Q1 2022 HSBC Holdings PLC Earnings Call

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference call for HSBC Holdings Plc's earnings release for the first quarter 2022 .

For your information. This conference is being recorded at this time I will hand, the call over to your host Mr. Ewen Stevenson group Chief Financial Officer.

Yeah.

Thanks on that.

Putting in London, and good afternoon in Hong Kong.

Thanks for joining today for our first quarter results.

I'll run quickly through the presentation and then open up for questions.

At our full year results and all and I set out a path back to double digit returns strong revenue growth driven by volumes and rising rates and tight cost discipline.

Our strategy to get there is on track all of these building blocks were reflected in our first quarter results.

Strong underlying volume growth across most of our businesses with $21 billion of lending growth.

And lending up in every global business and region.

The benefit of rate rises is now being reflected in our net interest margin. Our net interest margin was up seven basis points in the quarter.

Our highest quarterly number since the second quarter of 2020 <unk>.

Implied consensus policy rights that further strengthened since full year results.

Let's say the positive implications for our net interest margin and net interest income in 2022 and 2023.

We maintained good cost discipline with adjusted costs down 2% versus first quarter last year.

In line with our target of keeping costs flat this year and within a zero to 2% growth range for 2023.

Despite more challenged macro conditions. This quarter, we remain firmly on track at this point to deliver double digit returns in 2023.

While reported profits before tax were down on last year's first quarter. This mainly reflected a weaker quarter for wealth.

Driven by a combination of weak market and Hong Kong Covid restrictions.

Together with a turnaround towards a more normalized level of expected credit losses from net write backs in first quarter last year.

On capital with a 14, 1.1% core tier one ratio, we're now back within a 14 to 14 and to have the same target range.

We've completed the $2 billion buyback, we announced that our third quarter results and we expect to launch our next $1 billion buyback in early May following our annual General meeting later this week.

And with the now expected benefit of higher net interest income in 2023, there should strengthen our returns outlook and our capacity to fund attractive growth in distributions.

On the next slides, we're seeing good momentum across most parts of our franchise, reflecting a five years back to areas of competitive strength.

In wealth and personal banking, our underlying insurance business performed well.

With new business levels equivalent to pre pandemic sales.

And that's despite the closure of the Hong Kong mainland, China border and the impact of Covid restrictions on Hong Kong branch openings.

And our mortgage franchise continues to underpin good growth in personal banking.

In commercial banking, we saw strong lending growth of $9 billion or 3% versus the fourth quarter.

With credit and lending up $6 billion in trade balances up $3 billion.

Commercial banking fees were also up 13% the seventh straight quarter of increased fee income and commercial banking.

We were profitable in all regions, including strong performances in the U K ring fenced bank in the Middle East.

You will have already seen a sustainability announcements, which we're now working hard to implement.

And we made further progress in reducing our real estate footprint with a further seven buildings closed in the first quarter. Our footprint is now down 25% since the end of 2019.

On the next slide we provided an update on our business in Hong Kong and mainland China in light of the material payload restrictions that have been in place in both markets in Hong Kong branch closures and soft market has clearly impacted revenue.

But we continue to see good sales activity in the quarter underpinned by the increasing shift to digital sales and the investment we've made over recent years to support us.

Our room night sales capability, particularly benefited insurance, which delivered pre pandemic levels of sales volumes. Despite the branch closures and the continued closure of the mainland China border.

As we've seen globally with the short cycle of I'm, a koran Hong Kong is now starting to reopen our branches are operating normally again as of last week and we expect client activity to begin to normalize as a result.

In mainland China, we had another solid performance despite the impact of Covid restrictions on our own team and more widely.

Revenues were 9% were up 9% on last year's first quarter lending grew by $6 billion or 11%.

With a strong commercial banking performance as the standout.

Turning to slide five I've touched on most of this already adjusted.

Adjusted net interest income was up 10% at $7 billion in the quarter.

Reflecting buys right rises in balance sheet growth.

But no net interest income was down 16%, mainly due to insurance market impacts and the effects of COVID-19 restrictions on Asia well.

Our tangible net asset value per share was $7 80 down eight cents with profit generation more than offset by fair value movements and the impact of FX.

Turning to revenue on the next slide while wealth and personal banking revenue was down 6%. The bulk of this was jujo insurance market impacts.

We had a good personal banking performance revenues up 7% on fifth third quarter last year benefiting from rate rises in balance sheet growth.

This was offset however by a week at Volcker, and well with revenues down 19%.

Driven by the impact of weaker markets in Hong Kong private restrictions.

Commercial banking revenue was up 9% spread across all our main products with continued good fee income growth.

G L C M and trade were the standout performers G. L. C M up 21%, reflecting both higher balances and higher interest rates and trade, reflecting continued balance sheet balanced growth.

While global banking and markets revenue was down 4%. This was mainly from lower revaluation gains in principal investments.

Market. So in security services revenues were down 2% against the strong first quarter last year.

Underpinned by good performance in FX up 15%.

Global banking was up 4%, reflecting a different business mix to many peers with J L. C M revenues up 21% from higher rates and volumes.

On slide seven net interest income was $7 billion up.

493 million versus last year's first quarter. This was mainly driven by higher rates and volumes, particularly in wealth and personal banking and commercial banking.

On rights. The net interest margin was 100 and 626 basis points, that's up seven basis points on the fourth quarter.

Implied consensus policy writes a further strengthened since full year results with further positive implications for net interest income in 2022, and 2023, giving us even greater comfort and senator even double digit returns in 'twenty two 'twenty three.

On the next slide on credit performance, we've reported a net charge of 642 million of ECL was in the quarter. Some 25 basis points of average loans the.

The overall quality of our loan book remains good stage III loans as a percentage of total lines are stable at one 8%.

Seattle charge includes around $250 million relating to Russia exposures and.

And around 160 million relating to China commercial real estate.

We've released most of our remaining private 19 provisions some $600 million in the quarter.

This was largely offset by additional reserves of $525 million, comprising 275 million of forward economic guidance, driven additional expected credit losses.

And a $250 million central management provision, reflecting a cautious approach given the increased economic uncertainty.

We continue to expect the sales to normalize towards 30 basis points of average loans for the year.

Turning to slide nine first quarter adjusted operating costs were down 2% from the same period last year driven by continued cost control.

And the lower performance related pay occur relative to last year's first quarter.

As in previous quarters, we are continuing to invest in technology, while reducing other E us.

We've made a further $600 million of cost program savings during the first quarter with cost your teeth spend of around $400 million.

We remain on track to achieve the higher end of our five to five and a half billion of cost savings either the three years to the end of this year.

With at least a further half a billion dollars of cost savings from this program now expected in 2023.

To reiterate despite a low run rate cost to achieve in the quarter. We continue to expect to have some utility cost yohji spend of around $3 $4 billion. This year.

Which will complete our combined cluster G spend of $7 billion when the three year program ends in the fourth quarter of this year.

We remain on track to achieve stable cost this year compared with 2021 and.

And we remain committed to keeping underlying cost growth in 2023 within a zero to 2% growth range.

Turning to capital on Slide 10, our core tier one ratio was 14, 1%.

Down 170 basis points on the fourth quarter and.

And back to being within a 48% to 14.5% target range.

We flagged the impact of regulatory changes and the unwind of software capitalization benefits at our full year results.

Together these reduced our core tier one ratio by around 80 basis points in the quarter.

And the dividend accrual and they announced the additional $1 billion buyback accounted for another 30 basis points.

In addition, the steepening of the yield curves on financial assets designated as held to collect and sell reflected a negative after tax reserve movements of $3 1 billion or around 40 basis points, which was reflected in other comprehensive income and our core tier one.

Reported other blue eyes were up $24 billion on the fourth quarter due largely to a regulatory changes and lending growth.

Partly offset by ongoing risk weighted asset saves and FX movements.

Our cumulative.

Saves are now $112 billion.

We're firmly on track to achieve our new ambition of at least 120 billion of cumulative AWS saves by this year end.

Just as a reminder, later this year, we expect an impact of around 35 basis points of core tier one from the sale of our French retail business.

Which we expect to contribute to us falling below our 14% to 14 and a half the St Jogger range during the coming quarters.

As I stated our full year results our intention is to manage within the 14 to 14 it off the same range as the time.

We've now completed a $2 billion buyback announced in October and.

And we expect to launch our next $1 billion buyback in early May following our AGM later this week.

As we're now at the bottom of our target range due to the impact of fair market fair value market losses.

And that we're continuing to see good expected growth in the business. We're now unlikely to announce further buybacks during 2022.

However, I have of buybacks remain an integral part of our capital management going forward.

So to conclude despite a tougher set of operating conditions. This quarter, we remain very focused on getting back to double digit returns in 2023.

To achieve this we need to see good volume growth rising rights and cost discipline.

All of these attributes where they're in these results underlying volumes grew in most parts of our business underpinned by lending growth of $21 billion.

Our net interest margin rose seven basis points for our highest quarterly net interest margin since the second quarter of 2020.

<unk> costs declined by 2%.

So despite the macro environment impacting wealth revenues unexpected credit losses. This quarter the fundamentals of the benefit of rising rates of viney strengthened since our full year results, increasing our confidence in delivering double digit returns in 2023, and our capacity to fund attractive growth in distributions.

With that Martin if we could please open up for questions.

Thank you Mr Stevenson.

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We will now take our first question today. This comes from Malone of throws of tickets and with Jefferies. Please go ahead.

Hi, Good Hi, Joseph.

Hi, Thank you for taking my question just a quick one.

Just on the Q1 noninterest income and how much of this is frankly backward looking given.

<unk> got a lot of market impacts et cetera, and it sounds like your commentary from your commentary things are starting to pick up and in Hong Kong.

Can we start to see some.

Are you able to recoup.

Some of the quote unquote lost revenue from things like wealth sales in markets will do what they will but I guess it seems like if most of this is backward looking you're set for quite a rebound in noninterest income over the coming quarters, but just would like your commentary on that please thank you very much.

Yes Joseph.

I think it's a mix.

So there'll be.

Insurance market impacts obviously, yes.

That will depend on the performance of markets in the second quarter, but we certainly wouldn't why not anticipating the same extent of negative market adjustment that we saw in Q1.

Yeah. There are some line items like equity brokerage the flight business that obviously are equity brokerage volumes for us in Hong Kong.

We're down almost 50% in the quarter.

We do expect that to normalize back.

A key one is normally our strongest quarter, but we don't think we'll recoup the flow of business that we lost in Q1.

If you look at something like mutual fund sales, which in Hong Kong were down around 30% I think it'll be a mix I do think part of that yeah, we should recoup.

In the coming quarters.

So overall I would yeah, I think you'll see a decent recovery in Q2 Q3 Q4.

Yeah. It's some of what happened in Q1, I think is lost and just remember that Q1 was our strongest quarter. Normally you say you have to see a seasonal lies my comments that I've just made.

Thanks very much.

Thank you Bruno take your next question does come from loan of Oman recall of Barclays. Please go ahead.

Good morning, Ian and more on Tuesday morning.

Two questions if I may one on revenue.

You flagged in the firm and net interest income outlook.

Note that you retain the kind of mid single digit revenue growth aspiration for this year. So just wanted to be exactly clear on.

To what extent there was an offset.

In noninterest income.

<unk> because of.

The activity impact in Hong Kong and China.

What kind of assumptions, you're making about a reopening are you thinking about mid single digit revenue growth in.

In 2022.

And that was around FX I.

I think this is something typically consensus struggles to model very well for HSBC.

And I know there is a pretty meaningful.

Revenue headwind from FX of about $1 4 billion based on March.

On the 100 million.

Costs based on the average FX in March because look at spot FX rates that probably even a touch weaker.

Yeah.

Particularly for revenues, if I was to Rebase.

2021 revenue for the updated FX and factoring in the mid single digit revenue guide it probably is pointing to 2022 revenues around 51 billion.

Consensus is around 53 does that sounds about right to you is there any additional color that you would add to that thank you.

Yes.

Look we do think that we'll see.

Net interest income growth.

We are comfortably in excess of sort of mid single digits.

Yeah.

Yeah, Yeah, the AR offset by.

<unk>.

Non net interest income.

Particularly given the impacts that we've seen in the first quarter on Asia wealth.

Yeah, which which will hold.

Yeah, which will impact non interest income for the remainder of the year, but.

Yes, there will be an FX impact Ah Yeah, I do think your estimate of around 14141 5 billion is a reasonable estimate of that net interest that FX impact roughly split I guess across <unk>.

Noninterest income.

Net interest income.

The.

Yeah, your forecast feels but like semi.

Actually despite everything I've said about the impact of FX.

Yeah, that's probably a longer we're going to say on your own forecast.

That's great. Thank you very much.

Thank you. Your next question today comes from the law and the pros of Jpmorgan. Please go ahead.

Good morning, Thanks, very much for taking my questions maybe the first one just.

Focusing a little bit on the NIM trajectory.

On Slide 18, you again during a very helpful breakdown and what is interesting here is the U K bank NIM actually improved quite significantly quarter on quarter.

Whereas gili.

Anything else it is picking up very nicely as we go along so I guess my question is is there anything specific in terms of repricing youre seeing in the U K.

Blame that movement and related to the Hong Kong are you seeing.

How should we think about the gap between high border LIBOR is about 50 basis points now hybrids, obviously lagging the move up in U S interest rates, how should we think about that impacting the NII trajectory.

And then.

I'm delighted too.

Just another follow up question, if I can on <unk>.

Obviously, you had positive credit migration again from asset quality this quarter.

Just wondering what do you think about the moving parts a lot of the ways for the rest of the year.

But on the NIM trajectory in the U K I think there is nothing really to call.

Out in relation to asset on the asset side, continuing pressure as you all know in the U K mortgage market.

But yeah the main.

Thing Youre seeing is the benefit of the two rate rises that have already come through in the quarter.

And as we talked about.

Yes deposit beta as being sort of below 50% for the first few rate rises.

Yeah, we continue to think that we will see very material.

Our net interest income growth in the U K as is.

The policy rates continue to rise over the remainder of the year as we expect.

And Hong Kong are with high ball.

Yeah, if consensus is to be.

Yeah, the current consensus and our own full pass at HSBC I think for us for a 50 basis point rise in fed funds next month another 50.

In June if we get that 100 basis point right rises coming through it's very difficult to see how high but doesn't react.

So if you had asked me.

Yeah.

Full year results I would've said, we could have envisaged a set of six month lag between high bar in U S. Dollar rights given the shape of U S. Dollar rate rises that were now likely to see being much more front end loaded.

I think it's hard to see that gap being more than one quarter.

On risk weighted assets for the remainder of the year.

Yeah in terms of things to call out you've obviously got FX.

Yeah, I don't think there's any material rate movement from head of called out you've obviously got the impact of M&A and the fact that three including the.

The French retail bank exit and a few smaller acquisitions that we've made.

But I you know that Q1 was definitely a quarter that we expected to see.

Yeah, most of the activity that we've now seen so it will be a much more normalized trajectory I think in the coming quarters.

Yeah.

Thank you that's really helpful. I don't know if I can follow up but on regulatory changes.

Last quarter, you had called out about a 5% out of your inflation guard for the medium term on regulatory changes and how much of that is remaining I'm just thinking more medium term about our W. Edwards.

Yeah, I mean, I think at the moment, we're through most of it.

Yeah. The yeah, you then roll forward to the introduction of Basel I guess pushed to January 25, maybe.

We're actually thinking that will be a small net benefit to us.

Even further forward by the time, we're out to 2030.

Yeah, we might see the impact of the output floors at that point, which would be I think unless we adjusted our business model would be a negative at that point, but.

Certainly over the next few years I think we're through the bulk of it and as I say in one January twenty-five weight as we currently model, we think Basel will be a net positive for us.

That's really helpful. Thank you.

Our next question today comes from the line of tracing Napier of UBS. Your line is now open.

Good morning in hydro and taking my questions.

Two please both on net interest income the first is if if we take.

4% volume growth over the year and just run it into 2023.

And then give you about 150 basis points of of kind of yield curve moves.

We're getting sort of $37 billion to $38 billion of net interest income.

Consensus is sort of in the 30 threes take what you're saying about FX.

But I guess, we've all got our opinions on using a 50% deposit beta in the Max.

It is there.

Kind of wrong with volumes, plus 150 basis points that we should know about sort of structurally as far as the walk forward into next year is concerned.

And I've got a second question.

No.

Well you know I don't like talking about 11, NII forecast, Jason but.

Okay, I think reflecting on what's happened over the last couple of months I, Yeah, I think yeah.

The average consensus model was probably updated following our full year results in late February .

Since then we've seen very material.

<unk>.

Right rises coming through in March and April , which I think is reflected in consensus.

So yeah.

Our internal forecasts are materially ahead of consensus as they currently sit for net interest income in 2023.

Without commenting on your numbers.

Thank you and then the second one.

Perhaps it will be useful wondering from your perspective, just in terms of the mechanics of the way that.

I've never quite been able to square.

The.

Five trillion number even if you are using a 50% deposit beta and today I found myself, even less capable of doing that and I'll tell you what the unwind.

Ci.

Is it sort of a 5 billion tailwind.

Period.

Of course that only relates to 350 billion in bonds and you've got a trillion in loans and deposits at match one another I just wonder why the rate carrying isn't substantially more than that if the golden tail wind on the chart given what's happened to rates is about 5 billion is it something fundamental that I am getting wrong, there that you could spot.

Yeah, I'll show you a bond tireless bond style I think so yeah. The way I think about it is yeah, we have a gross and net interest rate exposure.

Yeah, we we hedge about M <unk>.

20% of our overall net interest income exposure through that bond portfolio that we're referring to which we've just taken the fair market value losses on.

Yes that that doesn't provide us with that incremental.

<unk> four 5 billion of unwind over the next five quarters, we see that benefit in the other 80% of the portfolio.

Yeah, and the interest rate sensitivity that we show you is the net interest rate sensitivity a great interest rate sensitivity.

If we didn't have that portfolio and hedging in place.

Yeah that $5 4 billion is probably closer to $7 billion or sampling.

So.

Yeah.

The benefit of higher rates that we've seen coming through that has created the fair market value losses.

The benefit of that.

That higher net interest income we want to see in that portfolio, we will see in the unhedged, 18% of the portfolio that we've given your interest rate sensitivity for.

I don't know whether that helps or hinders your ending.

That's very helpful. Thank you. So that's why you're you know an uplift as focal in the new year 345 gets you to eight.

Okay got it thank you.

Your next question today comes from the line of you're always hung Chung of Citigroup. Please go ahead.

Thank you I have one.

Hi, good morning.

First one is around the capital markets.

Gary.

In the quarter because of market volatility just wanted to get a flavor.

Hello can you be coming down a bit how is how are you thinking about the thick.

The capital market side.

Perfect.

And then secondly is to look at.

25.

Quite a lot of color on the impact to OCI.

Just wanted to have a better understanding how should we be modeling the coming coming few quarters.

So OCI impact that is going to come.

Come from the higher rates that we see.

Thank you.

Yeah, so on blood banking market and the outlook I mean, I guess, a few things there's nothing really to call out that surprised us so far in April so very much tracking.

According to the underlying plans at the moment.

We haven't seen.

Yeah, any material slowdown going on in that market franchise month to that.

Global banking <unk> done.

Whether it's us, but you know our pipeline continues to look pretty robust and has been pretty resilient.

Yeah, probably in part we are less exposed to the U S M&A and IPO markets and some of the other markets that we are exposed to it like the middle East.

<unk> have been outperforming for us.

I think at night, and our global banking markets franchises.

A lot of the revenue line items are interest rate sensitive securities.

Security services.

J L C M D G I R F.

They should outperform on.

On the back of those beta rights environment.

Which will help cushion if there was any weakness that we saw in some of the sort of more traditional investment banking lines in market lines that you would compare with peers.

And I do think we're continuing to operate in an environment with higher levels of FX volatility, which again should benefit our FX franchise.

Oh I see I think the only thing to call out is if you take the.

If you take the months to date adjustment.

The treasury portfolio, there's about an additional $1 billion pre tax of.

Fair value losses, which would obviously run three ICI in April .

Would there be anything additional.

That 1 billion when we think about it.

I mean that the connect very much depends on the forward curve of interest rates from here over the remainder of the quarter.

If they didnt lose a it would be about $1 billion, if they do move.

It will adjust up and down but just to give you some sense of sensitivity and please take this as a very broad and basic sensitivity but.

Yeah every year, approximately 25 basis points of higher rights across the curve.

Adds about $1 billion of additional fair value losses.

And the reverse of that also being true.

If they were 25 basis points lower that fair value loss would come in by about $1 billion.

So I think that will give you enough to model lives.

Yes, the quarter, depending on where interest rates are relative to today.

Got it that's how many quarters.

So, let's say if rates.

Right.

You said that is.

From that point.

Hum.

Penetrates that we shouldn't be thinking about once interest rates stabilize.

From higher Treasury trends.

Or should we just take that into account from the net interest income.

Right.

No there'll be no later than year, one off gain or loss at that point.

Yeah, and then effectively you'll see the benefit of wherever that is right right.

Bright stabilized come through in net interest income on the net interest margin over time.

Got it thank you so much.

Our next question today comes from the line of Omar Keenan of Credit Suisse. Please go ahead.

Good morning, everybody. Thank you very much for taking the questions.

So for US It was commented on earlier market expectations for policy rates have moved up since since the full year.

Appreciates the.

Sensitivity, that's being given them for the year one in year five.

Can I, perhaps just ask about how you're thinking about things in terms of in terms of the net interest margin.

If we think about 2019.

The fed funds rate peaked out at about 2.5%.

Nims were quite close to $1 six I think the 1.5 knowing that the.

Has anything changed in terms of the balance sheet structure.

That would mean that.

Just in terms of.

They tend to checking.

That wouldnt.

It wouldn't be achievable.

Again or is that pace was good.

Good good target too.

Think about.

And just on a related question to Reits.

Hum.

Yes, if you're thinking more of a maybe with the medium term.

How comfortable are you that the through the cycle.

30 basis points, a learned off guidance is.

Right for a world where policy rates, though a close too.

3%, So I guess the crux of the question too.

Troy I understand.

Either way with a negative from higher rates might.

My offset offset the positives.

Is it is that inflection rate.

So substantially higher above 3%. Thank you.

Yeah. So I mean, what's changed in 2019, I mean, especially the balance sheet is materially bigger so average interest earning assets have gone up materially so.

Yeah on a REIT, but volume basis, we should be earning net and higher net interest income if we return to previous NIM levels. They are.

The thing is I, you know I think the market implied rights, particularly in some markets are actually higher than 2019.

So.

Ted.

Yeah, we certainly expect to say a very strong recovery back in NIM.

As you model it three it might be in some market that gets you back to higher levels of men in different currencies than you had previously and the balance sheets are larger.

Hum.

On the 30 on the negative impacts of higher rights.

There's a few things I mean, firstly on costs is yeah. The high rights reflects higher inflation.

<unk>.

Yeah, if you looked at a fixed pie increases this year that were more than double.

The fixed pay on pay increases that we put through in 2000 a 2020.

Or the eight before so Ah.

We do think we're managing to offset that inflation at the moment for additional cost saves and we've committed.

And continue to commit to flat costs this year.

And keeping cost growth within the zero to 2% range next year, the higher end of that range reflects very much the impact that we're seeing of inflation.

Yeah on Acos, I think rates need to go up materially higher than what are currently being.

We're currently seeing in forward right because remember we're starting from.

Yeah decades, so with century sensory lows in terms of the start of this rate cycle.

So we do think that it would have to go up materially further than what we currently see employed.

So just as a reminder, we said 30 to 40 basis points during the cycle.

Not 30.

But how can we continue to be comfortable with that guidance.

Thank you very much.

Our next question today comes from alone of Tom Rayner from Numis. Your line is now open.

Good morning, Ian.

Could you maybe sort of talk us talk us through in a bit more detail. This sort of the impacts of these OCI movements on the capital ratio and how.

You might expect that to impact to be the size of the next four to six quarters, because I guess my concern is that consensus forecast may have already factored in.

Benefits all time interest rates based on your sensitivity disclosures and the forward curve.

Not factored in the negative impacts that you'll have you'll know flagging on the capital ratio. So I'm just wondering is there a danger that.

This sort of equity tier one ratio versus consensus NIM might be somehow out of line and let's see but maybe talk us through that please.

Yeah, so on ICI movements.

Yeah, as we talked about today that would be about another $1 billion pretax movement in April by stone, how Reits have strengthened further in April .

The.

And yeah, there was a sort of a multiplicative effect on a threshold deductions as core tier one declines then you would say.

I think you'll see in the numbers, there's also a sort of meaningful chunk of.

Of course, they want them payment that's come through.

As a result of the reduction in core tier one and the impact that has on threshold deductions together with the.

The increases we've seen in bulk all of them and now the acquisition of extra Singapore.

Yeah Rolling forward, it's not the unwind of that just to repeat to what I was saying with Jason it's not the unwind of the fair value losses.

That benefits net interest income and capital it's the impact of his hire rights on the 80% of the book roughly that's not hedged.

And therefore.

Therefore, we expect it will take about five quarters for that higher net interest income to get us back to the same place.

We don't think as I said earlier.

Yeah. The rate rises are implied rate rises that we've seen coming through in March and April are reflected in consensus.

If we look at our internal numbers Theyre materially ahead of consensus for 'twenty three.

Based on the latest right because.

I think what you will see therefore is that it translates into core tier one.

As you should get back to the same point on core tier one sometime next year.

But in the near term, where we've had the 40 basis point impact from.

The fair value losses, we've had three first quarter, we've got about another 10 basis points, if you adjust for a fair value losses in.

April will just under 10 basis points.

Uh huh.

Yeah, we will recoup that through higher net interest income by over the following five quarters, so there'll be a timing mismatch on capital.

It's that timing mismatch on capital, which causes us to sites that I that we think it is now unlikely that we will do further buybacks in the second half of this year.

But the reverse of that should be.

Much higher a much.

<unk> net interest income much our returns.

My childhood distribution capacity in 2023 and beyond.

Yep Okay.

That if you are putting through.

Net interest income based on future rate movements, we have to consider the capital implications of those rate movements as well.

Is that fair yet so I think if I look at consensus today, why hasn't that reflect that it didn't hadn't reflected the impact of the fair value losses on capital equally it hadn't reflected the benefit of those interest rate rises on net interest income over time.

Okay.

Also secondly, just very quick one just on <unk>.

Q1, ECL numbers, because obviously there's lots of.

Moving parts here and I guess, you know the provisions you've taken.

Russia and China, how they.

It reflects everything that you expect at this moment in time. So you wouldn't expect I guess to be taking similar to <unk>.

<unk> for those issues and and then and with the economic uncertainty as well there was a chart in there and I think maybe that's just a change in assumptions, but these are all things, which we can look at it as sort of the Q1 noise and really going forward, we should think more about the underlying.

Sort of the run rate challenge that you flagged that you expect this year.

Yeah, well, so for Russia, I would say Ah yeah. We've obviously spent a lot of time in our Russia or exposure, we've been able to do it.

Pretty good estimate of where we think losses will come true, we think that 250 million dollar charge, we've taken for Russia.

Yeah. It is a good estimate of what we can see today, so something dramatic would have to change in relation to the Russia, Ukraine wall for a position on a Russian subsidiary to to get to a different outcome to what we've announced today.

On.

On the 160 million odd of our China commercial real estate, Yeah, I would not make the same statement.

Now that you've got a very fluid situation and the China commercial real estate sector.

Theres been too big.

Factors going on one has been policy tightening that we saw at the back end of last year that started to get unwind on wound at the beginning part of this year.

That created a liquidity squeeze that is now ease substantially.

But the underlying credit conditions off the China commercial real estate markets continue to be weak.

Yeah, we did see a number of small names going into default this quarter.

The 160 million dollar charge was a mix of stage, one two and three.

It's down materially from the half a billion or society that we took in Q4.

But I wouldn't say, yes, it would be a big cold tell them to say that was it in relation to the.

Remaining provisions required from the China commercial real estate market.

But we're not anticipating it will be a material number.

And it is contained within the guidance that we've given for the full year provisions sorry, yes.

Yeah that statement is that we expect to trend towards a 30 basis points of ACL provisions this year.

Q1 was 25 basis points.

Yeah go ahead.

Okay. Thanks, a lot.

Our next question today comes from the line of Ed first off K B W. Your line is now open.

Yeah good morning.

Yeah, Hi.

Two questions first on costs really what one was back to the cost to achieve charge.

You're obviously running well below that and it will be annualized rate I guess and I know the expectation again, we just think about the expectation is to pick up in the rest of the year.

But in the policy. If you if you haven't spent the money you then roll it forward into the next year. So should we be expecting that as the sort of the core scenario is.

It's not the way we should be thinking about it as we as we look out for the rest of this year and I guess, that's the first question.

And then the second part is if I look at your cost guidance of flat this year and flattish flat to 2% next year I mean that that is.

Quite markedly different from another a number of other global banks, who are talking about the need for additional investment, particularly digital and payments et cetera et cetera I'm.

And I'm just wondering what why why that is so I mean is it.

Do you feel that you are investing in the past and therefore, you know you can bring it back a bit or are they doing stuff that you're not doing or why is that sort of thought about difference in terms of the cost.

Okay. So.

Look on the first one you shouldn't think of the program drifting into 2023.

We have a board approved program that expires at the end of this year.

Yeah, we will spend the.

Our remaining $2.9 billion I think it is.

Now and the end of the year and if we don't we lose it. So our intention is to spend that money. We think it is sensible to spend the money because we can drive that incremental cost savings.

And that thinking is factored into our competence in keeping.

Cost growth to zero to 2% next year so.

Yeah. Our current intention is that we will run very close to spending that $2 9 billion.

For the remainder of the year.

So if you don't see it coming in next quarter, just the same I'm, making exactly at the same call man.

When they get interim results about the flow through into the second half.

Yeah on the cost program that might be I should say thanks.

Yeah, I'd run the cost program.

I can't comment on other banks, but okay.

Okay, I think yeah, what's clear here is that no top down is very very committed to delivering on the targets that we've announced to the market.

Yeah, we've got.

A very detailed plans in relation to achieving the.

Flat costs for this year I would say for next year, Yeah, we need to find a bad on incremental cost savings of about $1 billion.

We are working hard on that at the moment, we expect to have that solutions part of the time that we get to see.

The interim results at the beginning of August .

And you know that sort of cost gap is not unusual relative to previous guidance that we've given for future years at this time of the year.

We're well developed across a number of work streams and identifying areas that we can strip out incremental cost.

So yeah, I would say the cost management here has been transformed over recent years and you can see that in terms of the overall cost trajectory that we've had.

From a change from 2019 onwards, where we broadly kept costs flat now.

In 19 2019.

19 322.

Yeah Okay.

Given the inflationary environment. That's obviously a much you are actually improving your cost savings rather.

Rather than building a plant.

Okay.

Yeah, no we understand that.

And that's why we've got a degree of a range for next year.

Consistent with that.

Great.

Thanks, so much.

Our next question today comes from the line of going stepping so of BNP Paribas.

<unk> is now open.

Hi, guys. Good morning, good morning.

Most of my questions been.

Austin answer so just a couple of them capsules throughout them.

Could you expand on the hit from a threshold deductions in Q1 I recognized some of it was simply a reflection of the move in the equity base itself, but how much is some residual stuff and was it particularly old quarter for bocom treatment should be worried about assuming that even the future. We're actually want you to see a partial reversal.

Dividends should come through.

And then on the longer term and it's great to be able to quantify the helpful commentary on Basel III. One is supposed to be a net positive now pre the output frugal.

Very broadly we talking low single digit percentage is dropping all day I used that sort of magnitude any additional color there very helpful. Thanks.

Yeah, so in terms of the.

The increase in threshold deductions about 1.3 billion off it comes from the growth in the.

The value of investments in our OXXO, which is about 600 million and Bocom, which is about $700 million.

And then there's about 800 million is due to the threshold being lower because we've got a lower core tier one ratio, which is as a result of the fair value losses.

The loss of core tier one treatment for software intangibles, the dividend accrual and $1 billion share buyback.

I would take it from all of the comments, we've been saying did I. Yeah. We think yeah, we're back into a cycle of of March our returns.

What should drive.

<unk> core tier one improvement and therefore.

Helped mitigate some of the impacts that we've seen this quarter.

The second question.

The second question.

So the second question was just almost $3 one that color you gave.

Yeah. So yeah as we said we think in 2020 five we'll say a modest benefit for them, but modest.

From the introduction of Basel reform, partly big Yeah, almost entirely driven by the fact that we've taken are most of the impacts upfront.

Leading in this quarter.

I do think over the next couple of years, you'll see a much cleaner odd <unk> trajectory for us with the only thing to pay attention to which we'll need to give your Colorado as the impact of M&A by far side and sell side.

Okay. Thank you.

Our next question today comes from Manus Costello Autonomous. Please go ahead. Your line is now open.

Moving my math right.

I wanted to ask about the macro situation because there are some negative my crew signals coming out of China.

Lockdowns the effects as volatile <unk> premium to the U S.

No, but you seem to remain quite confident in the outlook, but haven't really.

So much I was just wondering if you could give us more color on what you want more worried about the way Tyler is developing at the moment, whether I misread what your comments were.

Yeah, No I mean.

They were probably I mean.

As you know.

Think about quite a child.

The impact on Hong Kong, there's a far more dominant driver of what happens to us.

Yeah, and we are confident that a combination in Hong Kong a combination of.

The market reopening as lockdown restrictions get lifted together and importantly, the likelihood that we're seeing material movements in high bull in the coming quarters will mean that we'll see a strong recovery in Hong Kong earnings in mainland China are itself I think it reflects a few things.

Yeah, Firstly, just an observation that wed.

That despite being the biggest bank in China.

We are small we have our biggest foreign bank in China, we have less than a 0.2% market share.

If you look last year, we agreed the line book by 11%.

Which was far in excess of underlying GDP growth.

Our ability to grow the loan book is not.

As correlated to underlying economic growth and if we were a big lender as we are in Hong Kong. So.

Yeah, we are somewhat insulated to some extent.

I think with Pinnacle again, a life insurer in furniture, we're continuing to actually to see very good traction in that business.

And see nothing in relation to what's happening that would cause us to slow down the plans for that business.

We also have a lot of revenue connected with trade in China.

And somewhat perversely.

If there's a disruption in supply lines. It means people have gone to run they could trade AR balances.

With us as we've seen in our overall trade franchise with the disruption in supply line side.

Again, you've got a number of things that Apple, which yeah, we're not perfect.

Uh huh.

Yeah, it's different in the U K and Hong Kong.

We very much track macro in a market like China or it's much more micro.

Okay that makes it thinking can we spoke a very quick follow up on Nio as well just because you commented that you're expecting rate hikes to come through more quickly in high voltage will rise more quickly than previously at what point to the mortgage cups in Hong Kong.

And how material might that be if the rate hikes are coming sooner or larger.

That mean.

Pick up sooner and therefore.

It benefits flattened out quicker.

Yeah, I'll I'll get alright, I I R investor.

<unk> seem to follow up matters, but I think it's around 160 basis points is where it stops to have an impact on NOI growth and I'll get to our.

Investor Relations team to follow up.

Okay. Thank you very much.

Thank you we will now take our last question today from the line of Martin Let go of Goldman Sachs. Please go ahead. Your line is open.

Thank you good morning Jordan.

Thank you for taking my question I have just two questions. Please one on U K NIM.

And a follow up on.

On capital.

The reporting on HSBC U K banks do you see shows that NIM increased by 15 basis points to 163.

And I was just wondering if you could share your thinking on on the phasing of freight benefits coming through in the U K to what extent does touching delay the impact because it seems like from the increase you had in the first quarter.

That's hatching is comparatively a smaller box.

All of that of the rate sensitivity, if you like and that's actually a good part of the rate sensitivity comes through quite quickly would you be able to share how big the structural hedge is in the in the U K ring fence, so sort of get a better sense on phasing if any.

Further rate hikes on the P&L.

And on capital I was just wondering the leverage ratio is up.

Including the corridor following Oh as leader there that changes that.

That's in fact, how you see certain businesses.

We have a low risk weighting of the high comparatively high I said wait.

Say trade finance repo is there more opportunity to engage stronger in some of these business lines. Thank you.

Yeah.

You look at the second one Martin I think.

That's a very complex question that you need to drive down to the individual legal entities because.

Yeah, we're sort of relatively unique and that we don't have a single balance sheet. Yeah. If you look at the average pay of probably 70 plus percent of their.

Assets are within a single balance sheet, where for us. So I don't think a single balance sheets more than about 30% of our total balance sheet. So.

Yeah, where leverage constraints capital constraints stress constraints impact as a entity by entity discussion.

But I think fundamentally anything has changed our strategy in any of those legal entities.

Over the last one to two quarters.

Oh, Okay. No I think our I think we are hedged blowouts are much lower than some other banks. We also have I think higher levels of liquidity in short I did.

Liquid assets.

So I do think we probably have more interest rate sensitivity than peers.

Without commenting on their interest rate sensitivity.

Yeah, and as you saw in our dysplasia as Oh, Yeah, Sterling as I my sensitive.

Currency.

And we do think what we're saying in terms of rate rises therefore should correspond linked to a very material net interest income growth not only in the ring fenced bank, but also in the non ring fenced bank that has exposure to sterling interest rate sensitivity.

Yeah.

Very clear thank you very much.

There are no more further questions at this time back to you Ewen.

Okay, well look thank you everyone to joining appreciated the discussion and look forward to catching up with you and at our interim results.

If you do have any immediate follow up our Investor Relations team is here to help so thank you all for joining.

Thank you, ladies and gentlemen that concludes the call for the HSBC Holdings Plc's earnings release for the first quarter 'twenty 'twenty. Two you may now disconnect.

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