Full Year 2021 HSBC Holdings PLC Earnings Call
<unk> will businesses grew fee income in 2021 by high single digits.
Costs were down slightly year on year.
We expect 2022 adjusted costs to be stable on that position.
Rosie was eight 3%.
Our capital ratio remained strong at 15, 8%.
And we expect to move into our CET, one target range of 14 to 14 in the half the savings in 2022.
And we've made over $104 billion of RW I saves across the group over the last two years.
Against our original three year target of $110 billion.
Given this progress we now expect to achieve $120 billion of cumulative RW I say is by the end of this year.
The next slides go through key metrics on our four strategic pillars.
The first pillar is focus on our strengths.
Which is about capitalizing on the unique advantages we have as an institution.
Wealth and personal banking is one of those areas, particularly in Asia.
Our investment in people technology and capabilities yielded strong returns.
We had a strong year in net new invested assets, especially in Asia.
Greatly helped by a strong flow of referrals from our wholesale banking clients.
This is an inherent strategic advantage that we are investing in.
Overall wealth balances grew to one seven trillion dollars and within that funds under management increased by 5%.
Supported by more than 30, new asset management products in Asia.
Asia wealth revenue also grew by 10% mainly due to the improved improvement in equity markets and customer sentiment.
While we also saw strong mortgage growth in Hong Kong and the U K.
Finally on this slide I was pleased that the value of new insurance business in Asia in Q4.
Was higher than the same period in both 2019 and 2018.
This is the cumulative effect of a significant investment program and turnaround in that business over the last three to four years.
It is also particularly encouraging given.
Given the border between Hong Kong and mainland China remains closed.
Slide five focuses on wholesale banking.
We saw strong fee income growth across our wholesale franchises, even as we exited clients and shrunk our capital base in global banking markets.
This offset lower trading income when compared to the exceptionally strong performance we saw in 2020.
International connectivity remains key to our strategy.
As I said earlier trade balances were up 23% overall and above pre COVID-19 levels.
<unk> balances were up $54 billion or 8% year on year to over $750 billion.
And collaboration revenues were also up 8%.
With referrals between commercial banking.
And global banking and markets up 12%.
I've been pleased with the way the global banking and markets has performed for the past two years, even while we've been repositioning that business.
Adjusted arguably ways were down 10% as we continue to transfer our resources, mainly from Europe into Asia, and the Middle East.
Slide six shows how we've exited non strategic businesses in the west.
While accelerating customer acquisition in the east.
I'm pleased by the progress we've made in transforming the U S and Continental Europe business.
But also by their good profit performance in 2021.
The transactions for the sale of the U S retail business have closed on schedule in the last two weeks.
Meanwhile, we expect to close the sale of our French retail business in the second half of 2023.
We also accelerated the development of our Asia wealth capabilities through the acquisition of Axis Singapore.
Which was completed earlier this month on schedule.
The acquisition of LNG investment management in India, which we hope to complete towards the end of this year.
And regulatory approval to take full ownership of our HSBC life joint venture.
In China.
All on top of the organic buildout of our pinnacle business in mainland China.
Each continues ahead of schedule.
Slide seven looks at our second pillar digitize at scale.
Which is about making it easier for our customers to bank with us.
I'm, making our processes more efficient.
We've continued to invest heavily in technology.
While managing costs.
Spending around $6 billion in 2021.
Which is equivalent to around 19% of our adjusted operating expenses.
Which was up one percentage point on the prior year.
Our ambition is to keep increasing technology spend in.
So more than 21% of our operating expenses by 2025.
This investment provides us with significant operating leverage as we grow the business in the future.
It is also enabling us to deploy solutions at scale globally and to further leverage agile work in and cloud technology.
While our usage of both agile and cloud increased in 2021.
We have ambitions to drive further growth in the years to come.
Digital penetration levels have also increased.
With today, 84% of trade transactions globally initiated through digital channels.
A 58% increase in the share of digital payments made through H SBC net marble app.
By wholesale customers.
And 43% of retail customers are now mobile active.
Although this figure was up five percentage points from the prior year I still see a significant opportunity to grow it much further.
Our third strategic pillar is about creating a dynamic inclusive.
Culture, where people want to work and they feel empowered.
In our most recent staff survey our employee engagement score was 72%.
Unchanged on 2020.
But encouragingly five percentage points up on 2019.
And four percentage points above the financial services benchmark.
We're aiming to build a more diverse business.
We were pleased to exceed our target of 30% of women in leadership roles globally in 2020.
And we set ourselves a new target of 35% by 2025.
We've also made progress on ethnicity representation, especially.
Especially for black colleagues.
But we still have a way to go to get to where we want to be a need to be on both of these measures.
And we're helping our colleagues to develop future ready skills over 115000 colleagues use the new degreed learning platform last year.
With the average time spent on training for full time employee of 16% despite the pressures of Covid.
An increasing share of this time was spent on areas like digital data and sustainability all of which are essential for our future.
I also want to add there are another important part of our culture is that we remain cost conscious.
I'm absolutely determined we won't go back to the days when rising interest rates loosen our grip on costs.
Slide nine looks at the transition plan Senate zero.
Our fourth pillar.
Our ambition is to provide and facilitate between 750 billion and one trillion dollars of sustainable financing and investment by 2030.
I truly believe this will enable us to play a leading role in the transition.
And we've made a very strong start.
Since the beginning of 2020, we provided and facilitated $127 billion of sustainable financing and investment to our clients.
We are committed to working with our clients.
To develop valid.
Science based transition plans to understand sector by sector client by client, how we move to net zero by 2050.
These transition plans and the targets within them must be predicated on the science relevant to the individual sectors.
We will use them as a basis for further engagement and decision making.
Including how we drive change within our portfolio construct.
As part of this process, we have today disclosed interim targets for on balance sheet financed emissions in the oil and gas and power and utility sectors.
In the year ahead, we plan to search engines entering targets for financed emissions across a range of other sectors.
And we will work on our climate transition plan, which will be published in 2023.
We will bring together in one place how we embed our net zero targets into our strategy our processes, our policies and our governance informed by bottom up transition plans.
I am pleased by the progress we've made reducing greenhouse gas emissions gas emissions from our own operations.
Combination of less travel.
And sustainable energy deals enable us to halve our scope one scope two emissions.
Compared to 2000 2019.
Sorry 2019.
As the World Normalizes, we have to be clear that we do not expect our routes in that zero to be linear.
But we do believe that many of these changes are embedded for future years or.
Overall, there is more to do but I'm pleased with the progress we've made so far.
I'll now hand over to Ewen for the Q4 numbers.
Thanks, <unk> good morning, or afternoon, all under ACA now great to see so many of you in the room today with us.
We had another good quarter of reported.
Reported pretax profits of $3 $7 billion up 92% on last year's fourth quarter adjusted revenues were modestly up on last year's fourth quarter.
This reinforces what I said at the third quarter, we think we're now past the trough in revenues.
<unk> were $450 million net charge in the quarter operating expenses were down $800 million on last year's fourth quarter Geek, our lower bank Levy and continuing good cost discipline.
Our return on tangible equity for 2021 was eight 3%.
Core tier one ratio remained strong at 15, 8% tangible net asset value per share of $7 88 was up seven cents on the third quarter.
We've announced full year 2021 dividends of 25 cents per share that's up 67% on the prior year. We also intend to initiate an incremental buyback of up to $1 billion. This will begin after the buyback of up to $2 billion is concluded in April .
Turning to slide 11, as a headline we're pleased with our lending and fee income growth that we're now seeing lending balances were up 1% overall in the third quarter underlying this was 5% growth.
For our personal and commercial banking businesses combined equivalent to $38 billion in title.
Which was partially offset by planned reductions in global banking and markets.
There was strong lending growth within wealth and personal banking up 27 billion or 6% on the fourth quarter of last year, reflecting another strong mortgage performance in the U K and Hong Kong.
Lending was up $11 billion in commercial banking, mainly in trade and term lending in Asia.
Fee income increased by 5% versus the fourth quarter of 2020 within this commercial banking increased fee income by 15%, reflecting both good volume growth and repositioning in some areas toward fee income.
On the next slide despite the impact of lower rates.
We've been seeing a recovery in revenues for commercial banking for a few quarters now and that's continued in the fourth quarter.
Banking and markets had another good quarter, driven primarily by good performance in FX and capital markets and advisory.
And we saw our first quarter of year on year revenue growth in personal banking since the onset of COVID-19.
And in wealth strong new business growth was offset by adverse insurance market impacts.
Tonight for the current quarter, we expect some weakness in our Asian wealth revenues.
As highlighted previously our revenues will be impacted by the adoption of ire for 17 in 2023.
We continue to expect an initial downward adjustment to our insurance profits of around two thirds.
As we said at the third quarter, we are planning for and around $3 billion adjustment to our insurances tangible equity.
And we intend to provide further detail on our for our 17 in the third quarter of this year.
On slide 13, net interest income was $6 $8 billion up 3% against the third quarter on a reported basis.
This was mainly driven by higher yields on customer loans as well as underlying asset growth.
On rights.
The net interest margin was 119 basis points unchanged on the third quarter with higher asset yields offset by changes in the asset mix.
Based on the current interest rate expectations for 2022, we expect net interest income to now growing materially with further material growth in 2023.
We think we've given you the building blocks to model this including modeling the sensitivity is rate curve shift.
Turning to slide 14, and recognizing the higher gearing, we have to a better rate environment I wanted to say a few words on our disclosed interest rate sensitivity analysis. As a reminder, our high interest rate sensitivity is driven by a balance sheet structure.
<unk> nine layer deposit surplus of around $700 billion and the short tenure of our lending portfolios and trade franchise.
For illustration purposes, our tables now assume a simplified path three right for all interest bearing deposits in reality for the first few rate rises we lost sing.
I assume we'll see a lower pass through rate rising towards or above 50% of rates continue to rise.
On the next slide where we reported a net charge of $450 million of <unk> in the quarter.
This included stage two charges, primarily relating to commercial real estate in mainland China.
A substantial part of which is booked in Hong Kong.
As in all says there has been some positive sentiment since the year end. We expect this to begin to help ease the current chart tightened liquidity for the sector.
Stage three charges remained low in the quarter also included COVID-19 related releases.
We're continuing to hold around $600 million of COVID-19 uplift to stage, one and two ECL reserves.
Evelyn so about 15% of the initial reserve.
The overall quality of our loan book remains good stage III loans as a percentage of total lines are stable at around one 8%.
We expect sales to normalize towards 30 basis points of average loans in 2022 with upside from potential COVID-19 releases in the first half of 2022 and potential risk from continued uncertainty in mainland China commercial real estate.
Turning to slide 16 fourth quarter adjusted operating costs, excluding the bank Levy were modestly down on the same period last year.
2021 costs were broadly stable on 2020 as payer our third quarter guidance.
The fourth quarter performance was driven by continued good cost control together with a lower performance related pay accrual in the quarter relative to the fourth quarter last year.
The bank Levy came in at $116 million. This was lower than expected due to an offsetting credit for bank levy fees paid in prior years.
We expect the bank levy to normalize at around $300 million per year from this year onwards.
We made a further $600 million of cost program savings during the fourth quarter.
With an associated cost to achieve of around $600 million.
Turning to the next slide in the first two years of our three year cost program, we've achieved savings of $3 $3 billion.
With team lots of cost to achieve spend to date of $3 $6 billion.
We now expect to see exceed our overall target of five to $5 $5 billion of cost savings with at least a further $2 billion of cost savings in 2022 and at least a further $500 million of savings in 2023.
We expect to fully utilize our $7 billion cost to achieve budget by the end of 2022. So please model a final cost giorgi spend of $3 $4 billion. This year.
Despite inflationary pressures and al and I are committed to continuing to deliver tight cost control.
For 2022, we aim to keep adjusted costs again broadly stable and in 2023, we intend to manage adjusted cost growth to be within the zero to 2% range.
A few things to note for 2023 costs and beyond.
Firstly on recent M&A activity, we expect the net impact to be broadly neutral on costs in 2023.
And modestly positive in 2024, following the completion of the sale of our French retail bank in the second half of 2023.
Secondly, there will be a reduction in operating costs as a result of the shift to ire for 17.
But also an associated reduction in revenues.
And thirdly from 2023 onwards, we intend to move away from reported adjusted numbers with any further restructuring costs absorbed above the line.
And any large distorting items disclosed on the notable items.
Turning to capital on Slide 18 core tier one ratio was 15, 8% down 10 basis points on the third quarter.
Reported risk weighted assets were down $1 billion on the third quarter risk.
Risk weighted assets saves and improving asset quality offsetting risk weighted asset growth from lending and regulatory change.
Cumulative risk rather it asset saves in our 104 billion against the three year target of $110 billion by the end of 2022.
Given this progress we now have an ambition to achieve $120 billion of cumulative risk weighted asset size by this year end.
On the next slide we're expecting to be within our core tier one ratio of 14 to 14, 5% during this year.
As shown on this table, we expect around 125 basis points of total impact during 2022 from notable items, including regulatory change and M&A.
A large part of which will be in the first quarter.
It will also include the planned sale of our French retail bank in the third quarter.
Once within a 14 to 14, 5% range, we intend to actively manage to be within this range.
But please recognize that due to normal capital volatility you could see us above or below this range in some quarters.
In addition, and in line with PRA regulatory guidance, the dividend will accrue at 55% of reported profits for each quarter of 2022. This is not a signal of future dividend intentions.
And finally for clarity on our two buyback programs the $2 billion buyback program that is currently underway has the complete by 20th of April under its six month regulatory authorization.
The AGM in late April we intend to then launch the $1 billion buyback program that we announced today.
So to conclude in the context of a continued challenged macro environment. These were a good set of fourth quarter and full year 2021 results.
Heading into this year with strong core momentum under pinned by increasingly robust growth.
And continued tight cost discipline.
If the current rates outlook is maintained we are on track to deliver a return on tangible equity of at least chamber sent in 2023, that's a year earlier than our expectations of the third quarter, and finally, and importantly healthy capital distributions have now been restored.
With that Martin can we please open up for questions in the room and on the line.
And Richard <unk> coming up the host Q&A. Thank you.
Thank you Mr. Stevenson, if you would like to ask a question today on the line. 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 answer you may remove yourself from the queue by pressing <unk>.
Once again to ask a question. Please press star one please ensure that the mute function on your telephone is switched off.
The first of your questions will be taken in the room. So I will now hand over to Mr. Richard O'connor.
Yes, good morning, everybody.
I'll take the first read from the room as the operator said if you just give your name and institution. Please.
Over to rail and the Frontload start with as you wait for the Mic. Please.
Hi, good morning, it's relative or from JP Morgan. Thanks for doing this in person.
Couple of questions for me to start firstly on NIM.
I was wondering if you could unpack the moving parts across the big parts of the franchise. So if you look at etch perhaps name it.
It's broadly stable if you look at the U K NIM is down quarter over quarter.
What is driving this sort of weakness in the U K Amendment, how do you think mortgage pricing will impact that going forward I think we can do a number of them hedge about NIM going forwards and then the second question is just coming back to the cost discussion, perhaps more floor I think in the.
Quite interested in your comments about the historical slippage and of course when rates have gone up with HSBC.
And I guess one of the things that is different. This time is inflation is obviously moving up. So I was wondering if you could talk a little bit about how you're managing inflation. What are you seeing in terms of inflation across the bank and how you're managing that over the medium term within your customers. Thank you.
200 <unk>.
Look on NIM and I'm sure there'll be a few questions on them.
The.
In terms of what we're saying look on in the UK I think what you predominantly saying is that a mix shift towards mortgages at the moment impacting NIM together with continued very healthy liquidity levels.
We do think over time, what we'll say is a recovery in some of the other loan books, particularly.
Unsecured.
You should begin to see.
Both an improving shift in the asset mix together with.
Significant benefits coming through from rate rises.
As you can see in our interest rate sensitivity tables.
Sterling is.
Yes, most sensitive currency.
Yeah in Hong Kong I don't think there's anything particular to sort of call out in terms of asset mix again.
The main thing the main source of debate I think in Hong Kong looking out is.
Obviously, the Hong Kong dollar is pegged to U S dollars, yes, just how quickly if we are seeing.
And when we do see a rising U S rate environment, how quickly that will translate into a rising high ball I think if you go back over time typically theres been about a three month lag period.
I think given omicron at the moment that might elongate it out a bit but we would certainly think yeah in the coming months, we'll start to see a very material recovery in hydro coming as well.
On costs now.
On costs.
We've managed to contain the costs up slightly.
Slightly down in 2021 relative to 2020, why because frankly, we took a $3 $3 billion of transformation costs in the first to use of the transformation program that has allowed us to fund increased investment in tech. It's allowed us to fund an increase in the variable pay pool.
'twenty, one run relative to 20 or 31%.
And if you look at the VP pool, it's up 31% on 'twenty is up 5% on 2019.
Avi people in 2021 .
Still inflated over 19, but we managed to keep the costs flat.
No you and said we are also planning a further $2 billion of cost takeout. This year as part of that transformation program and another half a billion in the year after.
And that we believe gives us the cushion necessary.
To recycle that cost transformation into investment in tech and into investment in people, whilst keeping the overall cost base flat for 2022.
Within a range of low to 2% thereafter in 2023.
And we've got good line of sight on the cost takeout, So I think it's manageable and achievable.
While we really want is the revenue momentum we have on an underlying level.
Complemented by the interest rate curve, that's coming our way so actually flowed through into returns not to flow through in cost and we determine to try and enhance the returns of the business, which is why we are pulling forward the return target by a year.
Simpson, who we want to go beyond that.
I don't want the cost to takeaway from that achievement.
The other thing that we've.
And during Covid is obviously the benefit in certain activity. That's just fundamentally changed as a result of COVID-19 .
Yeah. If you go back two years, we were spending $400 million on travel and entertainment.
That's less than $60 million last year, we expect it to recover but we've said, we're not going to allow our travel costs to return to see.
It's capped at 50% of what it was pre COVID-19 .
<unk> announced that were going to get out of 40% of our.
Non branch based commercial real estate.
Yeah, we've done about half of that so far.
Again.
And the fact that we are going to adopt hybrid working on a permanent basis opens up a significant opportunity.
I'll now hot Desking, and I know that <unk> has gone on solar and a whole bunch of printers out of the building to make it harder for us to point, but for those of you who hot desk you certainly don't want any paper at the end of the day, because then you'd have to store it.
So I think yes, and then you've got this big shift in digital engagement from our customer base has gone on three COVID-19 .
Particularly in some cohorts of the customer base like the elderly who previously would not that digitally engaged and again I think that will open up further cost opportunities for us and at some of those cost opportunities I think that have helped.
Offset the inflationary pressure that we wouldn't have seen previously.
Let me give you. An example on that if we can just Richard if you allow me tradeshow.
Trade transformation, we embarked upon a digitalization program of our trade platform, where the biggest trade bank in the world as you know, we fundamentally re platform that business over the past four years answer button technology.
Consequence of that trade revenue for the full year last year was up 9% trade balances up.
Over 23%.
If you look at Q4 on Q4 trade revenue was up around about 20%. So there's momentum in the trade in the revenue, but what it's also done is this increased our NPS schools. We now got a positive NPS in trade of 69.
We didn't have that four years ago as.
If you also look at what it's done for cost we've got a 26% reduction.
In our baseline baseline headcounts that existed in 2017, when we started that program. So if you look at it from whatever angle facilitation revenue growth because we're more competitive we've got new product capability.
Better customer service as evidenced in the NPS on a lower cost to serve as evidenced in the head count and trade.
That's why we're putting more money into their digitization agenda and that's the impact you can have on the business and I think that's why we could recycle some of those cost savings into inflation metering inflation needs of the remaining <unk>.
<unk> base.
Richard.
Joe next.
Okay.
Externally.
Hi, Thanks, It's Joe Dickerson from Jefferies.
Just a quick question on the buybacks. So is this something you want to make a recurring feature of your capital return because of rates.
Do what you think they'll do.
To get to your 10% return on tangible equity you'll generate a lot of capital. So assuming that you want to do on a quarterly basis 1 billion a quarter or what is there what's the thought process around creating regulate.
Some regular cadence to buybacks.
Yeah.
Well as sort of broaden the question that I think Joe.
Again, our primary tool of distributions as dividends and we've sort of been clear that we're going to pay within a.
40% to 55% payout ratio. This year, we were right at the very bottom end of that range at a 40% payout ratio I think that reflected our view on the sustainability of particularly the ECL line, where we had significant write backs this year.
So I think going forward you should expect certainly for 'twenty two our expectation is that will be higher up in that payout range.
Then last year.
In terms of buybacks, we pointed out today that if you were to sort of effectively if you want normalize.
Core tier one today for items that we know that are coming such as regulatory change in M&A.
The 15 point age is probably closer to $14 five today for that 125 basis points of adjustments we pointed out.
Yes, we do.
And then you've got for this year I think.
Yet the natural growth in the business, where we said we're targeting mid single digit loan growth.
We've pointed out that we still think we grew up $14 billion or more to do with it.
<unk> saves.
We've got the dividend.
We've got the incremental billion dollars buyback that we announced today.
We do still expect there to be some inorganic activity.
Yes, we are but they will be similar to what we've done small bolt on deals.
I think consensus for this year sitting about $2 billion of buybacks I think we're reasonably comfortable with that consensus at the moment.
But we do intend overall to actively manage our capital base as we said.
But for this year I think we're sort of comfortable with where consensus is currently sit but you Shouldnt view. This buyback program as some sort of in perpetuity buyback program will use it to manage surplus capital.
Thank you.
And then Tom afterwards, okay.
Good morning, Omar Keenan at credit Suisse. Thank you for the presentation today I've got two questions. Please.
So one on the rate sensitivity and then just a second one on the outlook for acquisitions and divestments.
So firstly on rate sensitivity. Thank you for the disclosure on the deposit beta I was wondering if you could help us with how much discretion.
Discretion HSBC has over its deposit pricing.
In places like Hong Kong, I guess with the idea being that.
Yes.
The surplus deposit position is quite good and the benefit from rate hikes might be much more than the guidance implies.
Earlier on than that later on.
And then secondly on on the <unk>.
Outlook for acquisitions and divestments.
You've completed the three bolt on acquisitions that you said you would do.
And <unk> also completed the sign.
Exit from the French and U S retail business.
Could you comment on how the footprint now looks like.
And.
I guess just bearing in mind that there's a disagreement in Mexico with Citigroup is doing and whether there's more potential for bolt ons, whether we could see more inorganic activity the HSBC linky.
Julian do you want to take a right first.
Yeah look on the right sensitivity I think yes.
Yeah, as we said we would certainly assume that for the first few rate rises the deposit beta is going to be.
Less than 50% mini Ethan.
It's a matter of public record.
Intentions are in the U K, we've announced a series of.
Deposit increases.
As of the first of March.
They would imply a deposit beta well below 50% for the rate rises that we've seen.
Yeah, Hong Kong, we are the market leader in the market.
Yes.
We would expect it to be.
Some increase in deposit rates, but again I think for the.
The first 50 or so rate rises that deposit beta as we would expect to be well below 50% yes.
So that just to explain that.
We did change the table this quarter.
Obviously, we had a sort of averaged 50% deposit beta but it varied by market. So what you see for example is the Hong Kong sensitivity has come down and their table relative to Q3. The reason for that is because we have effectively increased the deposit beta or up to 50%. We just thought that was easier for you because.
Gave a consistent basis for each of them make your own assumptions.
Just one of the <unk>.
Points alone and I'm sure you've got it in your analysis on that is.
And I was hoping somebody earlier about my.
My liking of cash.
And leverage is positive, particularly when you're bringing in via operating accounts on a lot of the cash deposits. We bring in is not paid for deposits through savings accounts is operating accounts through G. LCM through personal banking through wealth management.
Before what we were able to see is a higher <unk>.
The ability to hold onto interest rate rises because we are so.
Focused on bringing in operating accounts is the fuel paid for deposits.
And that's particularly true in our Asia franchise.
Where we've drawn in a lot of balance sheet via GLC in business.
Good luck cash in a digital sense no.
[laughter].
Sure.
There's one attribute of carried with me for 34 years from Willie purpose, which is get the cash in first the Netherlands.
So old fashioned.
The question on M&A M&A, Yeah, I'll take the Allison.
We're pleased with the progress we've made on that we're pleased with the disposal.
Decisions on the U S and on France, I think Michael has done an excellent job and his team in the U S on executing on time on schedule and driving out cost as a consequence of that.
Really congratulate him on that we're on track for completion of more complex disposal program on the French retail business, hence it will complete in 2023, but we knew that to be the case.
Plans are progressing well on that.
On the bolt ons are going well, we're still looking.
We're observing other opportunities in the market, particularly in Asia, particularly associated with wealth and for wealth Reed insurance asset management.
Broader wealth management capability.
As and when any of those become a reality if they do become a reality we will let you know at that point in time, but we're still active looking at opportunities.
On the acquisition side.
Stress, it's bolt on.
And to maybe turn to your specific question on Mexico, No. We're not looking to acquire in Mexico, we have a good business in Mexico.
A produce returns on tangible equity last year of around about 13% I think.
Within the wealth business and retail business in Mexico is higher inherent returns.
We've got an organic growth model.
We had previously guided the market review that our M&A activity would be primarily focused on Asia.
Sean.
<unk>.
Excuse me for all those online who just certainly sneeze very sorry about that.
And they saw Covid honestly.
So I think we've got a very clear focus on where we want to bolt ons to be to be focused on.
Thank you Tom and then I'll take one from the line.
Thank you very much it's Tom Rayner from Numis.
Could I just have to place just sticking with the rate sensitivity initially.
I'm most interested in is how quickly will the sensitivity sort of fade away. Once you go beyond a 100 basis points move because.
Yes, you're going to see pass through rates, increasing as rates rise also I imagine there'd be some asset spreads issues such as in the Hong Kong mortgage market with sort of caps versus prime et cetera. So I just wonder if you could give us a bit more color on how things that when you go beyond the 100 and I have a second question on costs.
Do you want it now or.
The guidance says zero to 2% from 2023, I'm, just wondering what's going to sort of determine where abouts you land in that range, whether youre running a sort of jaws target. If you like so if revenues strongly.
The upper end and if revenue disappoints, you'll be looking to hold it down at the bottom is that that youre thinking there. Thank you.
Yes.
Sure.
On rate sensitivity above 100 basis points. So it's not a question we often get asked what were getting us.
I mean, if you look.
I mean, I guess going back to where we were in 2019.
The NIM at the time was 158 basis points.
It fell to 120 last year.
We lost I thought about $7 billion of net interest income.
The book, the average interest, earning assets bigger than where it was back in 19.
You're right in some markets like Hong Kong there was.
Relationship with the prime rate with.
That's that.
In fact that heavily and once rates rise by more than 100 basis points.
So.
I would look at the trajectory of what happened from sort of 19 321 and then.
It's not quite analogous because sterling rights are going to be much higher this time.
But try and draw some comparisons from that as you do your modeling.
On costs, we are certainly not targeting our jaws number.
It's hard to target jaws, when you've got rising interest rates and you don't want the benefit of those rising interest rates to get reflected into rising costs.
I think it just highlights a decent degree of uncertainty as where we are on inflation.
Yeah, we are when you go out into 2023.
We've got.
Yes, the impact of M&A that we've highlighted that also be the one off from our for our 17, which will drive cost down that's not in that guidance.
You do have to model that.
We know that we've got at least half a billion dollars of cost savings coming through from the cost programs that we're running.
The we are going to have to yeah. We're.
Getting rid of the cost to achieve program in 2022, so it's definitely finishing at the end of this year. So any restructuring costs will be absorbed above the line.
I would say in addition to that cost guidance, because we're comparing sort of what we call adjusted to adjusted.
Yeah typically at the moment, we're having about half a billion dollars of other costs that would be in cig items being sort of large litigation costs and.
Yeah, when we sell businesses and stuff the losses on sale of that so yeah.
In addition to that adjusted cost guidance typically there's about half a billion dollars or so of other items, which will be on top of that.
And just for Tom its a good question, but just put it in context.
It's hard to predict how inflation will move forward over the next year or two.
But.
Likely to be inflation there.
Somewhere between.
Low cost increases on our lifeblood basis $600 million Institute.
Relative to if you are in.
If you roll the clock back in U.
He rolled in the interest rates effect that we lost 7 billion.
So the north <unk> two is relatively insensitive, whether its no one or two relative to what could be.
Six or $7 billion of incremental revenue by that time.
I think what we're trying to signal very clearly is we're not looking to have an explosion in costs, just because interest rates are going to come through.
And so considering it in the north to 2% range.
Is a reasonable.
Reasonably flat cost base relative to what could be happening on revenue.
And if you look at consensus that has existed a couple of weeks ago.
Yes, there was about a $6 billion increase in a 12% increase in revenues from 'twenty one through 'twenty three.
And we're saying, we're going to keep cost growth to 2% over that period.
I think 23 consensus as it was a couple of weeks ago was understated because that hasnt fully reflected the impact of rate rises.
So the rate rises in the consensus a few weeks ago is inconsistent with today's.
Curve.
You just take those numbers, you've got very very material, which orders coming through.
Thank you okay.
I'll open the lines to hopefully Jason Napier of UBS.
Good morning, Thank you for taking my questions the.
First one is around that.
No.
You just shared.
I would just focus on net interest income.
Annualized in the fourth quarter at 27 billion.
5% loan growth gets you to 28, and a half and half the right gearing that you've given today on a beta that's too high.
The $30 billion in 2022, and the same math would get you.
At a minimum 35 or six in 'twenty two 'twenty three.
Even in the past.
It helped us with blend to expectations around the NII Im sure you don't want the market to get too carried away, but it appears to me that on the simple loan growth and great gearing numbers, you've provided the consensus should be.
Substantially high at $2 3 billion for this year and maybe three next year.
First one.
The second question is is around the.
The shape of the group from a capital perspective.
Most of the <unk> savings that Christine has been done.
And yet the <unk> share of Asia is roughly stable at about 42%.
Okay, Great and I, just wondered with the.
The restructuring of balance sheets, and then moving of capital around the group.
Shouldnt lead to faster.
<unk> growth in the.
As Ed or was it really more about taking capital out.
Ken.
Destinations, so should we be expecting faster growth and innovation now that that catheter that's been freed up from its parts pieces. Thank you.
I'll take the second question.
Do you want to.
<unk>.
I hate forecasting net interest income and NIM, So I'll do my best.
Talk about the I did think Jason.
Thanks.
Another in Hawaii, New mass, but you are a bit choppy on 2022.
Yeah, we think that consensus.
Which was that.
Yeah, we had.
Yeah, we think consensus for 2022, which we had a $28 7 billion was understated.
But not by the magnitude that youre talking about.
And consensus was published average consensus with 31 nine for 'twenty three we think that is more meaningfully understated.
And I don't know whether Jason how you factor then.
Things like the continued IWA rundown program.
Because if you look at what's basically implied with our with rated asset growth this year.
Yes, if we're talking about mid single digits, we're saying 3% of that is coming from regulatory change. So there's a sort of a nit yeah call. It two percentage points of net increase which is underlying loan growth yet less the otherwise we're running off.
But so modestly understated for 'twenty, two more materially understated for 'twenty three.
Okay.
On your second point the shape the group probably draw your attention to two slides in the deck the slide 28.
And <unk>.
Slide 30.
Slide 28.
As a new piece of information that I think we've previously disclosed but what it shows for wholesale banking.
Is the Interconnectivity of the group. So if you look at the percentage of client revenue in house wholesale banking.
That has an international connectivity those clients bank with us in multiple geographies.
What percentage is 77%.
Now what you've seen in the report and accounts is where we book it in the legal entity. So you see legal entity booking in Asia.
And you'll see legal entity book and in Europe , and the U S.
So much of what we book in Europe , and the U S is connected to our business in Asia and the Middle East.
And what we tried to give you and that is in wholesale banking terms.
Essentially 70%, 77% of our revenue from clients in wholesale banking.
As some form of cross border connectivity.
But youll see the revenue booked in multiple legal entities. So I think your analysis on how much capital is Asia related relative Salon Asia is a bit distorted when you look at a legal entity basis and if you then go to slide 31.
What youll see from GBM.
Is 40% of the revenue.
Booked in the east on a legal entity balance sheets in the east.
Emerges from western clients.
So 40% too Greg in Georgia as revenue.
Essentially gets booked in the east but originates from clients we bank in Europe , the U K the U S in the west.
I'm not again, if you look at it purely on a legal entity basis, Youll see European and U S balance sheet and say why are they so capital heavy.
Because their feeder of business into our operations in Asia.
The middle East.
Yes, Jason I think in addition to what analysis went through I mean, if you go back to what we announced a couple of years ago about 100 odd billion of <unk> reduction in the west than redeployment in the east.
What we've seen over the last couple of years I think is a very successful execution of the first part of that.
We're now in addition, we are now in excess of what we started out with.
But the redeployment in the east has been slowed down as a result of Covid.
We do think that that redeployment rate will now pick up.
As the Asian economies progressively come out of Covid.
And we'll take another question from the line hopefully Ben Toms from RBC.
Ben.
Good morning, and thank you taking my questions. Two please firstly you fly.
The mortgage market share in the UK picks up significantly in Q4.
Do you intend to keep being aggressive in terms of pricing and growth in the UK and then secondly, if you could talk about the provisions for Chinese commercial real estate in the quarter can you just give us some flavor on what youre seeing on the ground with respect to Chinese Cree.
The indirect exposure that that keeps you awake at night.
Thank you.
Ewen do you want to take the mortgage market.
On.
<unk> market share in the quarter I think it was $9 three our stock share is seven five.
As you all know.
We still feel structurally underweight in UK mortgages.
Share of current accounts by value I think has ticked up to just under 15% now so we still feel <unk>.
Structurally underweight mortgages I don't think we describe our pricing is aggressive we don't necessarily aspire to be in the top three of the best buy tables.
But we do think we can continue to take market share above our stock share I think are notable feature of what we saw in the market, which you'll all be familiar with us.
Yes. This was the first quarter for quite a while I think we're a front book margins were below.
Back book margins.
And have continued to drop a bit.
In Q1 as well.
Yeah. We've also seen a significant increase in risk weighted assets for U K mortgages from the beginning of this year.
We still think we're earning returns.
Comfortably above the cost of capital at this point.
But.
Conditions at our competitive at the moment in the UK mortgage market.
Yes.
China real estate listen.
There was no doubt during Q4.
The level of market uncertainty increased on the level of contagion risk on that whole sector of commercial real estate in China increase relative to Q Q2 Q3.
And therefore, we thought it wise and prudent.
Model in additional stage, one and stage two provisions to reflect the uncertainty that refinancing risk liquidity risk.
We've seen the market conditions ease a bit at the start of 2022.
We think that is likely to have a benefit.
On the risk position on commercial real estate in China.
I will tell it's still too early to tell how it'll play out.
This affected pretty much every private CRE client in China.
As Ewen said we have.
A mixture of.
And so in that sector run about.
30%, 70% sort of sooner, so 70% or so.
<unk>.
Time will tell as to whether that sector.
Has more losses come in.
Or not but we thought it wise to model in some additional provisions based on that level of uncertainty.
We think the one thing I'll also say, we still standby the facts, we have good quality clients.
We know for a long time.
Operating in tier one tier two cities with good properties, but.
But the sector as a whole has a level of uncertainty over it is affecting all of them.
Humans are in that.
Yes, all of that thinking that Noel has just been traded is behind our guidance when we talked about.
<unk> 30 basis points of.
ECL provisions for this year.
Yeah, I would note is probably more conservative guidance and current consensus.
The uncertainty of the Crs within 30 basis points.
Correct.
Over to that side.
Yes, good morning, it's Aman <unk> from Barclays.
Alright.
I have two please one back on rate sensitivity.
<unk> one.
One thing that's always.
Kind of a.
Found remarkable for a number of quarters now is how low your USD rate sensitivity is I think.
Even on the updated deposit pass through assumption.
In a relative to the 460 billion.
SD of deposits I think that you can employ from <unk>.
Slide 27, why is that rate sensitivity. So so low out of the U S does it imply a lot of hedging.
Is there something you can kind of help us understand that.
Second would be on aspirations for wealth management.
Note the cautious guidance in relation to Q1.
I guess I'm, specifically thinking about the border between Hong Kong and China reopening.
Is there any way you could help us quantify what the potential benefit could be.
If we were to rediscover a pre COVID-19 level of activity for that business I mean.
It looks like the onshore Hong Kong.
<unk> franchise has done really well last year, so maybe there's a bit of easing there, but anything you can help us put some numbers to that would be really helpful. Thank you.
Yes.
<unk>.
The U S dollar of theirs.
Effectively an accounting mismatch, which is driving that lack of sensitivity and.
Part of the.
Funding base in the U S is used to fund the trading book.
So in a rising rate environment, the benefit from an accounting the accounting benefit on the revenue side goes to trading income.
At so you don't get that normal.
<unk> sensitivity that you would expect.
On.
I think on.
The board of reopening if you go back to 2019.
I think about 40% of our new business sales.
On insurance.
Two.
Mainland Chinese.
Yes, keep the keep the current profile of the domestic business in Hong Kong.
As seen going back to 2019 levels.
Sure.
As that border reopens.
So just on that.
First rate sensitivity point, then is that is that additional rate sensitivity that goes through noninterest income were you saying.
That actually.
Yes that would be a conclusion of that.
I thought it would be low hundreds of millions of them.
Okay. Thank you.
<unk>.
We pivoted a bit in the slide but I just I just do want to reemphasize, because it's such an important plank of our strategy Asia wealth.
Some steps.
Net new invested assets.
Our wealth business was.
21% year on year last year <unk>.
That's despite a bit of a slowdown in Q4, but for the full year it was up 21%.
Jude sort of cross border activity flow.
Let's just driving the domestic markets. While we're also investing in as China. So what we're trying to do is we've got a strong business that we've invested in in Hong Kong when navvy invest in in China through the joint venture taken image for ownership of the joint venture of our insurance amongst business, there and organically investing in pinnacle three.
Some people over the next few years, so we want to drive stronger domestic growth in China stronger domestic growth in Hong Kong, and then connected them through the likes of wealth connect in stock connect.
And that's where.
I think we got the icing on the cake. He can say when the border opens up.
So I.
I think there's still strong underlying growth for the medium term.
And although signaling a softening in Q1.
There's a strong track record of the Hong Kong economy bouncing back.
And I think that's what will happen at some point later this year.
Thank you.
Right and then we pause mud behind Okay Guy.
Morning, Thanks, It's a guy Steppingstone BNP Pappa exam first question was back on incomes of the building and the last question. Thanks for the comments already on net interest income and I'm sort of reflecting a whack consensus I guess for other operating income.
It sounds like a give me a tough starts at 29th June you'd refrain from giving guidance for this year on on revenues versus the the medium term double digit guidance. Just wondering if he you'll sense. He says potentially a bit of a give back to the you know outside.
This year from some of those trends on although I appreciate it very difficult to judge in this environment, but any color there and would you say that very much as a short term issue and indeed that could be potential catch up on that line is the environment normalizes uhm. So any distortion is really isolated to 20 twenty-two may indeed, you're median time guidance for it to be.
Five per cent of groups suggested a rapid pace of growth to come through at some point in the future.
Uhm.
And then the second question was just song Koston and thanks for.
According out the restart she's gonna be above the line from 2023, I think that's a very helpful development it'll say it goes against what we're seeing a number of banks in terms of talking about permanently higher restructuring type costs. Then maybe we've expected in the in the past and in that context, nor to 2% cost growth favorite two years looks like a very.
Good good targets to hit if you do indeed I managed to reach that just wondering what gives you confidence you can do that if you know they're all still some investment type actions, we aren't inflation environment. I mean is it just a sense of the the amount of rum right cost sase coming through the business give you that significant company you can't deliver that thank you.
Yeah on.
Non-interest income I guess I haven't made the same comments vs consensus.
That that should be it and but luckily and he wasn't just yeah. We had a couple of things going on firstly, we've had weak markets in Asia, which is impacting both the insurance M G, but the market impact and also impacting equity breakage, we've now got it.
About half of the branch network temporary enclosed in Hong Kong at the direction of each Guy may as a result of COVID-19 restrictions.
Yeah key one is typically best quarter of selling wealth product and a lot of that is sold through the branch network. So I.
Yeah, if we look at what's happened in every other market with omicron, it's being a three month thing and then the economies of reopen again. So yeah. We do think it is.
Sure dated in nature.
Uhm.
Yeah, and and we're sort of not trying to regard to on twenty-three at this point, yeah, I do think there could be some disappointment in wealth and he won.
But by the time, you get back into Q2 with Hong Kong reopening, we should see array rapid recovery.
On Star Wars the chicken.
<unk>.
Second.
Of course of course.
Why are we confident on north to yes, I, but we we've done if you go back to 2018, you know the back into ear that I joined.
Yeah, we had a we grew costs at about 5.5% that year and we did exactly what went wrong not to do now which is we were trying to inflate the cost by is in line with rising rates.
Since then we've done an enormous amount of work did he should've been bid good costs discipline across the organization.
Way that didn't exist the three years ago.
We've got a very well grow cost program at the moment I would say you know if you're just yeah. The investment that we're making into various parts of the bank and digitalization and automation can drive out huge potential cost savings in some areas yeah, if I look at what on.
Trying to do in finance at the moment, we've got a big move.
Move to take all of our reporting into a single day, just say it on the cloud.
One of our reporting engines off the cloud, we think that can reduce operating costs and financed by 25% to 30% over the next three to four years and.
Yeah. It's the same analogy that no used in the front office with.
Tried the trade transformation, we've done in the last few years so I.
I think I would.
Yeah, we've got confidence as we look at the combination of ice investment programs going on.
In addition.
You know we are continuing to effectively.
If you were to cut our cost structure on a geographic basis. What you see is the mature markets are declining outside.
Europe UK U S Canada.
Which is allowing us to fund the growth that we want to put on.
In the Middle East Asia and Mexico.
So it's a complex mix of course actions going on across the organization, but.
We do think that based on the work we've done today is pretty good bottom up grounding for the cost targets now, we obviously don't put them out lightly because no. One I know that you will remind us if we missed so I'd I'd say, we got the bottom up analysis, we got the benefit of a committee three year transformation program two years into it.
We delivered what we said.
We will continue that in your three this year.
So it's a combination of bottom up and frankly determination.
I want the revenue benefit to go into the return to go into the P&L.
Law just to be spent on incremental costs.
I'm trying to get a much more stable.
Cost base of the organization over time and not have is cyclical.
Hi, Reitz high costs low rates low costs.
Much rather have a.
A a much more efficient machine that is constantly reengineer in itself.
And technology is playing a big role in it hence we spent more than $6 billion on tech last year.
And if you take the guidance, we said that was 19th sense of our operating costs and we want to say, we're willing to take it north of 21% of operating costs.
If you roll that forward over a period of time over through two or three years.
That will take 6 billion up to 7 billion. So implicit in incremental I'd see investment is a reengineering involved fundamental processes.
We saw the impact of Digitization on trade, we've seen the same thing in the payments Arena, we've got a similar program running on a wealth business reengineering.
Offer line Internet banking capability build it once rollie globally get scale globally. So.
That's what we're working on.
Richard was.
One more than the we've got time for two more one purpose behind you and then and then when you were in the white shirt, while the they both had their eyes open and they'll they'll Martin.
Perfect you in but we were we were like a rough up okay. It's purely Muslim K B W. And I tried a presentation just two questions. One on income so well actually loan growth and really so you've delivered 1% loan growth and and 21. So what gives you the confidence that you are going to be able to.
Do mid single digits and in 22, given you know Hong Kong and China still very much sticking to zero Cal State policy. So.
Sort of putting a late on and on growth that and sort of related to that if you are thinking about mid single digit lone crowds, and then and and a rising rate environment, why you're only targeting mid single digit and revenue growth and again until the building on the previous question. So that's on revenue side and then on cost.
And you've talked a lot about digitization investment in technology, and roughly what is a split between and maintenance spend and innovation spend.
I'll do the lots of question on innovation of maintenance.
Lifeguards I think.
2021 was.
Heavily distorted by a couple of things Paisley.
The impact the cave it in the first half of the year, which I think had a significant dampening effect on lung growth in the first off I think what we've seen coming through now.
Yeah, we've had it in commercial for some time just continued quarter on quarter lung growth I think and reach out we're seeing very very good guys in what which is by the Nikkei in Hong Kong. Despite what you referred to in Hong Kong Ah underlying line growth there in the Bull would shake that continues to be very robust.
But the other big offset which is not.
Is the rundown that we've seen in wholesale in global banking markets in particular, which is camp and neck right right.
You know if you look at Q for the key for Grace right I think it doesn't take much to get that growth rate up on an annualized measures. The mid single digits right in C. M B.
Q4, so cute for.
In Asia loans was.
Loves it.
If you take trade.
Two four Q4.
Gross in the balance sheet and C N b.
I think it was 29%.
So what you saw was a slow start in the first half of the year and then a pick up in the second half of the year trade grew faster earlier.
So then to London until in London started to pick up in the second half of the year.
As economies came out of Covid.
They first went to reactivate the supply chain.
And then they went to reactivate some of its own Linda I still think to London's quite muted at the moment.
You know I don't think there's a huge amount of capital investment taken place, but we're starting to see some early signs of that comes through in queue for.
I think we just have to wait and see economic recovery continues in the first half of this year.
And then.
Your other question on how much of the investment in technology is innovation versus maintenance.
Its charm innovation can mean, many different things to many different people. So I don't use that term necessarily for icy investment while I'm looking at is how much of that investment is fundamentally reengineer in the business.
As opposed to doing care of maintenance on today's systems for regulatory reasons.
And I think more and more of our technology's going into the reengineering space unless into the care of maintenance, we don't give a breakdown on that but I got a significant proportion of our investment.
She'll go over 50% is going into the reengineering activities of the bank not just keeping the lights on and maintaining the existing systems, we're investing in reengineering.
<unk> tried as an example, we fundamentally replatformed the whole software base for trade.
So we turn it off the old and turned on the news turn it on the news.
And that has multiple benefits.
It lowers the ongoing running costs of technology. It lowers the ongoing running costs of the bank provides new product capability better customer experience better operational control.
We're doing that in many other areas as well.
I'm afraid we run out of time.
Members of the team will be available outside for a cup of tea or coffee after to answer your question sorry about the truth, where you didn't have time to get on better after now too.
For both of you because I know you had your hands over to now and I don't know if I could play remarkably.
Listen thank you very much for attending today for all of your interest in your questions.
To sum up I'm pleased with our 2021 performance.
Particularly pleased with the returns of revenue growth in queue for which I think bodes well for 2022.
We've got good cost control and which determines to maintain it.
Based on current interest rate assumptions, we would expect a rotary or at least 10% in 2023.
And a year earlier than previously planned.
We've made good progress executing against our key areas of our strategy on our transformation.
And I'm pleased that we were also able to provide our shareholders with health healthy capital returns this year.
Richard on that same are available to you. If you have any questions, but in the meantime, please stay safe and have a good day evening wherever you are thank you very much.
[music].