twenty. One you may now disconnect.
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