Half Year 2021 HSBC Holdings PLC Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the on the some invest the cold for HSBC Holdings Plc's interim as the old 2021for the information. This conference is being recorded at this time I will hand, the call of a chill Hey, Mr know Quinn the chief executive.
Good morning in London, and good afternoon in Hong Kong I've got Ewen 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 the summary of the key highlights.
Our progress against our transformation plans.
And in particular, what we're seeing with respect to growth.
For the second quarter.
A good operating performance supported by a net release of expected credit losses.
<unk> reported pretax profits of 5 point of $1 billion.
The $4 billion of last year's second quarter.
We saw a return to profitability in all our regions in the first half.
Including good performances in both Europe and 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 all of mass market retail business in the U S.
And our retail business in France.
Our odds of B Y on cost reduction programs of 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 2 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 Asia wealth business with global wealth balances up more than $250 billion.
Or 18% in the last 12 months.
It was driven chiefly by growth in assets under management rather than deposits.
We've extended sorry expanded our Asia wealth franchise recruiting of around 600, new frontline colleagues and growing affluent and high net worth customers in Asia by 7%.
While it's early days.
We've seen promising productivity data from our clinical wealth partners in mainland China.
With exciting momentum.
Within the business.
Because of that we're accelerating the rollout of pinnacle, So 5 new cities in mainland China.
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 the $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 and 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.
And global banking of markets, we've made good progress repositioning the franchise for growth.
The proportion of all of W. As allocated to Asia in GB and N is 9.6 percentage points higher than the same point last year.
With Orion the third of non Asia, arguably 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 of 56% year on year.
On a record quarter for U K mortgages.
Card balances of starting to recovery in Hong Kong.
And the U K and elsewhere.
Up around a $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%.
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 profit and both are now well advanced in their transformations.
The U S made around half a billion dollars of pre tax profits up from around $100 million in last year's first half.
Risk weighted assets in the U S. The last 16% lower than at the same point last year.
Cost of 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 completion of the migration of fixed income derivatives trading book from New York to London.
In Europe, we delivered $1.4 billion of pretax profits.
After recording a loss in last year's first half.
Compared with a year ago, we've reduced ought to be raised by 16% and costs by 3%.
Which includes a $149 million increase in variable pay.
We've also signed a memorandum of understanding to sell all of French retail business.
Both of our U S and European businesses are much better positioned to grow spend at the start of the year.
Slide 6 looks at our second pillar digitize of scale.
Our technology spending is now 18% higher than the same period in 2019 and.
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.
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 accounts opened in times.
For example, including first the Rex where it now takes 10 minutes to open an of cans instead of 10 days.
And we've introduced a signature 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.
Multi currency global money accounts launched last year in the U S.
And he is now live in both Singapore and the UAE.
We've launched kinetic in the U K, which already has more than 10000 users and a full 0.8 app store rating.
And we're simplifying and automating trade finance.
By 2023, our digital trade transformation aims to reduce 60 bespoke systems down to just 5.
Clients and Counterparties kind of 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 onboard 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 the real world impact for our customers.
Slide 7 looks at energize 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 of 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 of the year.
We're aiming to build a more diverse business.
We signed up to the west part of ship for racial justice in business and.
In the U N LGBT I standards of conduct for business.
We've also increased the proportion of female leaders for 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 transitions of net zero.
I was delighted and grateful that 99, 7% of our shareholders. That's our special resolution on climate change at our AGM in May.
That was the 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 line in the whole of 2020.
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 of May.
For them Investable.
Joining forces with WWF and the World Resources Institute to bring new projects and technologies into commercial scale.
Overall.
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 of.
$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 the comparison against the 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 franchise is driving a recovery in the coming quarters.
Expected credit losses were $284 million net release.
Second quarter in a row of Nate releases. This reflects our continued improvement in the economic outlook for our central scenario is less.
The less extreme downside scenarios, given the progress in global vaccinations and exceptionally low stage III charges in both the first and second quarters.
We still retain $2.4 billion of the stage, 1 and 2 ECL reserve build out we made in 2020.
Operating expenses were up 4%. This was due to price higher performance ride the pay accrual and higher technology spend.
Despite this we remain on track to deliver our target of broadly stable operating costs for the year ex of the bank Levy.
Subject of course, the final decisions on the variable pay for later in the year.
Lending and deposit balances were up 2% of 1%, respectively as lending growth spread for us beyond the mortgages in retail banking and trade finance and commercial banking with increased confidence in high line 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.
Tangible net asset value per share of $7.81 was up 3 cents on the first quarter.
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 2 of 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 lives. 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 day generating 22% of group profit in the first half of this year.
This included a strong current contribution from our U K ring fenced bank, which show of revenue growth of 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 goal of our 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 revenue is across the 3 global businesses and.
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 in insurance.
And mutual fund sales growth in Hong Kong.
Personal banking revenues fell by $161 million G of the impact of low interest rates on the deposit margins.
Commercial banking revenues were 4% lower due mainly to the impact of low interest rates on the global liquidity and cash management.
But with good growth in trade balances in the quarter and early signs of growth across other commercial lending.
And global banking of 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.
Right. 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 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 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 markets 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.
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 of around $2.4 billion of our 2020, COVID-19 uplift of stage, 1 and 2 E tail 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 term 3 of the cycle planning range of 30 to 40 basis points.
The potential even for a net release for full year 2021 and.
And for the stage, 1 and 2 releases in the first half of 2022.
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 phase of $494 million of cost program savings can paid compared with the prior year with an associated cost to achieve of $499 million.
To date, our cost programs of achieved savings of $2 billion relative to our year end 2022 target of.
5 to 5 for $5 billion.
With Chile related cost you rajeev spend of $2.7 billion.
Despite the higher second quarter costs, we continue to expect our 2021adjusted operating costs, 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 <unk> from lending growth, including of short term the increase of around $10 billion from Ipi lines in Hong Kong together with the decrease in capital, including a $3.5 billion dollar of 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 mid point of view of $40.
55% target payout ratio.
Reiterate my comments from last quarter, they shouldn't be read is the 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 and outlook at the time.
Reflecting the current improved economic outlook and improved operating environment in many of our markets. We now expect to move to our target payout range in 'twenty 'twenty 1.
We retain the flexibility to adjust earnings per share for non cash significant items and in 2022, we also maintain sort of exclude the losses on the sale of our French retail banking operations.
When thinking about the payout ratio for 2021 whaler attach of lower white to unusually low ECL charges or credits as part of this year's earnings per share together with the desire to see further progress from 2021 in 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 lines 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.
We remain fully on track to meet our target.
On slide 18, it's still early days in terms of our 2000 of 22 targets, but we've made good progress. So far we're on track to meet 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% over the.
Medium term.
The shift the 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 of our dividend policy aims to deliver sustainable cash dividends while.
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 of 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 in the word 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 the 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 the 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, Italy. Please ensure that the mute function on your telephone is switched off.
You find your question has been out of the Turkey Labor leave yourself from the can you by pressing star 1.
Once again to ask a question. Please press star 1 can you give me it yourself for 2 questions Amy.
Please ensure that the meaningful instead of annual 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 of taking my question and sorry if.
If I can just start with the with comments.
You made on the risk profile for us in particular, as we head into the pool.
Given the current economic outlook.
Earlier, this which of course could also I'm not sure the 30 to 40 basis points.
For the cycle.
The range as we head into 'twenty 'twenty, 2 just considering the management overlay still in place.
And related to debt I was just wondering in terms of how we should think of scope for copies of it.
The comment in the presentation.
<unk>.
All of the potential for a step up in conflict of interest.
I think of the dividend guidance.
The year, how should we think about the scope for potential buyback.
That's becoming increasingly of possibility.
We plan for 2000 people.
A key instrument in terms of how we should think about getting the core tier 1 ratio of Mexico level of 14 to 14, 5 which is the.
Target range for you.
And do you want to handle both of those.
Thanks, Thanks, Bob So on sales in 2022, I do think that we're going to continue just E. I talked about earlier of having $2.4 billion of.
Stage, 1 and stage 2 reserves that we built out from last year's debt in place that's around 60% of the reserve buildup, we put in place last year.
We do think of that will unwind or yeah to the extent of that unwind it will unwind over probably the following 4 quarters.
So there will be some benefit into the the first half of 2022.
I don't think the will begin to normalize unexpected credit losses at this point until the second half of 'twenty 2.
On capital distributions and I'll give up slightly fuller answer given I'm sure that there'll be several questions around this.
But relative to the comments I made at the start of the year.
Around our capital position on the 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 its a second quarter of of reserve releases.
And then 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 and what we thought.
Adding to lora risk weighted asset growth relative to what we thought a few months ago. So our core tier 1 ratio that is stronger.
And where we thought we'd be and the outlook is better.
We know that we've got some now unknowns in terms of capital headwinds.
Yeah, the software intangibles, which is around 25 basis points of benefit we expect the gate removed from the beginning of 2022.
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 uplift of around about $40 billion uplift in risk weighted assets over the next.
18 months.
But equally we know that we've just the crude under our accrual policy 17 cents of dividend. So this is the same sense that we just declared.
And we've still got at least $25 billion of IW rate reductions.
In our our deputy line he rundown program.
Yeah, we are committed to paying a.
Sustainable unhealthy dividend.
While continuing to progressively normalize our core tier 1 capital position over the next 18 months.
Buybacks will be 1 way for us to think about normalizing.
Using our surplus capital.
And we'll continue to keep buybacks under review in the coming quarters and I would note that tonality is different to what we said in previous quarters as you'll recall at full year, we said that we wouldn't.
Contemplate buybacks. This year, we're now saying that we will keep it under review.
Very clear thank you very much.
Thank you. Your next question comes from the line of milestone of from J P. Morgan. Please go ahead. Your line is open hi, good morning, everybody.
Couple of questions from my side as well that's 1 just the follow up for you in on your comments.
How would you define the surplus capital.
The country you're talking about.
Potential for growth opportunity after the very long period of time for me.
The background to the table.
And obviously.
You do have a very strong capital position with buybacks.
Alright back to come.
Also potential to deploy that capital true.
It's quite difficult from the outside the understand.
How much might be structure of the excess surplus capital to kind of execution.
Awesome.
So we could go about doing that that will be helpful for the second 1.
Just to come back to the comment around.
Stabilization.
And finally got from of the moving parts for them that the HVAC.
The only 3 basis points for the quarter, Kevin you can move down 2 basis points from.
Quite a few of your pictures of the talking about.
Push it could come.
Under the <unk> 9 billion all of the sort of like for you from the day here in Q2 as well. So I was just trying to understand what gives you the coding for doing that.
As far as the stabilized is that day.
Driven by the fact that.
Youre seeing the card volume pick up for you and you think that's probably likely to be the creatives.
It was coming down the pipe or is.
Is that something in the Q2 trends perhaps.
Always taking the pressures.
Yeah, that's all of them.
The use of capital.
Yes, Firstly, obviously, we've got organic growth I think we're still sitting at.
Sticking to our target of.
Mid single digit.
Loan growth.
Over the next coming quarters into 2022.
And I'll come back to that in terms of where 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 space and.
I would use the word bolt on quite carefully.
We are not looking at anything material, but yeah in aggregate.
We are looking at 3 of 4 opportunities in the wealth space across Asia at the moment.
Yeah, I think our distribution policy as it relates to dividends is very clear of the 40% to 55% payout range.
As I said for the.
This year I think you should expect us to be at the lower end of that range.
Because of the.
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 the anything that E.
Line tab on that as you know as the bolt on acquisitions, but if you think of 3 of 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 are we've seen high boy now broadly stabilize.
If I look at second quarter.
Of this year of the average high for 1 month LIBOR rate was 9 basis points I think in key 3 so far it's been around 8 basis points.
So we are traveling now.
If you look at the underlying growth.
We had about $16 billion of.
The loan growth in the second quarter.
You can take about 9 billion of that Hawaii.
For the Hong Kong IPO lines, you can add back 3 because we shifted.
The U S portfolio.
That we're selling into held for sale and that was probably up to 5 billion of GBM runoff global banking of market is run off from the line portfolio, particularly in the non ring fenced bank. So.
So we think we grew the underlying line portfolio.
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 in 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 of an apt 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 the game is please go ahead. Your line is open.
Hi, Good morning line.
No.
I was really going to push the button on the dividend policy I think you've kind of explained it I think very well now.
Obviously, if we see what the increase in.
Okay. The consensus payout I think this year.
It sounds like Youre going to see earnings because of the day.
The patent number and therefore, you're going to let the.
The ratio down towards the bottom line I guess as things normalize.
The pass this back up again.
It's just not really just saying you've got a progressive dividend policy I'm. Just wondering do you actually need this target payout range, what sort of the purpose is that sort of now should we just we think heal.
We're looking to maintain the progressive dividend increase each year.
And.
Secondly, outstanding until the crisis.
Yeah.
NII guidance and whether that does that.
You're talking about.
Thank you.
We are expecting now moving.
NIM pressure.
Bye.
Rob again, I Wonder if you could talk to that.
Okay.
Signs of slower growth in Asia.
Thank you sort of take longer for us.
The interest rate to normalize for me.
And the amount of called Silicon out 1 of the people just don't catch all of these things.
Yeah on the first 1 on dividend policy I don't think we've said that we have a progressive dividend policy. We said that we've got of 40 to 55 per cent.
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 the.
We would ideally like 'twenty, 2 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 savings and we find out of just under 20%.
Now for our earnings in the first off the yeah mathematically, we do expect a more substantial pay out in the second half of this year.
And we would anticipate.
The 22 dividends should be higher than 21 dividends without committing to a progressive dividend policy.
On net interest income.
I don't think were going to see yeah in aggregate much NIM pressure from here.
Sort of like to call the bottom in NIM.
I hate forecasting it for you.
So I, but I do think the combination yet the.
If any relative NIM pressure from here, coupled with stronger line growth means that we are close.
Price to getting back into a cycle narrow of seeing net interest income growth and I think certainly by the time, we get into 'twenty 'twenty 2.
We will definitely see non at nipigon.
The net interest income growth given the NIM will definitely of I think stabilized by then.
Our non rights.
Again relative to where we were 6 months ago, where.
Yeah, well planning position was that we were unlikely to see any policy right raws is probably until the very back end of 'twenty 3 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 high of policy rates.
In total if I could just sort of couple of 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 the the margins we're generating on UK mortgages.
All above for the back book margins.
Albeit less.
Slightly lower today than they would've been 3 or 6 months ago, but that's still well above the back book margins. So we're not seen of trade off on margin for new business relative to volume in any significant degree.
And then all of the dividend policy I just want to remind you. We we've put the dividend payout ratio of 40% to 55% because we wanted to get the 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 of those future growth opportunities a lot there either organically or Inorganically, then, we'll consider buybacks or capital return.
But if we do see growth then we have the ability to fund that growth through retention of capital.
And all of previous policy, probably didn't get that balance right, we were too much into distribution, but not enough into fund and future growth.
Okay. Thank you that's not interest.
Okay.
Thank you. Your next question comes from the line of <unk> from Credit Suisse. Please go ahead. Your line is the Ethan.
Good morning, Thank you very much for taking my questions.
So I just had a question on <unk>.
The Ah.
Asia wealth management strategy.
Just bearing in mind.
A couple of bolt on opportunities.
When you look at the HSBC.
The offering in the Asia.
Where do you think might be particularly the.
Geographic or product.
<unk>.
You might be looking to.
2 for then.
And secondly.
So the.
The question on the UK business and mortgage growth.
Which.
Strategically is looking to take market share.
I was wondering if.
Yeah. It does.
But any thoughts around perhaps.
Perhaps pursuing inorganic strategies, there as well thank you.
Okay. Thanks, Omar I'll take the.
Assuming the first 1 on wealth bolt ons.
We're clearly looking at Pan Asia.
We believe we have good organic growth opportunities with the platform we have in Hong Kong.
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.
Giving you the plans for the recruiting an additional 3000 people over the medium term with already 600 done in the first.
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 of.
And they are a combination of products.
On the distribution capabilities being acquired.
In areas such as insurance.
The net worth wealth management.
The asset management, so those would be the primary areas of focus.
All of mortgage growth of just you and can fill you in a bit more on the but just for clarity.
The more our share of mortgages in the U K was below our natural footprint share of customers in the U K.
And what we do and is rebuilding.
For a more natural mortgage market share to match.
The market share of customers, we have in the U K in the banking market.
So, yes, we're taking market share from others bullish 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 the if you look at that.
Current account market share by by VAT E and we've got a more affluent customer base, we have about of 13% to 14% share of current accounts.
Stock share is currently 7.4% of mortgages.
Yeah, we are and have been consistently growing our flow share in excess of the stock share we agree a flow.
<unk> share of around 858, 6% in the quarter of about 100 basis points higher than 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.
Established break of distribution, which as you know is around 70 per cent of the market in terms of distribution.
For the last few years, we've fully built out.
The 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 are highly attractive.
I I.
Thank you should expect us to continue to target.
Uh huh.
Hi of 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 the need to go out in the invest inorganically in the UK mortgage market.
Okay.
Thank you. Your next question comes from the line of non <unk> from Barclays. Please go ahead. Your line is the Ethan.
Good morning good.
Good morning, moving in.
Yes.
1 quick follow up for mortgages, if I may just around the already.
The already is there any chance that you could.
Give us some indication of what kind of ROE you are booking on.
Moving to use as you currently observe it.
No.
And then just around <unk>.
The <unk>.
<unk>.
And your expectations for the full year net.
The business.
It was kind of down.
A decent chunk in Q2, I mean, how much of that do you think sounds normalizing market losses.
Restructuring and do you think we can continue to express expect any kind of revenue attrition from restructuring this year in that business.
Okay.
Yeah look on mortgages, when I'll kind of go into the detail, but what where and in returns on capital yeah materially above our cost of capital.
Yes, partly because as you know the U K mortgage risk weights of very low and we've got plenty of excess funding. So.
Yeah that is very accretive business for us from.
The global banking of market. So I think we've said previously that we expect.
2021to be down on 2020.
By the above 2019.
That continues to be out of position.
Yeah as you know the whole street had a particularly weak.
Weak quarter in fixed income, partly because of the strength of fixed income a year ago.
And we do think that the some lines in that fixed income business that are important to us like the effects that will naturally recover as customer activity recovers.
On the commercial side and the retail side out of Covid.
Equities for US had actually had a really good quarter outperformed peers, but as of relatively soon.
Small part of our overall global banking of 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 is being the big driver of some of the profitability of some of the peers, but overall when we've done the comparison versus peers, we didn't see anything in there that the.
Other than sort of in the pack for fixed income.
Our performing in equities.
And Kim can I just.
1 quick follow up from on the mortgages I mean, there is set to be quite of lot of regulatory LW of inflation coming down the pipe for the next 12 to 18 months.
I mean do you of any sense as to whether that might provide the fuel plenty of the pricing of system level do you think the Sis.
The image already pricing basically adjusting for the sale of there'll be other inflation.
Yeah, I mean, well, we certainly are thinking about that at the Blue I uplift. So I think in aggregate I think the 10%.
For the portfolio of level adds about $3 billion of other blowout lift for us which is not.
Material in the overall context of our UK mortgage business.
Inevitably if if other blue ie Florence by or output flow was by no way down the track.
And we'll adjust accordingly I think.
Okay. Thank you.
Thank you. Your next question comes from the line of Andrew King.
Please go ahead your line is the Ethan.
Randy.
Good morning, 1 of them.
And then 1 of the world.
Kind of crop.
You flagged the desktop and variable pay this quarter.
Thank you for your fully of course.
Guidance is unchanged.
China on the stack is just the timing of shooting the variable pay of why they are.
The mix of the call.
And your full year guidance in the past slightly differently.
Growth.
Robert first question second question well.
If I look at life insurance manufacturing investing in distribution and the life insurance manufacturing number obviously has the.
Benefit from market.
That makes up quite a big chunk of the revenue contribution this quarter it for.
Do you think that's a more normalized base level of this quarter.
Obviously, you still got the shelf.
Sure sure sure that will come back for perhaps you could just comment thanks, so much.
In fact from distributions on the life insurance manufacturing and PR and more normalized core tenets of that base.
The volume from competitors. Thanks.
Yeah look on costs for this year.
There is.
There is a mix change going on 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.
The bot.
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 costs associated with running the bank like travel printing office premises and the like.
Think of kind of run yeah, a few hundred million dollars lower than what we previously anticipated for this year.
Which offsets a slightly higher accrual into the variable title. So that's why we're sort of still confident in committing to the flat.
Flat cost target.
On wealth.
I think.
Yeah, you have to bifurcate between the domestic Hong Kong business and what you see there is.
Actually the Hong Kong business is doing okay, and better than in previous quarters.
And the debt.
Affectively, the international women's particularly of the mainland China business.
Which continues to be significantly impacted because of the closure of the border.
Yeah, we don't expect that border to reopen until Q4 at the earliest.
So I wouldn't describe this quarter as of normalized quarter for insurance I would describe it as normalized probably for the Hong Kong business.
And continuing debris abnormally lives for the.
For the China business.
And just Tony.
Alright, great quick follow up if youre, saying the kidney is basically been delayed and thats the offset because you do expect the PNA coming back in 2022.
Hi.
The.
Of that slightly at that point.
Look I mean, I think I would describe it as the sort of margin for error in 'twenty 2 has tightened.
Because of that.
Yeah pay pressure that we're seeing.
Relative to what we previously thought youre right that is.
Covid related sale.
The savings should get back the 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, with.
Rajiv.
The travel budget. If you looked in 2019, we were spending about $400 million of year.
We have taken that down to the right run rate of $200 million of 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, you know of getting out of 40% of our.
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 the size.
The numbers were already embedded into our full year 2018 cost target.
<unk>.
The other thing just again just for all of you our cost targets.
Based on constant FX sorry.
What was 31 billion today is about 31 in the half billion dollars 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.
Thanks for taking the questions just a couple of follow.
A follow up for the first 1 was on margin.
The mix has been go lease it for them given the strength in the Kid just wanted to.
When you think about your line breaks from the ones from the hops the quarterly underlying duration of sort of being consistent the expectations going forward within that we should be assuming they still going be tilted more towards secured debt.
We can then obviously keeping all of the latest and other factors come to touch on the amendment just helpful to think about how much of that loan growth of just the flow through into NII growth.
And then just going back to distributions in time.
The 15.6 now all the great growth from the second half it looks like the guidance about 10 to 20 billion from 30.
The basic once the types of drag given the core should be much lower in the second half unnecessarily supplies with the upsides.
Sales like capsule of shouldn't leave an awful lot from the second half even pro forma for the the accrual.
Any thoughts for the collect from the start maybe with 100.150 basis points of headwinds for the target coming into the year.
Can we take your comments around buybacks during the fiscal.
And so the next 6 months dependent on bolt ons, it's about the thank you.
If I could just quickly take the new business comment.
We're not we're not expecting a significant change of 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 weights and not the <unk>.
Portfolio mix.
As you know we tend to be more of a secured books that are unsecured book, we do have a credit card business, we do have unsecured lending.
In our wealth business, we have the strong mortgage book.
And in all of commercial banking in the 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 the.
I think the I'm not kind of sort of a comment on your math in terms of.
Yeah, where our core tier 1 ratio of maybe at the end of the year, but I think we would be slightly more cautious of the need 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.
Growth in the second half of the year.
But overall in terms of the the main comment in relation to buybacks is I mean, if you recall at the full year results back in February I say definitely no buybacks. This year, we saw from that language slightly at Q1.
We're softening it again now.
And we will definitely keep it under review and we're not we are no longer calling out the the yeah.
There's an absolute ban on buybacks this year.
So I will keep it under review.
Okay. Thank you.
Thank you we will now take all of last question on the it comes from the line of Manus Costello from I'm told on the please go ahead. Your line is open.
Good morning, everyone I wanted to just follow up from the comments on insurance.
You would total let the offshore so coming back hopefully from Q4 onwards, I mean previously offshore insurance sales in the <unk> coal made up about 40% of total sales for that.
Do you think we can get back to that kind of level quite quickly once the border the endy.
Do you think the most you can be of catch up with the lost business from the last couple of EBITDA is coming true setting you up for a very strong 2022, if the board of reopen.
And secondly.
And some of it related I wonder if you could give us any indication of how you think for 17 will impact the business. So if you kind of indicate.
For the impacts of the business can you tell us when you will give us some indication of the affiliate in price.
<unk>.
I think on the insurance.
I mean, it's very hard to particular life after COVID-19 relative to life before COVID-19 because there were so many things that were changing but we would expect to rebound, but also you got to be cognizant of the fact, we're investing in the greater Bay area. We're investing in pinnacle, we're investing in our insurance capabilities and wealth management capabilities onshore.
So.
We believe we will be well positioned whether it comes back into Hong Kong or stays in Hong Kong, sorry stays in the greater Bay area will be will have the ability to serve both markets.
And then the.
Question on offer of 17 men of slow we're conscious of the fact that we I the market an answer on this and some guidance around this I think certainly in the next couple of quarters and I'd like to the full year results will.
Well, we'll give a teaching them what we think the impact of our for of 17 is but yeah broadly as you know.
Reported earnings will be lower materially lower than.
Current reported earnings.
For the insurance business.
Okay.
Thank you very much.
It would be sad if that is something to look forward to the minutes.
[laughter].
Okay.
Thank you I will now hand, the call back to know Cohen for closing remarks.
Thank you thanks, Sharon so to wrap up.
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.
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 of our ought to be way on cost reduction programs.
And confidence in delivering the road say, Idaho or above 10% over the medium term.
Thank you for joining today.
If you have any further questions.
To pick them up with Richard on the rest of the Investor Relations team.
Thank you and have a good summer.
Thanks, Phil.
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Okay.
Yes.
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