Q3 2021 HSBC Holdings PLC Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference call for HSBC Holdings Plc's earnings release for <unk> 2021 for your information This conference.
Is being recorded at this time I will hand, the call over to Phil Hurst, Mr. Noel Quinn group Chief Executive.
Thank you.
Good morning, or afternoon wherever you are you're always going to take the bulk of the call today.
I'll do that in the future Q1, and Q3 announcement.
So today, though let me start by saying that I'm really pleased with our third quarter performance.
We had a strong quarter with profit generation across all regions.
Bolstered by another quarter of net ACL relationships.
But most pleasing is the underlying revenue growth, we're now seeing across the business.
We feel that we're turning the corner on revenue.
Absorbing interest rate impacts over the last few quarters.
We've got strong fee growth in all businesses.
In global banking and Mark.
<unk> revenue is starting to stabilize.
And that's against the backdrop of a large managed reduction in risk weighted assets and lending balances as we indicated back in February 2020.
In terms of customer behavior.
We're seeing a strong deposit performance without any material drawdown on the liquidity that we built up over the last two years.
The lending market was softer than we anticipated in the quarter, particularly in corporate loans.
But the pipelines that we built up position us well for when company start investing.
And both the recovery.
The low carbon transition.
Our capital.
Total revenue starts to normalize sorry on capital as our revenue yourselves to normalize we would also look to normalize our capital position.
Capital returns to shareholders will be a big component of this and I am pleased to announce a share buyback of $2 billion.
Which we expect to start shortly.
On our strategy, we're executing with exactly the kind of pace I promised in February.
We made some important announcements in the quarter, including the acquisition of Axis cyclical.
This complements our existing Singapore business, very well and accelerates the build outs of our product and distribution capabilities.
And one of the world's most important wealth markets.
Pretty tough 2006, we've been working incredibly hard with clients governments and our industry peers on accelerating the low carbon transition.
We are walking with a range of partners to find new ways to overcome the sustainable finance market for projects and investors.
Four nights ago, we announced the pioneer in partnership with <unk>.
<unk> to debt finance.
<unk> platform for sustainable infrastructure in Southeast Asia.
Which I believe provides an important model for others to follow.
This is just one of a number of sustainability partnerships. So we hope to announce in the coming weeks.
And I look forward to updating you on those shortly.
In terms of the financial industry's contribution.
Force of international banks.
<unk> share of the recent months, just released that guy for banks.
And delivering next year Roe targets.
This is an unprecedented collaboration that makes an important contribution to help all banks operationalize the targets that you've set.
And importantly to bring consistency and coherence for our customers regulators and investors.
I'm really excited about the months ahead, Israel dynamism and optimism within the business.
We're focused on delivering growth in the areas, we talked about it.
With the added benefit of interest rate rises on the horizon, we're in a strong position moving into 2022.
With that I'll hand over to you to take you through the detail.
Thanks, Noel and good morning or afternoon all.
We had another good quarter reported pre tax profits of $5 $4 billion.
Up 76% on last year third quarter with an annualized return on tangible equity of nine 1% for the year to date.
Adjusted revenues were down 1% on last year's third quarter.
1%, excluding volatile items.
Welcome rotated into more consistent topline growth across most of our business lines.
Expected credit losses were $659 million net release.
Third quarter in a row of net releases with net releases for the year to date of some $1 $4 billion we.
We still retain 31% of stage, one and two ECL regime is no doubt we made in 2020.
Okay.
Operating expenses were broadly stable increases in investment in technology spend were offset by the impact of our cost saving initiatives.
But due to some inflationary pressures ongoing investment into great and additional cost due to the impact and timing of recently announced.
M&A activity, we now expect our adjusted cost for 2021, and 2022 to remain broadly stable at around $32 billion, excluding the UK Bank Levy.
Lending balances were down by $6 billion of 1%. This was due to the repayment of $14 billion of short term ipi lending in Hong Kong.
Stripping out the impact of the IPA lines lending growing by $8 billion over 3% annualized during the quarter.
He is a good growth in mortgage lending and trade finance.
Core tier one ratio was up 30 basis points at 15, 9%.
Primarily due to a reduction in risk weighted assets.
We now intend to reach our targets for core tier one of 14% to 14% by the end of 2022.
This will reflect the combination a combination of some regulatory driven.
W I impacts balance sheet growth and capital return.
So that is $2 billion buyback announcement as part of this commitment to accelerate the normalization of our core tier one position.
Our tangible net asset value per share of $7 81 was unchanged from the second quarter.
Turning to slide four we are seeing good signs of growth for attaining across all global businesses and wealth and personal banking, we've continued to grow net new money in private banking and asset management.
We've increased the value of new business and insurance by 59% year on year.
We've hired 450, new wealth planners and pinnacle knee Johnny's insurance franchise.
We kept the UK market share comfortably above our stock share.
And we've made good progress on new customer acquisition.
In commercial banking, we are seeing encouraging trends in global trade.
With good market share growth in key markets, such as Hong Kong and Singapore.
And we've maintained a strong business pipeline with $64 billion of new approved limits.
In global banking and markets, we saw a more stable revenue compared to a strong performance in the third quarter last year with.
With good revenue growth and by security services and equities.
At GBM.
Performance was achieved despite a 7% reduction in risk weighted assets year on year.
Looking geographically in Asia, we're seeing strong underlying revenue trends.
Excluding insurance market impacts revenues were up 7% quarter on quarter and 5% year on year.
And in the U K ring fenced bank revenues were up 2% quarter on quarter, and 6% year on year with fee income up 25% over the third quarter last year.
Finally, and importantly, we're delivering on our goal to be a leader in the transition to net zero.
We have the issue of $170 billion of Green bonds junior to date, including leaning on leading on a number of pioneering green bond offerings, such as the first UK Green guilt.
And we're making good progress against the commitments, we made in our AGM special resolution in May.
Turning to slide five and looking at third quarter adjusted revenues as a whole.
And wealth and personal banking headline revenues were down 3% on a year ago.
That excluding market in insurance market impacts wealth management revenues grew by $145 million was 7%.
This was mainly due to higher fee income and asset management and private banking together with insurance sales Brian.
Personal banking revenues fell by $31 million due to the continuing impact of low interest rates on deposit margins.
Commercial banking revenues were 4% higher driven by higher fee income across our products and growth in trade lending and deposit balances.
In global banking and markets revenues were down 3%. This Ms jee slower customer activity in fixed income markets.
Our strong third quarter last year.
However, equities benefited from both higher client activity and volatility in Asia and security services grew through higher fee income and assets under custody.
Slide six shows the revenue trend quarter on quarter with growth in all three global businesses, excluding insurance market impacts.
This is being driven by a combination of more stable net interest income.
Together with good fee income growth across all our businesses up 10% year on year.
We're increasingly confident that we are turning the corner on revenue growth.
Commercial banking is Glenn welcome.
Welcome personal banking is growing in wealth management and stabilizing in retail banking and global banking and markets as close to that inflection point now the bulk of its planned reductions in the business are now complete.
With the expectation of policy rates from 2022 onwards, we're now confident in seeing sustained revenue growth this coming year and beyond which together with strong cost control will help drive a sustained improvement in core returns.
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Okay.
On slide seven net interest income was $6 6 billion.
Up 2% against the third quarter of 2020 on a reported basis.
And broadly stable compared with the second quarter of 2021.
On the rights the net interest margin was 119 basis points.
Down one basis point on the second quarter, primarily reflecting changes in balance sheet mix and continued weakness in <unk>.
Lending volumes were down on the quarter, but excluding the repayment of Ipi lines lending grew by $8 billion.
With continued good volume growth in mortgages in Hong Kong and the U K together with the ongoing growth in our global trade franchise.
But 2020 today.
With our net interest margin stabilizing policy rate rises on the horizon and loan growth building, we're increasingly confident on the outlook for net interest income.
On the next slide we reported a net release of $659 million of <unk> in the quarter compared with an $823 million charge in the third quarter of 2020.
The net release was across all our global businesses, reflecting a more stable economic outlook.
<unk> with stage III Chargers that remained very low.
Despite the net releases, we continue to retain a conservative outlook on risk, we still hold $1 3 billion or.
Or 31% of our 2029.
<unk> 19 uplift the stage, one and two ECL reserves for.
For the full year, we now expect net releases to be broadly in line with the net release in the first nine months with perhaps a very modest net release in the fourth quarter after phase III judges.
For 2000 2010, we continue to expect the ECL charge for the full year to be lower than our medium term.
Through the cycle planning range of 30 to 40 basis points with more modest ECL releases expected to continue into the first half of 2022.
Be it with an expected net charge off the stage three impairments.
Turning to slide nine third quarter adjusted operating costs were broadly stable on the same period of last year.
A $263 million increase in technology spending and a $340 million increase in investments and other costs were offset by further $600 million.
Cost program savings compared with the prior year with an associated cost to achieve a $400 million.
To date, our cost programs have achieved savings of $2 $6 billion relative to one and 2022 target of at least $5 billion in cost savings.
And cumulative cost to achieve spend to date has been $3 1 billion with an intention to still spend $7 billion through the end of 2022.
In terms of outlook with some inflationary and performance related pay pressures.
Bearing investments spend and additional cost due to the impact and timing of recently announced acquisitions and disposals. We now expect 2021 and 2022 adjusted costs, excluding the U K bank levy to be around $32 billion.
This is relative to our previous FX adjusted guidance of $31 $3 billion for 2022.
Which included the bank lately.
Turning to capital on Slide 10, our core tier one ratio was 15, 9% up 30 basis points in the quarter. This reflected a decrease in risk weighted assets from lower short term lending.
Favorable asset quality movements and their effects.
Partially offset by a decrease in CET, one including around $1 $7 billion for foreseeable dividends.
Excluding FX movements risk weighted assets fell by $14 4 billion in the third quarter.
Driven by lower short term guideline of exposures in Hong Kong and positive movements in asset quality.
In the third quarter, we made a regulatory deduction of 20 basis points for foreseeable dividends in the quarter. This was based on 47, 5% of our third quarter EPS of <unk> 18 cents.
Which is the midpoint of our 40% to 55% target payout ratio.
The dividend accrual for 2021, so far is $3 $8 billion.
After payment of the seven cents per share interim dividend.
Please remember that this is not guidance of our full year 2021 dividend intentions that Devin.
That accrual is purely a formulaic calculation that will true up the full year based upon the results and outlook at the time.
When thinking about the payout ratio for 2021 will attach a much lower white to unusually low ratios.
<unk>.
This year to.
Together with a desire to see higher dividends per share in 2022 relative to 2021.
We intend to normalize our core tier one ratio over the coming quarters to be back within 14 to 14, 5% target range by the end of 2020 T driven.
Driven by a combination of balance sheet growth.
Capital returns and regulatory impacts.
Various things Tonight for your capital modeling through the end of 2022.
We expect today's buyback announcement.
The loss on sale of our French retail banking operations.
And the reversal of the current software capitalization benefit to each impact on core tier one ratio by around 25 basis points and.
And we also expect some $20 billion to $35 billion of regulatory <unk>.
<unk> uploads in 2022.
So in summary.
This was another good quarter good earnings diversity across the group.
Broad based return to topline growth in most of our businesses and.
And continued strong control on costs.
While the results were flattered by net Tcl releases, we're happy to be turning the corner on revenue.
With robust lending platforms.
Growth in trade and mortgage balances and the likelihood of daily a pipeline rate rises than previously anticipated we're increasingly confident on the revenue growth outlook for 2022.
We've included a few are for our 17 slides in the appendix we tend to guide three this in more detail on our follow up call on wooden stay with sell side analysts all deferral, we expect an initial downside adjustment to our insurance profits of around <unk>.
And a smaller percentage adjustment to insurance to reinsurance as tangible equity.
Importantly, there will be no significant impact on the group's regulatory capital.
And there will be no impact on the dividend flows from our insurance businesses to the group.
Despite inflationary cost pressures and the impact of higher for <unk> 17 implementation.
We remain confident in achieving returns at or above our cost of capital over the next three years together with delivering attractive growth on attractive capital returns.
Finally, we're looking to normalize our quarterly run rate share over the coming quarters of which today's buyback announcement is an important first step.
With that Sharon if we could please open up for questions.
Thank you Mr Stevenson.
Like to ask a question today. Please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off if you find your question has been answered you may remove yourself from the queue by pressing star and <unk>. Once again to ask a question. Please press star one please ensure that the mute function on your telephone is switched off.
Your first question today comes from the line of Andrew Coombs from Citi. Please go ahead. Your line is open.
Andy.
Good morning, Thanks for taking my questions.
Let's start with one on the buybacks and then one on costs. So when you quantified.
<unk> 2 billion plus.
Buyback can you just give us the metrics that youre using to size that how are you thinking about the buyback, but I'd say buybacks going forward.
And basically the Kpis in your decision, making process on the magnitude of days.
So that would be the first question.
Second question is on the cost outlook.
So like you changed your guidance, let's say the destination Youre using.
I think that <unk> got that.
One.
And then adjusting the mix slightly he cannot be cost guidance by about $800 million.
So can you just give a breakdown of what the moving parts are in the increase how much of it keeps the timing around the M&A and divestments that is how much is inflationary pressures and how much is higher.
Compensation related to performance related pay.
Yeah. So.
Buybacks, Andy as you would expect it's part art part science.
Yeah, we our capital position is obviously in a much better place than we had anticipated.
At the start of the year when we had said no buybacks for this year.
We've had a combination of much higher profitability than we expected because of.
Lola much Laura <unk> net releases and.
Slower cost to achieve being expense through the P&L.
And risk weighted assets have also been longer than we anticipated, partly because a lot of growth, but also because of lower credit rating migration.
Yeah.
I think yeah within today's announcement is a commitment to get back to 14 to 14, 5%.
The end of 2022.
Yes.
We are committed to.
Using excess capital, if we can find attractive organic and inorganic growth opportunities.
Yeah, we've previously talked on inorganic about wanting to spend up to $2 billion.
And M&A, we've announced the deal in Singapore access Singapore for just over $500 million. So.
That will give you some color if the extent of M&A activity that you might see over the next year or so.
I do think that yes.
We are likely to see if we achieve what we think we'll achieve next year.
Really the buyback activity in 'twenty two.
On costs.
Yes, I think your numbers are broadly right, if you add about $300 million.
MNI.
Yeah in terms of the sort of roughly half a billion dollars and upwards.
Fuel cost.
Yes, the bulk the bulk of that is compensation related.
And you're right part of it is variable pay but I would sort of put it all in the bucket of compensation cost being higher.
Yes broadly.
Our total wage bill lines about $19 billion out of the $32 billion of total costs.
Yeah, So if you've got half a billion dollars of incremental.
Inflation on that is about to there's about half a billion.
Two 5%, it's about half a billion dollars of extra compensation cost yes.
Yes, whether you put it into fixed pie or variable pie.
I think we are seeing a sustained way.
Price pressure globally at the moment.
But in terms of the incremental amount that we've put into the variable pay April of this year.
Yeah significantly more than offset by the increase in profitability that we see.
I think if I could just add a comment to the extent that we've talked to various and say hello.
Because we've had a good trading performance this year.
Really we've given.
Some indications around trading proposals next year.
Close to.
And it would be right.
An appropriate level of variable.
And time.
Does that trading performance next year does not materialize then we have some flexibility.
Very good.
So its right to also signal that there is some fixed pay.
Inflation pressures in the market generally.
Services at this point.
So the extra the extra itself of course is a combination of fixed and variable pay.
As a consequence of the external environment and the trading performance of the bank.
Yeah, I think the last thing I'll say that's important is we've made a very conscious decision not to cut back on investment.
Despite that inflationary pressure in order to meet.
So from post cost target.
That's great. Thank you bet and we say thank you.
The slides are north of <unk>.
Thank you.
Thank you. Your next question comes from the line of Tom Rayner from Numis. Please go ahead. Your line is open hi, Tom.
Yeah. Thank you Hi, Hi, I don't know.
Two please just a quick follow up on costs and then one on revenue.
You mentioned you spent 300 of the increased guidance is M&A related is can you give us some sort of estimate of how much that M&A activity might add to the revenue over the next two to three years.
And then just on revenue.
Clearly more positive.
The revenue outlook you flagged the number that.
You didn't really comment I don't think on the outlook for the net interest margin.
I looked at your consensus and it only has an increase from Q3 lights out to the end of 2020, you save about seven basis points.
If I just take your loading rate sensitivity and sort of multiply it by what's in the <unk>.
Being discounted by the market they don't see be a multiple of seven basis points I Wonder if you could comment on the outlook for NIM specifically please thank you.
Thanks.
So on costs.
I think Axa, Singapore will add about 300 to revenues and 300 the cost of it.
We would expect that picture to move over time.
But if you pull back on $300 million into 'twenty.
Into 'twenty two.
On the revenue side on.
And then.
But David Ross.
Sure.
If you looked at current consensus.
Yeah. It does look like relative to the consensus policy rate rises that we now see in the markets.
Yes, just as a reminder, our biggest single.
Sensitivity is the U K.
And a 25 basis point rise would add about half a billion dollars of income in the first year.
And secondly, Hong Kong and it does look like in the U K, we will see yeah T. Three rate rises between now and the end of 'twenty two.
Coming potentially as early as the next month or so.
Hong Kong, maybe a bit smaller.
Yeah, one of the one of the offsets to clear off say, it's to the guidance, we're giving on cost today is the fact that we do think we're going to see daily.
Bel Air and stronger <unk> than we had previously anticipated.
Yeah, we lost about $7 billion designs of the last year two years or so as a result of the shift down on interest rates.
So it was had a very very material impact on us.
And we do think with the policy rate outlook of alignment and then consensus that we should start to claw back a meaningful amount of that in the next two to three years.
Okay. Thank you very much.
Thank you.
Next question comes from the line of Ross from Jpmorgan. Please go ahead. Your line is open.
Thank you good morning.
No.
A couple of questions from my side, maybe firstly, just staying on the revenue line.
I just wanted to understand the pandemic impact does to wall Street to REO various businesses.
Holding back the revenue line. So I was wondering if you could comment on the rail.
Business in Hong Kong.
In light of all the travel restrictions how you think.
This quarter has been held back and how that might shift over the next year or so.
Also any trade, obviously, you flagged a very strong improvement.
So there's a lot of uncertainty around truly what's happening with trade so any thoughts on the outlook that would be helpful.
And then just a broader second question.
On China real estate.
Hum.
Thank you for the disclosure I think we all get sort of.
Your first order impacts.
Exposures are relatively limited, but I was wondering what you think about the second order impacts on your business in the mainland just given default have spread beyond sort of single name into quite a few developers now so how do you see that impacting the rest of your book.
The rest of your business.
Yes, some of it might be.
I'll start off and then now you can.
Add some comments then on tried on commercial real estate after I finish.
Look on the Hong Kong when the border being shopped. The I mean, you can see some direct impacts on things like.
Insurance franchise.
We're not as exposed obviously to.
Others, like Peru, and I hate to the mainland Chinese insurance market, but it is a.
Meaningful kicker to the performance of our insurance franchise in Hong Kong.
Having said that I think.
Value of new business in Q3 was in line with Q3 pre pandemic.
Yeah, you can see certain sectors in Hong Kong continuing to suffer.
Uh huh.
Yes, the biggest board.
As the Hong Kong mainland, China border, rather than the international water for Hong Kong.
Given the pre pandemic about $50 million mainland Chinese.
We're visiting Hong Kong in any given year.
So we would expect is that border progressively reopens.
And it's been much slower than we would've anticipated six or nine months ago.
We will just see an incremental benefit coming through to the Hong Kong business.
Yeah on trade.
Despite supply chain disruptions I think.
Yeah, we're pretty pleased with the recovery that we're seeing in that business.
Yes people are holding higher working capital balances at the moment.
Consistent with the uncertainty that exists in supply chains, but yes.
We do need that as a temporary nature.
Global economy at the moment and that we will get back to more normality and more sustained growth in 'twenty two.
Yeah on the China real estate market I mean, we've just been through as you would expect a pretty Ah.
Intensive review of our.
Chinese real estate exposure, including the provisioning would run against it.
Just to repeat what we say today, we've got no direct exposure to.
Regulus borrowers, we're pretty comfortable with the exposure either all in.
In aggregate.
Real estate commercial real estate in China was less than two.
$20 billion.
In the context of a trillion dollar line portfolio.
And I think the yellow thing you should read in rural is the fact that we're doing a buyback today and the size that we're doing it is that we're reasonably confident about where we're sitting in terms of our outlook.
No no not whether you want to add anything on that.
[noise] just ironically.
Trade.
Feature tomorrow.
Global economics.
All he is normally the time when trade finance.
Because of uncertainty.
The supply chain.
<unk>.
Credit environment, So we've seen strong growth in trade policies.
A lot of that is a function of economic rebound.
Part of that I think is a function of working capital cycles, while along with today than they were pre pre COVID-19 and pre pandemic because of the sanctions in the supply chain.
On the bottlenecks.
Part of that is people tend to use documentary credit more in uncertain times and open okay.
Before I turn more to the financial services sector to finance trade in a structured manner rather than financing trade in an unstructured.
Hoping to kind of methodology.
So I think there's.
Theres a number of reasons and then the fourth the fourth ingredient is frankly, we all take your market share in trade in in Asia in particular, particularly in Hong Kong, Singapore, So those four dynamics sustain could lead into.
Very strong double digit growth in trade I think if you look at our trade balances from the end of last year to the end of September.
Around about 18 27, if you do a year on year comparison.
So I think we may be mid 20% growth in trade.
Particularly in Asia. So.
It's those four factors are they could play into the trade with Hulu.
On China or the only other comment at Macy's.
There is second order risks skin whenever theres a market adjustment of the size taking place in a particular industry sector, particularly one of those important commercial real estate I think we're pretty comfortable with our position.
We're staying very close to any potential second order risks.
Uh huh.
Reinforce what you said, we feel comfortable with our positioning.
Bank in China is performing well and set a good nine months.
No.
We are well positioned on commercial real estate from a primary respond to view.
We think we are well positioned on any second order risks.
I'd be foolish, if I said that will slow second order risks.
Essentially exist for all of us.
Thank you can I just follow up on the trade margin I don't know if you've seen that sort of shift in the trade margin within the business and if you expect that to shift going forward given what we're seeing in terms of the global trade picture.
Im not aware of any material shift in the larger it's more of a volume game at the moment for you and is that your understanding.
Yeah look I, if anything I think its just ticked up by a few basis points, but nothing material.
Thanks very much.
Thank you.
Your next question comes from the line of Melissa Costello from Autonomous. Please go ahead. Your line is open.
Hi, Matt.
Hi, I just wanted to follow up actually on those questions about that.
Hopefully post pandemic reopening you gave us some data in the second quarter about credit card balance is growing but I haven't seen it so far this quarter I Wonder if you could talk to us about what youre seeing in unsecured.
And you mentioned within the NIM, there was a negative mix shift, which hurt the NIM at what point will that mix shift change so as unsecured consumer starts to grow presumably you'd start to see a positive benefit.
Color you can provide around that would be appreciated. Thank you.
Yeah.
Yeah, well I mean, firstly on NIM.
Things were going on I think to sort of push it down five basis points in the quarter. Firstly was high vol. A drifted down by couple of basis points a quarter.
Do hype, we're now at the trough with that.
And there is a mix shift with bi.
The higher propensity of mortgage yeah.
Spread mortgage lending.
And the.
The fact that we're continuing to increase our liquidity reserves at the moment.
Yeah, the unsecured was probably up.
About 1 billion underlying.
In the quarter Oh.
Across Hong Kong, and the U K and about half and half across the three markets.
What we are saying is credit card spending come back up.
Twice at the pre pandemic levels, but what we're not seeing yet the balances.
Go up in line with that I think that will have.
Yes, it should happen over time, but at the moment, whether it's <unk>.
Commercial customers all personal customers and we're seeing the same thing in UK mortgages. For example people are paying down debt when they can.
And I think that's just a sign of confidence at the moment, but we would expect to continue to improve as is as we continue to move away from.
The depths of KBR.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Jeff <unk> from Citigroup. Please go ahead. Your line is open.
Hi, Thank you I have a question along with revenue you gave color that allowed.
How does the update again is coming from.
The higher expected interest rates some of your markets. Besides that interest rate shifts are there any.
Organic growth sector HSBC is gaining market share that you think that where we are.
Telesat is missing that particular, either more consensus revenue from non interest income. Thank you.
Yes.
It's clear that we're not reliant on interest rate rises.
<unk>.
Underpinning the business plan that we've got the.
Yeah, we're seeing with NIM stabilizing, yes, we're probably going to see about 3% loan growth. This year, we would expect mid single digit loan growth next year.
So you would expect a healthy increase in net interest income next year with or without rate rises.
We're seeing very good growth in fee income as we come out of kind of it I think.
Up 10% year on year.
So the core business at the moment is seeing very good.
Attractive growth.
Interest rate rises will just come on top of that.
And then in terms of where we're growing.
Okay, and now said earlier, we're taking share in trade, we're off a couple of percentage points of share.
The last year, both in Hong Kong, and Singapore, We're continuing degree UK mortgage share about stock share I think we were sort of about 1% ahead of <unk>.
<unk> share in the quarter.
Yeah, we're growing.
The private bank I think ahead of peers, particularly credit Suisse.
Asia at the moment.
So yeah most of our businesses I think are flat to gaining share.
Thank you.
Yeah.
Thank you. Your next question comes from the line of Guy <unk> from Exxon BNP. Please go ahead. Your line is open.
Yes, good morning, thanks for taking the questions.
The first one was back on cost and then one on out of the way so on costs and you and you briefly alluded to before the previous question. The link with the interest rate outlook I mean, how much is the new guidance intertwined with market inflation and interest rate expectations, let's put it another way if policy right.
Yeah.
In line with market expectations should we expect you to come in lower than that guidance.
And then the second question on <unk>.
Because as nearly 70 billion in Hawaii by the end of next year than where we sit today I. Appreciate there's some regulatory headwinds on the horizon that you flagged in you've now delivered the majority of the Grace <unk> Auto Gage says you've got it to you by the end of next year, but the market auto your expectations because I understood next year look a little too conservative given the starting point of what you're seeing currently.
I was just lack of credit migration.
Yeah.
On the cost side.
Yeah, but they are connected but not a direct line between the inflationary pressure that we're seeing.
Coming through the cost structure and the fact that we expect to see earlier policy rate rises.
Yeah, just to give everyone assurance, we are actively managing our cost base in line with what we previously thought we're still committed to taking out <unk>.
$5 billion of costs over the period to the end of 2022, and we've done just over half of that so far.
But on a $19 billion Whitesville, if if you see at.
Each percentage point is another $190 million of cost.
Yeah relative to where we were at the start of the year.
Definitely seeing more inflation.
I'll say it for that should be policy rate rises coming earlier and stronger.
And if they do that we'll comfortably all sand.
The inflationary pressure, we're seeing on calls.
Bob.
We are now.
We are not going soft on cost just because we think that there is a potential of white realizes that that's not how we're operating the business.
<unk>.
Yeah, I mean, I think we've given you pretty much all of the.
Inputs to the model.
I guess, what where more.
Comfort and on the.
<unk> growth outlook for net lending growth outlook for next year. Then I think is currently in consensus and we've got it to mid single digit loan growth.
Yeah. The other thing that yeah, we've given you the impact on regulatory capital.
Yeah, you can plug in your own numbers in terms of we've given you our distribution policy on dividends. So are there any things that you don't have as.
Yes, well the profitability is going to be next year, yeah buybacks, we're going to do and even on inorganic we've tried to give you a sneer as to.
What's the total quantum of financial Inorganically, we might do as well.
Okay. Thank you.
Thank you. Your next question comes from the line of Amy Machina from Credit Suisse. Please go ahead. Your line is open.
Good morning, Thank you very much for taking the questions.
A few questions on rate sensitivity. Please.
I was hoping you could give some color around that.
Is it because in your rate sensitivity disclosure.
Especially for the U K.
Hong Kong.
Given one of your peers.
Reassessed.
UK rate sensitivity based on the.
So a more realistic assumption.
Deposit beta is unlikely to be.
And any color that you can give on the proportion of deposits are contractually linked to.
Market rates in both those markets would be very helpful.
And the second part of my question on rate sensitivity.
Is the other currencies figure.
A $1 5 billion.
Could you, perhaps just elaborate a little bit more about what the key sensitivities in terms of different currencies.
Because it's all about the speaker's fee Hong Kong sensitivity. Thank you.
Yeah. So look on rate sensitivity I think you should have seen for the first one or two interest rate rises there'll be a relatively lightly.
Deposit feature on that and that we will try to capture.
Yes at a higher than average.
Capture out of those Frank rises.
I think over the longer term.
We work on the basis of about a 40% to 50% deposit beta but in the very very short term with the first rate rise I think of the way.
So other than that.
Yeah in terms of other currencies are India Indian rupee remotely.
Various emerging market currencies in which Mexico is important.
I'm sure if you follow up with.
The IR team and I can give you a breakdown of that.
That's wonderful things and can I just check the published sensitivity is that based on 50%.
Yeah, well it differs by product by market high but roughly yes.
Okay. Thank you very much.
Thank you. Your next question comes from the line of amount of a car from Barclays. Please go ahead. Your line is open.
Good morning.
Just most of my questions have been off, especially but a couple of points.
Clarification. So thanks very much for the Oi for 2017 disclosure on the insurance business.
In terms of the two thirds PBT impact the you kind of expect in 2023, I mean, I guess that insurance.
Profit that we would be making that adjustment too.
Are we talking.
Is it around kind of what.
$5 billion hit that.
But we should be looking for kind of reported PBT in 'twenty three.
Any clarification, there would be really helpful.
And then just a second on the cost to achieve I know youre sticking with the guidance.
$7 billion, but it doesn't imply that she then you're going to you're going to do a lot next year.
I mean could you help us understand exactly why you've not been able to spend it so far and kind of what you are going to be doing that here with that.
Yes.
Okay.
So PBT impacts well.
Yeah, one $5 billion. It obviously depends what your forecast is but if that's two thirds of the insurance profits in that year then yes.
It's probably not wildly out of line with what we think.
But just again just to repeat.
Hi for 17.
Yeah, there's no impact on dividend fly from the insurance companies to the group there is no impact on core tier one for.
The timing of earnings recognition has changed so far.
The main fill economics, we don't think has changed.
The other thing that.
On tangible equity just.
Because I know a few people playing around with the numbers today.
There'll be about a $3 billion plus or minus <unk>.
Impact to tangible equity as there was a shift.
And head count.
He then will be negative, but that's minimal and it.
Its still tied in with a commit.
Commitment to get back to cost of capital returns.
C. G. A I think we'll think we'll probably spend about another $1 billion or 74.
With lasers about $3 billion of aside just spend in 'twenty two.
Yeah, we did have a slower delivery this year.
A big part of that was a lot of our change programs are being run in India.
And then you obviously had a pretty severe impact.
As a result of the pandemic, which meant that our hiring plans, particularly technology resources that we intend to bring on board.
<unk> had been slower so there's been about a three plus months delay to some major programs of work.
And it's one of the reasons why as a result of that.
We expect cost to tick up in Q4, because we've got this ramp up in investment coming.
Into Q4.
That's great. Thank you.
Thank you. Your next question comes from the line of Bob Naval from Deutsche Bank. Please go ahead. Your line is open.
Good morning.
Excuse me could you talk us through how interest rates are actually hedged in the various markets.
Hey.
Hong Kong and U S.
And then so we'll actually see what sort of licensing do you actually medium short rates to go up and all of those countries, where you benefit from higher rates in the market and some others.
And then secondly, just on the U K, what did you see or from mortgage margins.
I mean comparisons where they were where they all are on the back book.
Do you think.
Recent swaps the increase in swaps are they pushing rates up in the market in the U K now.
Thank you.
So on the hedging program Hong Hong Kong is very short dated.
Everything reprice is typically one to three months.
The U K there was a five year rolling hedge that we have in place consistent with most unique ideas I think yeah, which an average duration of about two and a half years.
The U S is slightly longer than five years, albeit I think that will change once we divest ourselves out of the retail banking business.
And it's not as material, obviously as Hong Kong and U K.
Yeah. If you look at the structure of our assets and liabilities they tend to be much more short dated than the average peer.
Which is a combination of the impact of the short dated nature of Hong Kong, but also in the commercial space.
Trade businesses relatively short dated as well.
So the second question was fortunate.
The second question.
Right.
Some good mortgage margins versus back book, and whether you think swap spreads will.
We're closing Chris Ross.
<unk> are probably slightly below the back book margins currently for the first time in quite a while.
Yeah, we have seen some margin pressure.
Going through the UK mortgage franchise.
We do still think that parent rights that we're riding business comfortably above the cost of capital.
But that has been some margin contraction.
Great. Thanks very much.
Thank you. Your next question comes from the line of Ed Firth from K B to B. Please go ahead. Your line is open.
Yes.
Yes, good morning, everybody I'm, sorry, do go on about this interest rate sensitivity, but I guess he is quite quite crucial in terms of the outlook, but the debate I didn't really understand is when I look at the currencies. If I look at your year one sensitivity.
Youll Sterling sensitivity is materially higher than your Hong Kong sensitivity.
And yet you'll sterling is the bit that's hedged.
Hong Kong and yet the total balances in Hong called up.
Well orders of magnitude similar but I guess, you if anything slightly higher in Hong Kong than they are in Sterling said I think it.
Is it possible to help us a little bit why you have this huge sensitivity in sterling and perhaps not so much in places like Hong Kong, what you're short dated.
Yeah, So look I mean, firstly in Hong Kong remember that.
Finally around 50% of our deposit balances are Hong Kong dollars Si.
Yeah. There there is an impact of the particularly U S dollar broker in Hong Kong I think in that interest rate sensitivity.
Which with the U S dollars about 40% or 80% of the 50%.
Now Hong Kong dollars.
Uh huh.
Right.
Yeah Yeah.
I'll need to get you a detailed answer out of.
Yeah.
Out of <unk>.
So you know if you give him a call, but I assume your interest rate sensitivity analysis is correct.
Yeah, No I just think it's about the assumptions its just.
The thing we're struggling with that in all area just trying to make sure that you know.
People can put any assumptions they like whether it's actually going to happen I guess is the key.
Christian.
Yeah, that's fair, but I mean, yeah, we do take.
Take time to show you that interest rate sensitivity and yeah that is supposed to be helpful guidance.
Okay No that's great. Thanks, so much I'll speak to later.
Thank you. Your next question comes from the line of Martin like get from Goldman Sachs.
Please go ahead your line is open.
Yes. Good morning, just a very quick quick follow up on structural hedging one one of your peers has announced its intention to deploy structural hedging a little bit more just changing I guess.
Some of the assumption on the stickiness of certain deposits is that scope just based on your comments that Hong Kong is very short they did 40% of Hong Kong deposits on U S. Dollar would there be scoped or we get some of those deposits on page <unk>.
You may be similar to the U K that deposits that would kind of behavioral maturity of Ics and well.
Could this be a source for additional income going forward and secondly on <unk>.
Capital.
I mean first of all thank you for the 14 to 14.5 guidance now for FY 'twenty two.
Just in terms of thinking about the core tier one trajectory and at the end of scope for Cabo to be doing for HSBC going forward over the medium term should we used is 14 and $14 five for the kind of a range going forward with waste to scope for capital go ahead Steven Lo.
I'm just trying to get if there's still capital efficiencies within the group will be impacting this 14 to $14 five range. Thank you.
Yeah.
In terms of our Hong Kong and Yeah, I mean part of the problem Martin as you know it's a very.
Sure David book, both on the asset and liability side, so that the choices that we have always made as an author on currency risk.
To extend duration that theres probably.
Yeah, I know you have hundreds of millions of opportunity in the next.
He is three.
Improved management of our liquidity book, we've recently hired a few months ago. The group treasurer out of UBS to kind of run out of Treasury business and.
So I think yeah over the next two to three years, we've probably got a few hundred million dollars of upside in terms of highway managing our global liquidity pool.
Hum.
On capital I would use the full 14 and a half.
The next few years I think.
Our aspiration is C ran a towards yeah, sorry end of that range. If we can.
Yeah as you think further out there's obviously the impact of our portfolios.
And what that does and depending on where they are applied and the impact on capital positions of subsidiaries etcetera, We're gonna have to pay attention to.
To get a lot is 14%.
Yeah, I think we've got a big program of where to step up our capabilities in stress testing I think a peak to trough fall and stress is still too high.
But yeah that will be a multi year program of where C and pretty stress testing and then go after the sort of higher risk.
Areas of the bank, where we're not getting remunerated appropriately.
For the purposes of the foreseeable future.
I assume that 40% to 40 in the half Cassandras way, we're managing to and if we can we will manage through the low end of that range.
Perfect. Thank you. Thank you very much.
Thank you we will now take our final question from the line of Joseph Dickerson from Jefferies. Please go ahead. Your line is open.
Hi, Good morning, Thanks for taking my question just on the cost versus benefit from rising rates.
And I guess, you've made the point that you havent lightened up on investment spend.
Can we just should we therefore assume that the.
90% or so of the rate sensitivity of whatever we might assume falls through to the bottom line.
What sort of quantum should we should we think about falls through to the bottom line.
Oh Wow.
I think the bulk of it.
Thankfully I mean, it depends what.
Inflationary pressure you put on a $19 billion whitesville.
$52 billion titled cost base, but.
Yeah, if relative to the previous guidance of flat cost if you got 1% to 2% inflation on that yeah, that's $3 million to $600 million of incremental costs, which.
I think more than gets offset by.
The interest rate rises I mean, what we saw over the last year.
Yeah, the bulk of that we lost and we werent able to offset with incremental cost savings side. I think we will keep we will keep cost control tight even if we see the benefit of <unk> coming through.
Thanks, very much very helpful revenue.
Yeah, and just photography, the amount of revenue that dropped off the P&L last year as a consequence of rate reductions was.
Yeah.
How much $7 billion.
So that gives you that gives you that gives you a certain specific.
The upside sensitivity of rates or the gun shy there'll be experience relative to a one or two percentage.
Points movements in cost.
<unk>, it's a it's a highly highly highly leverage.
<unk> on revenue to cost.
Yeah.
Brian Thank you.
Thank you that was all final question I will now hand back for closing remarks.
Okay.
No.
Yes listen thank you so much for your time today, a couple of closing comments from me first of all I am pleased as I said at the beginning with the performance of the business and I'm pleased to see.
Good signs of growth organic growth in fee income.
<unk> gross wealth management, so that's good.
I think more to come on that front.
We remain absolutely committed to driving cost efficiencies as we indicated in earlier. This year, we acknowledge that there are some inflationary pressures through the T from good business performance.
From underlying inflation, but we believe there is offsetting revenue growth.
So for the time, we remain committed to our return on capital So all good.
So good progress more still to do well.
We will continue to transform the business and we will continue to grow that business. Thank you for your time.
Thanks, everyone.
Thank you, ladies and gentlemen that concludes the call for the HSBC Holdings Plc's earnings release for three key 'twenty 'twenty. One you may now disconnect.
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