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 it's going to take the bulk of the call today and he will do that in the future of Q1 and Q3 announcement.
So today, though let me start by saying that I'm really pleased with our third quarter performance.
We've had a strong quarter with profit generation across all regions.
Suppose you by another quarter of net ECL releases.
Most pleasing is the underlying revenue growth, we're now seeing across the business.
We feel that we're turning the corner on revenue after absorbing interest rate impacts over the last few quarters.
We've got strong fee growth in all businesses.
In global banking and markets.
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.
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.
In both the recovery.
The low carbon transition.
Our capital.
Our revenue starts to normalize sorry on capital as already yourselves to normalize we will also look to normalize our capital position.
Capital returns to shareholders will be a big components 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've 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 open to sustainable finance market for projects and investors.
Our whole nights ago, we announced the pioneer in partnership with <unk>.
<unk> to debt financing 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.
Schools are international banks derive.
<unk> share of the recent months, just released a colleague for banks on setting and delivering let's say Roe targets.
This is an unprecedented collaboration that makes an important contribution to help all banks operationalize the target slide says.
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 and we're focused on delivering growth in the areas we've targeted.
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 Europe to take you through the detail.
Thanks, Noel and good morning or afternoon all.
We had another good quarter reported pretax 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 return to more consistent topline growth across most of our business lines.
I 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 Buildout, we made in 2020.
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 huge year, 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 with good growth in mortgage lending and trade finance.
Our 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.
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 on Johnny's insurance Thanks, Jeff.
We kept the UK market share comfortably above our stock share.
And we've made good progress on new customer acquisition.
In commercial banking were 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.
<unk> 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.
The issue of $170 billion of green bonds year to date, including leaning on leading on a number of pioneering green bond offerings, such as the first U K green guilt.
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.
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 correct.
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 was due to slower customer activity in fixed income markets.
It was a 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.
10% year on year.
We're increasingly confident that we are turning the corner on revenue growth.
Commercial banking is growing well.
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 that the bulk of its planned <unk> 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 and operating jaws.
Okay.
On slide seven net interest income was $6 6 billion.
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 our label.
Lending volumes were down on the quarter, but excluding the repayment of Ipi lines lending grew by $8 billion with.
With continued good growth in mortgages in Hong Kong and the U K.
Together with the ongoing growth in our global trade franchise.
But 2022.
With our net interest margin stabilizing policy rate rises on the horizon and volume 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.
Again with stage III Chargers that remained very low.
Despite the net relations we continue to retain a conservative outlook on risk, we still hold $1 3 billion or 31% of our 2020, COVID-19 uploads of stage, one and two ECL reserves.
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 stage III charges.
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.
With an expected net charge off the stage III in payments.
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 of <unk>.
Cost program savings compared with the prior year with an associated cost or achieve a $400 million.
To date cost programs have achieved savings of $2 6 billion.
Relative to <unk> and 2022 target of at least $5 billion in cost savings.
And cumulative cost to achieve spend debate 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.
And additional costs due to the impact and timing of recently announced acquisitions and disposals. We now expect 2021 and 2022 adjusted costs, excluding the UK 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.
But alaska 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 RTI line 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. The dividend 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 slower white or unusually low ratios.
Out of EPS this year.
Together with a desire to see higher dividends per share in 2022 relative to 2021.
We intend to normalize our core tier one ratio of over the coming quarters to be back within the 14 to 14, 5% target range by the end of 2020 T drift.
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> uplifts 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.
With robust lending platforms.
Growth in trade and mortgage balances and the likelihood of Elia 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 intend to guide three this in more detail on our follow up call on Wednesday for sell side analysts.
Overall, we expect an initial downside adjustment to our insurance profits of around <unk>.
And a smaller percentage adjustment to insurance to insurances tangible equity.
Importantly, there'll 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 core tier one ratio 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 Cogs.
You quantified.
On slide 2 billion plus.
Buyback can you just give us the metrics that youre using to size that how are you thinking about the buyback buyback is going forward.
And basically the Kpis in your decision, making process on the magnitude of days.
So that would be the SaaS question.
Second question is on the cost outlook.
So like you changed your guidance, let's say the destination Youre using.
I think back to your LOE guidance.
One <unk>.
And then adjusted EBITDA.
Hey, guys.
Guidance by about $800 million.
So can you just give a breakdown of what the moving parts are.
The increase how much of it is due to 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.
Stock buyback.
Buybacks, Andy as you would expect.
Science.
Yes.
<unk>.
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 a.
Lower much lower <unk> net releases and.
Slower cost to achieve being expense through the P&L.
And risk weighted assets have also been lower 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%.
By 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.
In M&A, we announced the deal in Singapore Axis, 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 yeah.
We are likely to see if we achieve what we think we'll achieve next year.
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.
Pure 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 about there's about half a billion.
Two 5%, it's about half a billion dollars of extra compensation costs, yes.
Whether you put it into fixed pie or variable pay.
I think we are seeing a sustained way.
Price pressure globally at the moment.
But in terms of the incremental amount that we put into the variable pay April of this year it's significantly.
Significantly more than offset by the increase in profitability that we see.
Hi, Thank you if I could just add a color to the extent that we've talked to a burden.
Because we've had a good trading proposals this year clearly we've given.
Some indications on what have you we're 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 rights are also signal that there is some fixed pay.
Relation pressures in the market generally within financial services at this point.
So the extra the extra itself of course is a combination of fixed.
Very good.
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.
I sell from post cost target.
That's great. Thank you Barry.
Let me say thank you.
The slides for <unk>. Thank you.
Thank you.
Next question comes from the line of Tom Rayner from Numis. Please go ahead. Your line is open.
Thanks, David Hi, Hi, Hi, Danelle How're you doing.
Two please just a quick follow up on the 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 sort of next two to three years.
To get a sense.
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 save about seven basis points.
If I just take your 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 access Singapore will add about 300 to revenues of 300 to costs.
We would expect that picture to move over time.
But if you plug in $300 million into 'twenty.
Into 'twenty two.
On the revenue side on.
NIM.
But David Ross.
Got it.
If you looked at current consensus.
Yeah. It does look like relative to the consensus policy rate rises that we now see in our markets.
Yeah, just as a reminder, our biggest single.
Sensitivity is the U K.
We're about 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 UK, we will see two three rate rises between now and the end of 'twenty two.
Coming potentially as early as the next month or so.
Hong Kong, maybe about slava.
Yes, 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.
Bel Air and stronger rate rises and we had previously anticipated.
We lost about $7 billion over the last two years or so as a result of the shift down on interest rates.
So it's had a very very material impact on us.
And we do think with the policy rate outlook of the alignment than 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. Your next question comes from the line of <unk> 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 tends to wash through your various businesses.
Sort of holding back the revenue line. So I was wondering if you could comment.
Router business in Hong Kong.
Sure.
Both the travel restrictions and how you think.
Performance in this quarter has been held back and how that might shift over the next year or so.
And also any trade, obviously, you flagged a very strong improvement.
So there's a lot of uncertainty around clearly what's happening with trade so any thoughts on the outlook that would be helpful.
And then just a broader second question I'm.
On China real estate.
Thank you for the disclosure I think we all get sort of.
First COVID-19 impacts.
<unk> had a 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 I'll try it on commercial real estate after I finish.
So look on Hong Kong, when the border being shopped. The I mean, you can see some direct impact some 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.
Randy with new business in Q3 was in line with Q3 pre pandemic.
Yeah, you can say you sit in sectors in Hong Kong and continuing to suffer.
Uh huh.
Yes, I think 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 the 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 have 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.
Yes, we do.
Read that as a temporary nature of the 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.
Intensive review of our.
Chinese real estate exposure, including the provisioning we've gone 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 of her role 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 other thing you should read in rural is the fact that we're doing a buyback today and the size that we're doing here. It is.
We're reasonably confident about where we're sitting in terms of our outlook.
No no not whether you want to add anything on it.
[noise] just ironically.
Try this.
The more certain.
Global economics.
He is normally the time when trade finance.
Because of uncertainty.
The supply chain.
The credit environment.
We've seen strong growth in trade policies.
That is a function of economic rebound.
Part of that I think is a function of working capital cycles, along with today than they were pre pre COVID-19 and pre pandemic because of the tension in the supply chain.
On the bottlenecks.
Part of that is people tend to use documentary credit more in uncertain times and open a cat.
Before I turn more to the financial services sector to finance trade in a structured manner, rather than financing trade in and on structure.
I'm, hoping to kind of methodology.
So I think.
Theres a number of reasons and then the fourth ingredient is frankly, we are taking market share and 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. So the end of September.
All right.
20% EBITDA of a year on year comparison September Tim, but 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 on.
China is 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.
So.
I'll reinforce what you said, we feel comfortable with our positioning.
Bank in China is performing well inside a good nine months.
We are well positioned on commercial real estate from a primary responded view.
I think we are well positioned or any second order risks.
I'd be foolish, if I said there was no second order risks.
<unk> exist for all.
All of us.
Thank you can I just follow up on the trade margin I don't know if you've seen a.
Instead of a 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.
Okay.
Im not aware of any material shift in the budget is more of a volume game at the moment for you and is that your oil yes.
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 Manus Costello from Autonomous. Please go ahead. Your line is open.
Hi, Matt.
Hi, I just wanted to follow up actually on those questions about the <unk>.
Hopefully post pandemic reopening you gave us some data in the second quarter about credit card balances 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 within the NIM, there was a negative mix shift which hurt the NIM.
What point will that mix shift change so as unsecured consumer starts to grow presumably you'd start to see a positive benefit.
Any color you can provide around that would be appreciated.
Firstly on NIM two.
Two things were going on I think to sort of push it down five basis points in the quarter. Firstly was high volt drifted down by couple of basis points.
Quarter.
We do hope we're now at the trough of that.
And there was a mix shift with a buy.
Our propensity of mortgage yeah.
Spread mortgage lending.
And the fact that we're continuing to.
Increase our liquidity reserves at the moment.
Yes.
Secured was probably up.
About 1 billion underlying.
In the quarter.
For both 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 that we would expect to continue to improve as is as we continue to move away from.
The depths of Covid.
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 around revenue you gave color at that time.
Allows us the optimism is coming from.
A higher expected interest rates some of your markets. Besides that interest rate shifts are there any oh.
Hey, Jeff.
D. C is gaining market share that you think that where we are.
Telesat is missing that particular, either more consensus revenue upgrades from noninterest income. Thank you.
Yeah, I mean to be 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 say about 3% volume 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 Covid I think it's 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.
Look I'm not we said earlier, we're taking share in trade, we're up a couple of percentage points of share over the last year, both in Hong Kong and Singapore, We're continuing degree UK mortgage share above stock share I think we were sort of about 1% ahead of sky.
<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.
Thank you. Your next question comes from the line of Guy <unk> from Exane BNP. Please go ahead. Your line is open.
Yes. Good morning, Thanks for taking my questions.
The first one was back on cost and then when I'm out of the way so on costs and you briefly alluded to before the previous question. The link with the interest rate outlook I mean, how much is the new guidance into <unk> with market inflation and interest rate expectations, let's put it another way it policy rates started to move higher in line with market expectations should we expect you to come in lower than that guidance.
Yes.
And then the second question on <unk>.
Because this is maybe 70, but 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 to knock it out of your expectations. I think of 907 billion next year look a little too conservative given the starting point of what you're seeing currently in <unk>.
Lack of credit migration.
Yeah.
Cost.
Uh huh.
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. They gave everyone assurance, we are actively managing our cost base in line with what we previously thought we're still committed to taking out.
$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 eight percentage point is another $190 million of cost.
Yeah relative to where we were at the start of the year.
Definitely seeing more inflation.
The offset 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 Cogs.
Bob.
Yeah.
No.
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.
Anyways.
Sure.
Yeah, I mean, I think we've given you pretty much all of the.
Inputs to the model.
I guess where more car.
Comfort and on the.
That'd be right growth outlooks in Atlanta and growth outlook for next year. Then I think is currently in consensus Yeah. 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've done to have us.
Yes, well the profitability is going to be next year, yeah, what buybacks, we're going to do and even on inorganic we've tried to give you a sneer as to what the total quantum of financial Inorganically, we might do as well.
Okay. Thank you.
Thank you. Your next question comes from the line of <unk> 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.
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 sort of 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.
The second pulse 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.
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.
Yeah at a higher than average.
Capture out of those break 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.
Much lower 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.
They are saying I can give you a breakdown of that.
That's wonderful things and could I just check the published sensitivity is that based on the 50%.
Yeah, well it differs by product by market, 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 on especially a couple of points as COO.
Clarification. So thanks very much for the <unk> disclosure.
On the insurance business.
In terms of the two thirds PBT impact you kind of expect in 2023.
I guess not insurance.
Profit that we would be making the adjustment to.
Are we talking.
Is it around that kind of I don't know $5 billion hit.
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 is and 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 next year with that.
Yeah.
Okay.
So PBT impacts well.
$1 billion of it.
Honestly it depends what your forecast is but if that's too just the insurance profits in that year then yes.
It's it's probably not wildly out of line with what we think.
But just again just to repeat.
Hi for 17.
Yeah, Theres no impact on dividend fly from the insurance companies to the group there is no impact on group core tier one.
The timing of earnings recognition has changed.
Fundamental economics, we don't think has changed.
The other thing that our tangible equity just.
Because I know a few people flying around with numbers today.
We think there'll be about a $3 billion plus or minus.
Impact to tangible equity as it was a shift.
And the headcount.
He then will be negative, but that's minimal and it.
Its still tied in with a 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 of 74.
With leaves us about $3 billion of society to spend in 'twenty two.
Yeah, we did have a slower delivery this year a.
A big part of that was a lot of our change programs are being run in India.
And they 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 Rob Naval from Deutsche Bank. Please go ahead. Your line is open.
Good morning.
Could you talk us through how interest rates are actually hedged.
Various markets, whether it is the U K.
Hong Kong and U S.
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 of the others.
And then secondly, just on the U K, what did you see or from mortgage margins.
Elements, I mean comparisons where they were where they all are on the back book.
What do you think.
So the increase in swaps are they pushing rates up in the market in the U K now.
Thank you.
So on the.
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 yeah. Most unique ideas I think yeah. What's your 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 do 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 thing to that as well.
So the second question was fortunate.
The second question sorry was.
Some good mortgage margins versus back book, and whether you think swap spreads.
Closing Christopher asphalt margins are probably slightly but like backlog margins currently for the first time in quite a while.
Yeah, we have seen some margin pressure coming through the UK mortgage franchise.
We gave you 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.
Ed.
Yeah morning, everybody I'm, sorry to go on about this interest rate sensitivity, but I guess he is quite quite crucial in terms of the outlook that the debate I didn't really understand is when I look at the currencies. If I look at your year one sensitivity.
Sterling sensitivity is materially higher than your Hong Kong sensitivity.
And yet you'll sterling is the bit that hedged.
Hong Kong and yet the total balances in home called up.
Well order to think that you'd similar but I guess, if anything slightly higher in Hong Kong than they are in Sterling said.
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 side.
Yeah. There is an impact of the particularly U S. Dollar book in Hong Kong I think in that interest rate sensitivity.
Which with the U S dollars about 40%, 80% of the 50%.
Now Hong Kong dollars.
Uh huh.
Sorry.
Yeah.
I'll need to get you a detailed answer out of.
Our IR team, if you give him a call.
I assume that your interest rate sensitivity analysis is correct.
Yeah, No I just think it's about the assumptions.
So it would definitely struggling with that you know what area just trying to make sure that.
You can put in any any sort of shoes, they like whether it's actually going to happen I guess.
A key question.
Yeah, that's fair, but I mean, yeah, we do.
Take time to show you that interest rate sensitivity and yeah. It 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 showed data at 40% of Hong Kong deposits on U S. Dollar would there be scoped till we get some of those deposits and teach.
You may be similar to the U K that deposit behavior maturity of IC as well.
Could this be a source for additional income going forward and secondly on capital.
I mean first of all thank you for the 14 to 14 45 guidance now for FY 'twenty two.
Just in terms of thinking about the <unk> trajectory and at the end of scope for company, we're 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 or is there scope for capital Gladstone low.
I'm just trying to get if there's still capital efficiencies within the group 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 yes.
Yeah, I know you have hundreds of millions of opportunity in the next.
He is three.
Our 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 how we're managing a global liquidity pool.
On capital.
Is the 14 in the house and go over the next few years I think.
Our aspiration is C ran it.
Towards yeah or end of that range, if we can.
Yeah as you think further out there's obviously the impact of our portfolio's.
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 multiyear 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 to 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.
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 fall through the bottom line.
Oh Wow.
I think the bulk of it.
Frankly, I mean, it depends what.
Inflationary pressure you put on a $19 billion Whitesville $52 billion total 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 cost, 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 cross savings side. I think we will keep we will keep cost control tight even if we see the benefit of rate rises coming through.
Thanks, very much very helpful revenue.
Yeah, and just to talk to the amount of revenue that drops off the P&L last year as a consequence of rate reductions was.
Yeah.
How much selling billions of dollars.
So that gives you that gives you that gives you a sense.
The upside sensitivity of rates for the time that we experienced relative to a one or two percentage.
Points movements in cost.
<unk>, it's a it's a highly highly highly leverage.
Ratio on revenue to cost.
Yeah.
Brian Thank you.
Thank you that was our 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'm pleased as I said at the beginning with the performance of the business and I am 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.
<unk> refreshes through VP 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 target.
So good progress more still to do.
We will continue to transform the business and we will continue to grow the business. Thank you for your time.
Thanks, everyone.
Thank you, ladies and gentlemen that concludes the call for the H D. C Holdings Plc's earnings release for three key 'twenty 'twenty. One you may now disconnect.
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