Half Year 2021 HSBC Holdings PLC Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the on the Sun Investor call for HSBC Holdings Plc's interim results 'twenty to 'twenty 1 for the information. This conference is being recorded at this time I will have to call. It if it's your host Mr. Noel Quinn group Chief Executive.
Good morning in London, and good afternoon in Hong Kong, while I've got you and with me today and I'll hand over to him shortly to go through the detail of our Q2 performance.
First though I'll start with a summary of the key highlights on.
Progress against our transformation plans on in particular, what we're seeing with respect to growth.
For the second quarter.
I got operating performance supported by a net release of expected credit losses delivered reported pretax profits of $5.1 billion.
$4 billion on last year's second quarter.
We saw a return to profitability in all our regions in the first half include.
Including good performances in both Europe on the U S.
Our U K business performed well with a record quarter for mortgages in Q2.
We generated good momentum behind our growth and transformation plans.
Made important decisions on exiting on mass market retail business in the U S.
And our retail business in France.
Our ought to be why on cost reduction programs are both on track.
Our Asia wealth strategy is gaining traction with.
With strong growth in wealth balances.
We see promising signs of early growth in both lending volumes and fee income, particularly in Asia.
And we retained a strong capital ratio of 15, 6%.
Which enables us to declare an interim dividend of 7 cents per share for the first half of the year.
The next to slides look at the growth, we're starting to see particularly in Asia.
In wealth and personal banking, we've already seen strong traction in our ratio wealth business with global wealth balance is up more than $250 billion.
Or 18% in the last 12 months.
This was driven chiefly by growth in assets under management rather than deposits.
We've extended sorry expanded our Asia wealth franchise recruiting around 600, new frontline colleagues on growing affluent and high net worth customers in Asia by 7%.
While it's early days.
We've seen promising productivity data from our pinnacle wealth partners in mainland China.
With exciting momentum.
Within the business.
Because of that we're accelerating the rollout of pinnacle to 5 new cities in mainland China.
I'm planning to hire 100 more wealth partners. This year than we had originally planned.
In commercial banking pipeline growth is starting to translate into lending.
With $8 billion of loan volume growth since the start of the year.
Our approved lending limits in Asia are up 100% on last year's second half.
And 70% on pre pandemic levels.
These include renewals refinancing on new facilities.
There are also signs of a recovery in Asia trade.
With $6.7 billion of trade finance lending growth in the first half.
In global banking and markets, we've made good progress repositioning the franchise for growth.
The proportion of our W. As allocated to Asia in G. B N N is 9.6 percentage points higher than the same point last year.
With Orion day third of non Asia ought to be ways supporting revenue booked in Asia.
Collaboration with other businesses is a big part of the G P and M growth story with.
With collaboration revenue up 6% against last year's first half.
This was supported by investment in new digital marquee platforms, which are helping to support our Asia wealth strategy.
Slide 4 goes deeper on the lending growth, we're starting to see.
We've seen strong mortgage growth globally.
With Hong Kong, Drawdowns up 56% year on year.
On a record quarter for U K mortgages.
Card balance is starting to recover in Hong Kong on.
On the U K and elsewhere.
Up around $1 billion quarter on quarter.
In commercial banking, we're seen approved lending limit growth translating into term lending with loans up 2% versus the first quarter.
Trade balances are up 9% on.
And we continue to capture market share in both Hong Kong and Singapore.
We're also continuing to grow our lending pipeline in Hong Kong, and Asia, which bodes well for future quarters.
Moving to slide 5.
Both our U S and European businesses saw a rebound in profits on both on a well advanced in their transformations.
The U S made around half a billion dollars to pretax profits up from around $100 million in last year's first half.
Risk weighted assets in the U S to last 16% lower than at the same point last year.
On cost are down around $100 million year on year.
We've announced the sale of our U S mass market retail business.
Which is an important milestone in the reshaping of our U S portfolio.
And we've also now completed the migration of fixed income derivatives trading book from New York to London.
In Europe, we delivered $1.4 billion of pretax profit.
After recording a loss in last year's first half.
Compared with a year ago, we've reduced ought to be ways by 16% and cost by 3%.
Which includes a $149 million increase in variable pay.
We've also signed a memorandum of understanding to sell our French retail business.
Both our U S and European businesses are much better positioned to grow than at the start of the year.
Slide 6 looks at our second pillar digitize a scale.
Our technology spending is now 18% higher than the same period in 2019 on 4% higher than last year's first half.
This is making us a better and stronger bank, both operationally and in terms of the customer experience.
On providing material operating leverage as we grow the business.
The proportion of payments that go straight through without manual intervention now stands at 96, 7%.
We're reducing account opening times.
For example, including first erect where it now takes 10 minutes to open on a cans instead of 10 days.
And we've introduced esignature for over 200 processes in Hong Kong substantially reducing both processing time and the use of physical forms.
We're launching and scaling new digital products.
Our multi currency global money account launched last year in the U S.
And he's now life in both Singapore and the UAE.
We've launched kinetic in the U K, which already has more than 10000 users on a per.
For 0.8 App store rating.
And we are simplifying and automating trade finance.
By 2023, our digital trade transformation aims to reduce 60 bespoke systems down to just 5.
Clients and Counterparties can already agree the wording of guarantees digitally which is then fulfill seamlessly in our back office significantly reducing both time and effort.
In supply chain finance, we can now digitally on board suppliers in 2 days, rather than AIDS, helping clients to support their suppliers and increase the resilience of their supply chains.
These are big innovations with a real world impact for our customers.
Slide 7 looks at energized for growth our third pillar.
I'll move to hybrid working is now well underway.
With a 10% reduction in our global office footprint since the start for 2020.
3 of our global business Ceos are in the process of relocating to Asia and.
And we made a number of key leadership appointments in Asia in the first half for the year.
We're aiming to build a more diverse business.
We've signed up to the West partnership for ratio Justice in business on.
On the U N LGBT I standards of conduct for business.
We've also increased the proportion of female leaders to more than 31%.
But we're still much more to do.
And we've hired more than 650, new graduates from 48 different countries more than half of whom are female.
Slide 8 looks at our final pillar the transition to net zero.
I was delighted on grateful that 99, 7% of our shareholders back to our special resolution on climate change at our AGM in May.
That was a strong endorsement of our climate strategy.
Which has at its core a commitment to support our customers on their transition to low carbon.
We're continuing to provide strong support to our customers on their transition journeys <unk>.
Taking part a more sustainable financing in the first half of 2021 that in the whole of 'twenty to 'twenty.
We're working closely with our own suppliers to help them improve their climate reporting.
So that we can become net zero in our operations and supply chain by 2030.
And we're building partnerships to unlock new climate solutions on May.
For them Investable.
Joining forces with WWF on the World Resources Institute to bring new projects and technologies into commercial scale.
Overall, it's still relatively early in the life of our growth and transformation plans.
But I'm pleased with our progress so far.
Ewen will now take you through our results and update you on our targets.
Thanks, Noel and good morning, or afternoon, all we had another solid quarter reported pre tax profit.
$5.1 billion, that's up almost 5 fold on last year's second quarter with an annualized return on tangible equity of $9.4 per cent for the first half.
Adjusted revenues were down 10% on last years second quarter due largely to the impact of the current rate environment.
Together with a comparison against a very strong global market second quarter last year.
Importantly, we think we're now close to the trough of year on year revenues with volume growth in our lending businesses and our wealth franchises driving a recovery in the coming quarters.
Expected credit losses were $294 million net release.
Second quarter in a row of net releases. This reflects our continued improvement in the economic outlook for our central scenario is less.
Less extreme downside scenarios, given the progress on global vaccinations and exceptionally low stage III charges in both the first and second quarters.
We still retain to $4 billion of the stage, 1 and to ECL regime filled out we made in 2020.
Operating expenses were up 4%. This was due to price higher performance ride to pay accrual and higher technology spend. Despite this we remain on track to deliver our target of broadly stable operating cost for the year ex the bank Levy.
Subject of cost to final decisions on the variable pay for later in the year.
Lending and deposits posit balances were up 2% on 1% respectively.
As lending growth spread for us beyond mortgages in retail banking and trade financing commercial banking with increased confidence in higher loan growth in the second half of the year.
Our core tier 1 ratio was down nearly 30 basis points at 15, 6%.
Due primarily to our dividend accrual.
Our tangible net asset value per share of $7.81 was up 3 cents on the first quarter and.
And we've declared an interim dividend of 7 cents per share for the first half of the year.
We remain on track to deliver all of our medium term targets, including rebuilding to a return on tangible equity of at least 10%.
Turning to slide 10, we're continuing to shift the balance of the group's focus towards Asia, 3 capital reallocation and the buildup of capabilities and people.
However, as other regions start to recover from COVID-19 lies we're also seeing much improved earnings diversity with profitability in all regions during the half.
Europe has gone from Lossmaking in last year's first half to generating 22 per cent of group profits in the first half of this year.
This included a strong contribution from our U K ring fenced bank, which show revenue growth to 12% and wealth and personal banking and 7% in commercial banking.
They were all showed good signs of recovery elsewhere, including the middle East the U S and Mexico.
We're also now seeing more balanced profitability across the globe are global businesses each business now generating roughly a third of group profits in the first half with a particularly strong recovery in commercial banking.
Turning to slide 11, and looking at the second quarter adjusted revenues across the 3 global businesses.
In wealth and personal banking revenues were down 4% on a year ago wealth management revenues grew by $187 million due mainly to an increase in the value of new business written and insurance.
And mutual fund sales growth in Hong Kong.
Personal banking revenues fell by $161 million due to the impact of low interest rates on deposit margins.
Commercial banking revenues were 4% lower due mainly to the impact of low interest rates on global liquidity and cash management.
But with good growth in trade balances in the quarter and early signs of growth across other commercial lending.
In global banking and markets revenues were down 23%. This was largely due to slower customer activity and lower volatility in the fixed income markets as compared with a particularly strong global market performance in the same period last year.
On slide 12, net interest income was $6.6 billion down 5% against the second quarter of 2020 on a reported basis that stable compared with the first quarter of 2021.
On rates the net interest margin was 120 basis points down 1 basis point on the first quarter.
Primarily reflecting lower asset yields, which more than offset lower funding costs on.
On volumes, we saw continued good loan growth in mortgages in Hong Kong and the U K and strong commercial applications that have started to translate into drawdowns for.
For the remainder of the year, we're seeing signs that net interest income has now stabilized and we expect loan growth to support net interest income in the second half.
On the next slide noninterest income was $5.9 billion down 11% against last years second quarter due to the exceptionally strong global market performance in the second quarter last year.
However, we saw good fee income progression in all our businesses against last year's second quarter with strong performances in wealth global liquidity and cash management and capital markets and advisory.
We expect customer activity and fee income to continue to strengthen as economic activity recovers, although the recovery path, obviously remains uncertain as a result of COVID-19 variance.
On the next slide we reported a net release of $284 million of expected credit losses in the quarter compared with a $4.2 billion charge in the second quarter of 2020.
The net release was across all global businesses. This reflected an improved economic outlook together with stage 3 charges that remained very low in the quarter.
Recognizing that.
The risks that still exists from the pandemic, we're continuing to hold around $2.4 billion of our 2020, COVID-19 uplift to stage 1 on to ECL reserves base.
Based on the current economic outlook, we now expect the ECL charge for the full year to be materially lower than our medium tier 3 to cycle planning range of 30 to 40 basis points.
With the potential even for a net release for full year 2021 and.
And further stage 1 to releases in the first half of 2020 to.
Turning to slide 15 second quarter, adjusted operating costs were $297 million higher than the same period last year.
This was driven by higher performance related pay accrual of $367 million.
And the $204 million increase in technology investment.
We made a phrase on $494 million of cost program savings can paid compared with the prior year with an associated cost to achieve a $499 million.
To date, our cost programs have achieved savings of $2 billion relative to our year end 2020 to target of 5 to 5 for $5 billion with cumulated cost to achieve spend of $2.7 billion.
Despite higher second quarter cost, we continue to expect a 2021adjusted operating cost excluding the benefit from a reduced bank levy to be broadly in line with 2020.
Turning to capital on Slide 16, our core tier 1 ratio was 15, 6% down 27 basis points in the quarter. This reflected an increase in RW eyes from lending growth, including a short term increase of around $10 billion from ipi loans in Hong Kong to.
Together with a decrease in capital, including a $3.5 billion dollar accrual for dividends.
As signaled at the time of our first quarter results. We will include a deduction each quarter for dividend accruals for the half year that deduction was 17 cents based on 47, 5% of our first half EPS of 36 cents, which is the midpoint of our 40 to fill.
<unk>, 5% target payout ratio.
To reiterate my comments from last quarter, they shouldn't be read as a signal or a forecast of our 2021 dividend intentions. The dividend accrual is purely a formulaic calculation that will true up at the full year based on the results on that look at the time.
We're reflecting the current improved economic outlook on improved operating environment in many of our markets. We now expect to move to our target payout range in 2021.
We retain the flexibility to adjust earnings per share for non cash significant items and in 2022, we also intend to exclude the losses on the sale of our French retail banking operations.
When thinking about the payout ratio for 2021 whaler attach a lower white to unusually low ECL charges or credits as part of this year's earnings per share together with a desire to see further progress from 2021 on dividends per share in 2022 and beyond.
Excluding FX movements risk weighted assets rose by $13.5 billion in the second quarter driven by growth in Asia, and the Ipi loans already mentioned, we now expect low single digit percentage growth in risk weighted assets for the full year.
On the next slide due to changes in the underlying calculation methodology, we've updated our risk weighted assets savings targets on a like for like basis from $100 billion to $110 billion SIFI, we've made around $85 billion of transformation size and remain fully on.
Track to meet our target.
On slide 18, it's still early days in terms of our 2020 to targets, but we've made good progress. So far we're on track to meet me to our cost and risk weighted assets savings targets and we remain confident that we're on track for a return on tangible equity at or above 10 per se.
And over the medium to the.
The shift to higher return areas is underway and we're starting to see results from the growth opportunities we've identified.
As mentioned, we now intend to move to our target payout ratio in 2021 as a reminder, our dividend policy aims to deliver sustainable cash dividends, while retaining the flexibility to invest in growing the business in the future.
Supplemented by additional shareholder distributions if appropriate.
So in summary, this was another solid quarter for us on near Fivefold increase in pre tax profits on the same period last year with good earnings diversity diversity across the group and evidence of strong execution in all areas of strategy.
While the results were on that would materially flattered by a net release of <unk>. We can see early signs of for broadening recovery in lending with volume growth translating into revenue growth as our lending net interest margin stabilizes and growth in fee income across our businesses.
Despite uncertainty on the pace of recovery from here, we remain on track with all of our medium term targets and with that our ability to achieve cost of capital returns and to fund attractive growth with that Sharon if we could please open up for questions.
Thank you Mr. Stevenson, if you'd like to ask a question today. Please press star 1 on your telephone keypad. Please limit yourselves to 2 questions for me. Please ensure that to mute function on your telephone is switched off.
We find to your question has been on Turkey Labor leave yourself from the can you by pressing star on tier 1.
Once again to ask a question. Please press star 1 on can you give yourselves to 2 questions for.
So that to me it from John on your telephone is switched off.
We will take our first question from Martin Light get from Goldman Sachs. Please go ahead your line of day.
Yes, good morning.
Thank you for the presentation and taking my question it's value.
If I can just start with what's coming on.
You made on on the risk cost outlook in particular as we're heading to 28.
Cool.
Given the current economic outlook.
And earlier this week cost could also on the shoot the 30 to 40 basis points.
We decided to.
The range as we head into 'twenty 'twenty to just considering.
Management overlay still in place.
And related to that.
Just wondering in terms of how we should think book.
Cope for capital return.
There are common.
<unk> about the potential for a step up in copper to Victor.
I think for dividend guidance.
How should we think about the scope for potential value.
That's a common increasingly a possibility.
We plan to 'twenty from pool.
A key instrument in terms of how we should think about getting the core tier 1 ratio back to to a level of 14% to 14, 5 which is to target range. Thank you.
Ewen do you want to handle both for those yeah. Thanks, Thanks, Bob So on sales in 2020 to.
I do think that we're going to continue to see you know I talked about earlier of having to $4 billion of stay.
Stage, 1 and stage to Rajiv.
But we built out from last year's debt on place that's around 60 per cent of the reserve buildup, we put in place last year.
We do think that that will on wind or yeah to the extent that that unwind it will unwind over probably the following 4 quarters.
There will be some benefit into the first half of 'twenty to 'twenty 2.
I don't think that will begin to normalize.
Unexpected credit losses at this point until the second half of 'twenty 2.
On capital distributions and I'll I'll give up slightly fuller answer given I'm sure that there'll be several questions around us.
But relative to the comments I made at the start of the year.
Around our capital position on capital distributions I think setting today, we are in a stronger position relative to what we thought.
Yeah, we've seen a much improved credit outlook, it's the second quarter of reserve releases.
And an expectation that we're going to continue to see additional releases over the coming for quarters.
We've also had much lower credit rating migration on what we thought.
<unk> to lower risk weighted asset growth relative to what we thought a few months ago. So our core tier 1 ratio today is stronger.
And where we thought we'd be and day outlook is better.
We know that we've got some no unknowns in terms of capital headwinds.
Yeah on software intangibles, which is around 25 basis points of benefit.
We expect to get removed from the beginning of 2020 to.
If you look in combination I think is around about 10 basis points of aggregate hit from the sales of our French and U S. Retail banking franchises that will impact us into 'twenty, 2 and 'twenty 3.
And we've got various regulatory driven an uplift of around about $40 billion uplift in risk weighted assets over the next.
18 months.
But equally we know that we've just to crude on.
There are accrual policy 17 cents of dividend versus the same sense that we just declared.
And we've still got at least $25 billion of IW rate reductions.
In our our debit card he rundown program.
Yeah, we are committed to paying a.
Sustainable unhealthy dividend.
While continuing to progressively normalize on a core tier 1 capital position over the next 18 months.
Buybacks will be 1 way for us to think about normalizing.
Using a surplus capital.
And we'll continue to keep buybacks under review in the coming quarters and not with night that to analogy is different to what we've said in previous quarters as you recall at full year, we share that we wouldn't.
Contemplate buybacks. This year, we're now saying, we'll keep it under review.
Very clear thank you very much.
Thank you. Your next question comes from the line of <unk> from J P. Morgan. Please go ahead. Your line is Nathan Hi, Mark.
Good morning, everybody.
Couple of questions from my side as well 1 just to follow up for you in on your common.
How would you define surplus capital.
You know them.
Country, you're talking about.
Pension for growth opportunity after a very long period of time from there.
On to the table.
And obviously.
You do have a very strong capital position with buybacks.
Alright back to come.
But also potential to deploy that capital true.
It's quite difficult from the outside to understand.
How much might be structurally excess surplus capital to correct.
Any thoughts from you.
We could go about doing that that will be helpful. The second 1.
Just to come back to the commentary on it.
<unk> location.
If I look at from them from moving parts within that.
Down 3 basis points for the quarter you came in at down 2 basis points from quite a few for you kept yours to drill came about.
Pressure to come.
And there's 9 billion all of sort of like for you for moving here in Q2 as well. So I was just trying to understand what gives you the calls per day.
As far as to stabilize is that mainly driven by the fact book.
You are seeing with card value to pick up to where you think that's probably likely to be accretive sort of loans.
It was coming down the pipe or.
Is there something to Q2 trends perhaps.
To your pressures right.
Yeah that's on.
On the use of capital.
Yes, Firstly, obviously, we book got organic growth I think we're still sitting at.
Sticking to our target of <unk>.
Mid single digit.
Loan growth over.
Over the next coming quarters into 2020 to.
And I'll come back to that and tangible way, we're seeing net growth.
We also have been public about the fact that we are thinking about a number of small bolt on acquisitions.
Which are almost exclusively centered on the Asian wealth Spice and.
I would use the word bolt on quite carefully.
We are not looking at anything material, but in aggregate.
We are looking at 3 or 4 opportunities in the wealth space across Asia at the moment.
Yes, I think our distribution policy as it relates to dividends is very clear to 40% to 55% payout range.
As I said.
For this year I think you should expect us to be at the lower end of that range.
Because of the.
Unusual benefit we would've had from <unk> this year.
And then on top of that yeah buybacks on top of that so I think you can sort of do the math and know what we're solving for anything that you.
<unk> tab on that as a as a bolt on acquisitions, but if you think of 3 or 4 smaller bolt on acquisitions of say half a billion dollars each will help in relation to that mats.
Net interest income stabilization.
Yeah, I think we on we've seen high book now broadly to stabilize.
If I look for second quarter.
This year the average LIBOR 1 month LIBOR rate was 9 basis points I think in tier 3 so far it's been around 8 basis points.
So we are trough now.
Hum.
If you look at the underlying growth.
We had about $16 billion of.
Loan growth in the second quarter.
You can take about 9 billion of that Hawaii.
The U S portfolio that.
That we're selling into held for sale and that was probably up to 5 billion of GBM, where on of global banking and market to run off on the loan portfolio, particularly in the non ring fenced bank. So.
So we think we grew the underlying lending portfolios.
By about $10 billion to $15 billion, which is about 1 to 1.5% growth in the quarter, which is 4% to 6% growth.
For the full year, which is very much on that run rate that I talked about.
Yeah, you're right that there may be some still some modest income pressure.
In the U K, but I think you saw this quarter or in the U K lending growth more than offset any decline in net interest margin and we continue to remain confident about our ability to grow faster than peers in the U K, particularly in mortgages.
Alright, thank you.
Thanks, very much for that.
Thank you your.
Next question comes from the line of Tom Rayner from Numis. Please go ahead. Your line is open.
Hi, John this morning.
No.
I was really going to push you a bit more on the dividend policy I think you've kind of explained it I think very well now.
Obviously, if we see a big increase in.
Okay. The consensus payout I think this year is 50%.
And it sounds like you're going to see earnings because of the day day.
Okay on that number and therefore, you're going to let the payout ratio down towards the bottom and I guess as things normalize.
The path back up again.
This does not really to saying you've got a progressive dividend policy I'm. Just wondering do you actually need this target payout range, what sort of purpose attached to it now or should we just anything to you.
We're looking to maintain a progressive dividend increase each year.
And.
Secondly on scanner to let's say price if there would be on crude.
Yeah.
The NII guidance on whether that.
You're talking about and then we'll continue.
We're all expecting now momentum pressure on it sounds like Rob again, I Wonder if you could talk to that.
To.
Signs of maybe slower growth in Asia.
It's going to take longer for that.
Interest rates normalize for me Phil on the amount to go to that that I Wonder if you could just as well as these fees.
Yeah on especially on dividend policy I don't think we've said that we have a progressive dividend policy, we said that we've got a 40% to 55%.
Pay out I think obviously, we're conscious of the market's desire to have a progressive dividend policy.
But it's not an official part of our policy say.
We would expect having said that that.
We would ideally like 'twenty to dividends to be higher than 21 dividends.
So you know in the first half of this year again, we accrued 17 cents faces the same from since we declared.
We had an EPS of <unk> 86 cents in the first.
6 months and we've paid out sevens and we find out just under 20%.
Now for our earnings in the first off the yeah mathematically, we do expect a more substantial pay out on the second half of this year.
And we would anticipate.
On the 20 to dividend should be higher than 21 dividends without committing to a progressive dividend policy.
On net interest income.
I don't think we're going to see yeah in aggregate much NIM pressure from here.
So to lives to call the bottom on NIM.
I hate forecasting it for you.
So I, but I do think the combination yeah that.
If any relative NIM pressure from here, coupled with stronger loan growth means that we are close to getting back into a cycle narrows seeing net interest income growth and I think certainly by the time to get into 'twenty to an E T.
Well, let me say non on NIM.
Net interest income growth given them, we'll definitely have I think stabilized by then.
And on rights.
Relative to where we were 6 months ago, where.
Yeah, well planning position was that we are unlikely to see any policy right raws is probably until the very backend for 23 or more certainly 2020 for.
I think we're much more enthusiastic now that we may begin to see policy whites rising led by the U K from sort of mid 'twenty 2 onwards.
And certainly twenty-three benefiting materially from higher policy rates.
And tell me if I could just how to cope with comments on the on the NIM.
<unk>.
Generally we're seeing the volume growth.
The new deal activity being transacted.
Hum.
Good names good margins, we're not having to trade margin to get that volume growth.
There is 1 area where.
There is a lot of activity unless U K mortgages, but even there the margins we're generating on UK mortgages.
All above the back book margins.
Albeit.
Slightly lower today than they would've been 3 or 6 months ago, but they're still well above the back book margins. So we're not seeing a tradeoff on margin for new business relative to volume in any significant degree.
And then on the dividend policy I just wanted to remind you. We we put the dividend payout ratio of 40% to 55% because we wanted to get to balance right between.
Distributing capital to generate a decent return for our investors, but also retaining sufficient capital to fund future growth and future opportunities.
No to the extent to those future growth opportunities a lot there either organically or Inorganically, then we'll consider buybacks for capital return.
But if we do see growth then we have the ability to fund that growth.
Through retention of capital.
On all previous policy, probably didn't get that balance right, we were too much into distribution, but not enough into funding future growth.
Okay. Thank you that's not interest income.
Yeah.
Thank you. Your next question comes from the line of Mark <unk> from Credit Suisse. Please go ahead. Your line is open.
Good morning, Thank you very much for taking my questions. So I just had a question on.
The.
Asia wealth management strategy.
Just bearing in mind that you are looking at a couple of bolt on opportunities.
When you look at the HSBC wealth management offering in Asia.
Where do you think might be particular.
Geographic or.
Product.
Accounts.
You might be looking to to fill in.
And secondly.
Just to.
On the question on on the UK business from mortgage group, which.
Strategically looking to to take market share.
I was wondering if yeah.
Yeah. It does.
I haven't been bitten on any thoughts around.
Perhaps pursuing inorganic strategies matter as well thank you.
Okay. Thanks, Omar I'll take that.
Assuming the first 1 on wealth bolt ons.
We're clearly looking to Pan Asia.
We believe we have good organic growth opportunities with the platform we have in Hong Kong.
And therefore.
That would be the primary focus I think in Hong Kong would be primarily organic growth in Hong Kong.
We're organically investing in China to grow our wealth business, there and we've given you the plans for that recruiting an additional 3000 people over the medium term with already 600 done in first up until the half first half this year.
If you're looking at therefore, where the bolt ons are likely to be the likely to the rest of Asia.
In terms of capabilities, we're looking at both products and distribution capabilities to accelerate our organic growth plans there.
We're willing to invest organically and the rest of Asia, but if we can find some bolt on acquisitions that can accelerate those organic investment plans that would be helpful. We are looking at 3 to 4 as we speak.
And they are a combination of products and distribution capabilities being acquired.
In areas such as insurance.
High net worth wealth management.
On asset management, so those would be the primary areas of focus.
On mortgage growth just UN can fill you in a bit more on that but just for clarity.
On more our share of mortgages in the U K was below on natural footprint share of customers in the U K on what we do and is rebuilding to a more natural mortgage market share to match.
The market share of customers, we have in the U K on the banking market.
So, yes, we're taking market share from others, but is to rebuild to where we believe we should be more laterally positions.
I mean, maybe just to add a few more comments to what I'll say to if you look on that.
Current account market share by by value and we've got a more affluent customer base, we have about a 13% to 14 for St share of current accounts.
Stock share is currently $7.4 per cent of mortgages.
Yeah, we are and have been consistently growing our flow share in excess of stock share we agree a flow.
Flow share around 858, 6% in the quarter for about 100 basis points higher than on our stock share.
And why are we able to do that partly is because yeah. If you went back a few years, we didn't have a.
Established product distribution, which as you know it was around 70 per cent of the market intends to distribution over the last few years, we've fully built out.
On broker distribution.
And we're sitting on a lot of excess liquidity in the U K business.
Which went up even further during COVID-19.
We think the returns on new business.
Highly attractive.
I I think.
You should expect us to continue to target.
Uh huh.
Higher growth in the mortgage market. If we can continue to take share of the type of margins that we currently see.
Thank you very much and sorry on the you should read into that to that given that we have we think substantial organic growth opportunity, we do not see to need to go out and invest inorganically in the UK mortgage market.
Thank you.
Thank you. Your next question comes from the line of non <unk> from Barclays. Please go ahead. Your line is open alright.
Hi, Good morning, no good morning.
Good morning, Ian.
Yes, just 1 quick follow up on mortgages, if I may just around Europe.
I mean is there any chance that you could.
Give us some indication on what kind of ROE you are booking on.
Moving to use as you currently observe it.
No.
And then just around <unk>.
I could ask around.
And your expectations for the full year on that.
That business.
Got it down.
A decent chunk in Q2, I mean, how much of that do you think stems from normalizing market velocity.
Restructuring do you think we can continue to express expect any from a revenue attrition from restructuring this year on that business.
Okay.
Yeah look on mortgages, we're not going to go into the detail, but where we're in and returns on capital yeah materially above our cost of capital.
Yes, partly because as you know to U K mortgage risk weights are very low and we've got plenty of excess funding. So.
That is very accretive business for us.
On global banking a market. So I think we've said previously that we expect.
<unk>.
2021to be down on 2020, but above 2019, I think that continues to be our position.
Yeah as you know the whole street had a particularly weak quarter in fixed income, partly because of the strength in fixed income a year ago.
And we do think that there are some lines in that fixed income business that are important to us like FX that will naturally recover as customer activity recovers both on the commercial side on the retail side out of Covid.
Equities for US had had actually had a really good quarter outperformed peers, but is a relatively.
Small part of our overall global banking and market franchise and capital markets and advisory remember we are weaker than some peers in the U S and we have stayed out of.
Spec financings, which has been a big driver of some of the profitability of some of the peers, but overall when we used on the comparison versus peers, we didn't see anything in there that.
Other than sort of in the pack for fixed income.
And outperforming in equities.
Thank you and can I just.
1 quick follow up on the mortgages I mean, there is set to be quite a lot of regulatory LW on inflation coming down the pipe for the next 12 to 18 months.
And I mean, do you have any sense as to whether that might provide a fuel to any of the pricing on a system level do you think.
System is already pricing basically adjusting for this our there'll be other inflation.
Yeah, I mean, well, we certainly are thinking about that add up to I uplift I think in aggregate I think the 10 per cent for the.
Portfolio level adds about $3 billion of R. W. I uplift for us which is not a must.
<unk> in the overall context of our UK mortgage business.
Inevitably if if <unk> to 8 floors by or output flow was by no way down the track and price.
Pricing will adjust accordingly, I think.
Okay. Thank you.
Thank you.
Next question comes from the line of Andrew Coombs Citi.
Can you just go ahead your line is open for Andy.
Good morning, 1 on.
And then 1 on <unk>.
From crop.
You flagged.
For the variable pay this quarter.
Thank you for your.
Cost guidance is unchanged just trying to on the stack is just a timing issue and the variable pay a weighted.
There has been mix.
And your full year guidance is perhaps slightly different to that.
Robert first question second question on Wow.
If I look at life insurance manufacturing index in distribution and the life insurance manufacturing number obviously had some benefit from mark.
That makes up quite a big chunk of the revenue contribution this quarter if were to strip that out to get back to me.
More.
Normalized base level this quarter.
You still got vein.
Sure sure sure that was to come back for perhaps you can just comment based on weather.
In fact from distributions on life insurance manufacturing and PR to more normalized quarter enough cash.
It runs from comparing.
Thanks.
Yeah look on cost for this year.
There is.
There is a mix change going on Oh for a few hundred million.
Not all of that increase in variable pay as a sort of timing issue. Some of it is a increase in the variable pay accrual relative to what we saw.
But yeah.
Yeah, the mix shift I think Andy is because we had anticipated in the second half than they were at <unk>.
Various line items that we would begin to see a return to normalization from Covid that we think is going to be much slower than what we previously anticipated.
So yeah generally cost associated with running the bank like travel printing office premises and the like.
I think are going to run a few hundred million blowers on what we previously anticipated for this year.
Which offsets.
Slightly higher accrual into the variable pay April so that's why we're sort of still confident in committing to the flat.
<unk> cost to AGA.
On wealth.
I think.
Yeah, you have to bifurcate between the domestic Hong Kong business and on what you see there is.
Actually the Hong Kong business is doing okay, and better than in previous quarters.
And the Ah <unk>.
That effectively the international women's particularly to mainland China business.
Which continues to be significantly impacted because of the closure of the border.
We don't expect that border to reopen until Q4 at the earliest.
So I wouldn't describe this quarter as a normalized quarter for insurance I would describe it as normalized probably for the Hong Kong business.
And continuing to be abnormally lives for the.
For the China business.
And just on the call.
Alright, great quick follow up if youre, saying the kidney is basically been delayed and thats. The offset could you give me you do expect to CNA.
To come back in 2020 to.
Variable comp.
Slightly at that point.
Look I mean, I think I would describe it as a sort of margin for error in 'twenty to has tightened.
Because of that.
Yeah pay pressure that we're seeing.
Relative to what we previously thought youre right that is.
Covid related sales.
Savings should get back to more normal levels of what we describe as more normal levels in 'twenty 2 onwards.
But remember also I think embedded in that is it's new normal versus old normal for example ways for.
<unk>.
The travel budget. If you look to in 2019, we were spending about $400 million a year.
We have taken that down to a run rate of $200 million a year for planning purposes going forward from 'twenty 2 onwards.
Yeah, we've talked about the big savings that we see in head office expenses are getting out of 40% to bar.
I am real estate ex branches over the next few years.
Which will reduce that part of our cost structure by just over 20%.
But youre right size numbers were already embedded into our full year 2018 cost saga.
The other thing just again just for all of you on cost target was.
It was based on constant FX sorry.
What was 31 billion today is about $31.5 billion of cost.
For 'twenty 2.
Thank you very much.
Thank you. Your next question comes from the line of Guy <unk> from BNP Paribas. Please go ahead. Your line is open.
Alright, good morning element on again.
Thanks for taking the questions just a couple of follow.
A follow up to the first 1 was on on margin.
The mix has been dilutive to NIM given the strength in <unk> just wanted to.
When you think about your loan growth from the ones from the hot spin quarterly underlying glaze from us with inconsistent and your expectations going forward. We did not we should be assuming it's still going to be tilted more towards secured.
We can then obviously keep them on some other factors to come to your question on NIM to just helpful to think about how much of that loan growth just to flow through into NII growth.
And then just going back to distributions on time.
Moving.
<unk> 6 now other great growth for the second half it looks like you're guiding to about 10 to 20 billion.
Based on its capital drag given the cost should be much lower in the second half unnecessarily supplies to be upsides.
Sales like capital shouldn't we have an awful lot from the second half from pro forma for the for the accrual.
When you fast forward to collect them to start maybe with 100.150 basis points of headwind to the target coming into the year.
Can we take your comments around buybacks.
And so net 6 months dependent on bolt on just about Sir Thank you.
If I could just quickly take the new business comment.
We're not we're not expecting a significant change in on mix between secured and unsecured I think we see we see the portfolio of having a similar balance to history.
So we're not re weighted.
Portfolio mix.
As you know, where we tend to be more of a secured book that on unsecured book, we do have a credit card business, we do have unsecured lending book.
In our wealth business, we have a strong mortgage book.
On an all commercial banking on wholesale business it tends to be secured.
So we don't we don't see a significant change.
Do you want to take the second question you.
Yeah. So.
Yeah.
I think I'm not going to sort of comment on your math in terms of.
We're on our core tier 1 ratio and maybe at the end of the year, but I think we would be slightly more courses than you in saying that we expect it to be in line with where we currently are.
The partly I think because we are anticipating decent.
Growth in the second half for the year.
But overall in tangible yeah. The main comment in relation to buybacks is I mean, if you recall net full year results back in February I say definitely no buybacks. This year, we soften that language slightly at Q1.
We're softening it again now.
And we will definitely keep it on to review and we're not we are no longer calling out that.
Yeah, there is an actually ban on buybacks this year.
So we'll keep it under review.
Okay. Thank you.
Thank you for you.
We'll now take our last question on the it comes from the line of Manus Costello from I'm, calling on those please go ahead. Your line is open.
Good morning, everyone I wanted to just follow up on the comments on insurance.
You talked to let me off shore, so coming back hopefully from Q4 onwards, I mean previously offshore.
<unk> sales and on coal made up about 40% to the total sales for that business. Do you think we can get back to that kind of level quite quickly once the border. We I assume to indeed do you think you can be a catch up with the lost business from the last couple of years coming true setting you up for a very strong 2020 to if the board to reopen.
And secondly on.
And somewhat related I wondered if you could give us any indication as to how you think for 17 will impact the business. So if you can't indicate.
How it would impact for business can you tell us when you will give us some indication of the affiliate index.
Thank you.
I think on the insurance.
I mean, it's very hard to particular lives have to COVID-19 relative to life before COVID-19 because theres. So many things that are changing but we would expect to rebound, but also you got to be cognizant to the fact, we are investing in the greater Bay area. We're investing in pinnacle, we're investing in our insurance capabilities and wealth management capabilities on Shaw.
So.
We believe we will be well positioned whether it comes back into Hong Kong or stays in Hong Kong, Oh, sorry stays in the greater Bay area will be will have the ability to serve both markets.
And then the question on offer a 17 managed flow we're conscious of the fact that we I the mark on an answer on this on some guidance around this I think certainly in the next couple of quarters and I'd like to then full year results will.
We'll we'll give a teach in on what we think the impact of our for our 17 to us, but yes broadly as you know.
Reported earnings will be lower materially lower than <unk>.
Current reported earnings.
For the insurance business.
Okay, so something to look for.
Thank you very much.
It would be sad for us to look forward to manage.
[laughter].
[laughter].
Thank you I will now hand, the call back to know Quinn for closing remark.
Thank you thanks, Sharon so to wrap up.
Hi, good operating performance supported by a net release of expected credit losses.
Good earnings diversity, both by geography and by business.
Good momentum behind our growth and transformation plans.
With good delivery in all 4 pillars of our strategy.
Traction in our Asia wealth strategy with strong growth in wealth balances.
Early growth in both lending volumes and fee income, particularly in Asia.
And we're on track in both our ought to be away on cost reduction programs.
And confidence in delivering our rote say, idaho to above 10% over the medium term.
Thank you for joining us today, if you have any further questions.
To pick them up with Richard on the rest of the Investor Relations to.
Thank you and have a good summer.
Thanks, Joe.
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