Half Year 2022 HSBC Holdings PLC Earnings Call
Good morning.
I'm really delighted with the Hong Kong today, our interim results announcement.
The first time since the COVID-19 virus struck the world.
I'm here today with no to me.
Dave will take you through the presentation shortly.
Noel will then lead the Q&A.
I was wondering if today's results. We've also getting plenty of time to meeting with our customers and investors face to face.
And I'm very much looking forward to meeting with our Hong Kong shareholders Tomorrow.
We have always greatly value their feedback and engagement.
And we look forward to seeing them in person.
There have been reports in recent months about ideas for alternative structures for HSBC.
The board has been fully engaged in examining these ideas and depth.
And we will continue that Saturday examination.
Now I will discuss this in more detail during the presentation.
The board firmly believes that as these results clearly demonstrate.
H S. P C strategy is working.
I would expect that it will deliver very good returns over the coming years.
So 157 years, we have fought out trade and investment flows to support our customers as they fulfill their financial ambitions.
We have used our deep experience and strong global relationships to.
To help our customers to navigate the world.
Today, we remain steadfastly focused on our core purpose of opening up a world of opportunity.
Our model is increasingly relevant to individuals into companies of all sizes, and whose financial ambitions span multiple countries and regions.
Our transformation has enabled us to emerge from the pandemic, a stronger bank and well positioned to capitalize on the current interest rate cycle.
And very few banks can rival our ability to connect capital ideas and people who are.
Our global network that facilitates the international collaboration required to execute succeed in today's world.
The focus for the board and the management team is on delivering our strategy.
Precisely because he is the best way for us to support our customers.
And to improve the trends.
With that let me hand, I'll, let you know.
Thank you Marc and good afternoon to everyone in Hong Kong, it's great to be here to present, our half year results.
And good morning to everyone in London.
Before I turn to the progress against our strategy.
Brief reminder of the context.
As Mark said.
Our purpose as an organization is opening up a world of opportunity.
These words are a product of extensive consultation with our customers all colleagues about who we are and what we do.
And I strongly believe our strength as a global institution comes from our ability to connect the major thing.
So connect the major trading blocks of the world.
I will come back to the value of all connectivity and strategy later on.
The next slide sets out the key points that were going to cover in our presentation today.
First we've had another strong performance in the second quarter.
I'm pleased with our reported revenue grew by 2% on last year's second quarter and was up 12% on an adjusted basis.
Adjusted profits before tax were up 13% on the same period last year.
On continued strong cost control led to a positive adjusted jaws of 12%.
Second we've made good progress with our transformation program.
If you look back a few years ago, we had lossmaking businesses in the U S and Europe .
Capital was being used inefficiently.
We have structurally repositioned our portfolio of businesses and our operating model for higher returns.
The two most material adjustments in our portfolio have been the exit and wind down of non strategic assets and clients in the U S and Europe .
On the strong impetus behind organic and inorganic growth in Asia.
Especially in wealth and personal banking.
This repositioning effect is starting to pay off in terms of growth and returns.
As these results show.
Third it's the benefit of transformation on the tailwind from higher interest rates, but allow me to announce some ambitious new targets and underpinning guidance.
Even against the challenging economic backdrop.
After delivering an annualized return on tangible equity of nine 9% in the first half.
We are confident of delivering at least 12% from 'twenty to 'twenty three onwards.
This would represent our best financial performance for a decade.
Finally, as a result, we are providing more specific guidance of a 50% dividend payout ratio for 'twenty, two 'twenty, three and 'twenty 'twenty four.
We understand unappreciated the importance of dividends to all our shareholders.
So we will aim to restore the dividend to pre COVID-19 levels as soon as possible.
We also intend to river two quarterly dividends in 2023.
Let me now walk you through the progress we've made in the first half of this year in transforming the bank.
In Asia wealth, our investments over the past few years are gaining traction.
We've made a series of bolt on acquisitions to accelerate our progress in the first half we completed the acquisition of Axis Singapore.
We remain on track to complete the acquisition of LNG investment management in India.
And in mainland China, we continue to build momentum on the back of 17, new licenses on regulatory approvals gained since the start of 2020.
Seven of which were in the first six months of this year.
We've got strong revenue momentum across all of our businesses with 4% of the adjusted revenue growth in the first half.
After turning the corner on revenue back in 2021.
Normalizing interest rates give us confidence in the returns trajectory for the coming years as we will explain later.
We have also got good cost control with adjusted costs stable in the first half despite inflation and higher spending on technology.
We had an annualized return on tangible equity in the first half of nine 9%.
We have not made cumulative arguably way saves of $114 billion.
And remain on track to exceed $120 billion as we continue to exit assets and clients that do not add value to our international proposition.
Our CET one ratio was 13, 6%.
And we aim to manage back to within our target range, what it means for 14.5%.
During the first half of 2023.
Our capital allocation to growth opportunities in Asia, and wealth and personal banking also showed good progress.
We have a strong focus across all networks today.
When you combine exiting unprofitable businesses.
Under productive arguably ways.
With types of costs.
On an impetus for growth you got much better geographic performance.
With every region profitable in the first half.
One of the standout performers, what's the H S. P C U K.
Which contributed $2 $5 billion of adjusted profits up 15% on the first half of last year.
Many of you heard about the fantastic job that Ian Stuart on the U K to team are doing at the recent Investor day.
If not please do look at the materials on the website.
Looking forward at <unk>.
Transformation also means we can expect the current rate cycle to bring higher returns than previous rate cycles.
Because we have more liquidity less risk.
And much higher operating leverage.
The level of surplus deposits, we hold <unk>.
We're very well positioned to benefit as higher rates kick in.
We also now have less risk in our two key books.
The retail unsecured loan book on the SME lending book.
We have around $91 billion of business banking deposits in Hong Kong on around $55 billion of business banking deposits in the U K.
At very low a D ratios.
And we have outperformed our peers on cost management in recent years.
The next few slides cover our four strategic pillars.
Starting with a focus on our strengths.
Our market, leading commercial banking franchise had a very strong first half.
Revenue was up 14% on last year.
Within that it was particularly promising that there was fee income growth of more than 12%.
Trade revenue in commercial banking increased by nearly $200 million or 20%.
Driven by a 25% increase in average trade balances.
As clients trusted us to help them navigate supply chain shifts.
J L C M was up 42%.
With a strong benefit from interest rates normalize it.
And by Geography every region performed strongly.
Revenues were up 19% in the U K.
5% in Hong Kong.
Up 18% in the rest of Asia.
And up 12% in the rest of the world.
In wealth and personal banking the impacts of the transformation I described is particularly evident.
Net new invested assets in wealth grew by 9% in the first half.
In Asia, we achieved significantly more positive dollar growth.
Don was reported recently by our European wealth management peers.
And it was great to see the value of new business in our Asia insurance franchise grow by 41%.
Ooh, despite adverse market conditions.
Revenue in wealth and personal banking was stable.
But excluding market impacts and a gain on pricing updates on policyholders funds it was up by 7%.
Personal banking had a very strong half.
Lending balances were up 4% driven by a strong U K mortgages performance.
I'm looking at revenue by geography, excluding market impacts on the insurance gain.
The U K was up 22%, Mexico was up 16%.
While Hong Kong remained resilient down only 1% despite the impact of Covid restrictions.
All of this underlines.
The way, we structurally reposition the business.
We should not get the benefit of normalizing rights on top of that.
Global banking and markets also performed very well in the first half.
Reflecting our differentiated and diversified business model.
Strong revenue performances in transaction banking and our markets business were driven by rate rises and continued good levels of client activity.
Collaboration between global banking and markets and commercial banking is a priority.
So I was particularly pleased to see these collaboration revenues increased by 14%.
Back in February I talked about the proportion of global banking and markets client business booked in the east.
But originated in Europe , and the Americas.
In the first half this revenue grew by around 8% on the same period last year.
Underlying the strength of our connected franchise.
We will continue to invest in coverage and build share and connecting capital and trade flows between the worlds major economic blocks.
Digitizing H S. P. C continues to improve the client experience.
Make our processes more efficient.
We've continued to raise our spending on technology with more than half spent on change the bank initiatives to drive growth and efficiencies.
This is in spite of the commitment to keep our overall costs stable in 2022.
With more than double the proportion of our agile workforce over the past year.
Which we expect to translate into a much faster release frequency for new features and propositions.
Our cloud adoption across public and private cloud continued to increase beyond 30%.
With an ambition to go much further.
And across trade HSBC net and retail mobile.
Penetration levels and volumes increased materially.
With ambitions to grow them even further.
The next slide covers our last two strategic pillars.
First we're continuing to build a dynamic and inclusive culture.
We remain on track to achieve our revised target of 35% of senior leadership roles filled by women by 2025.
The total number of hours spent by colleagues learning about sustainability digital and data increased seven fold.
Flex in the increased power ROTC placed on future skills.
And to give you. An example of how we're opening up a world of opportunity for our people.
We're rolling out a talent marketplace, which uses AI to match colleagues with short term projects alone it.
Based on their skills and ambitions.
Then on transition to net zero.
The amounts of sustainable financing and investment that we provided and facilitated was stable in the first half of last year.
Despite the overall market for green, social and sustainability and sustainability linked bonds being done in the first half.
The overall amount of sustainable finance, an investment provided and facilitated since the start of 2020 now stands at more than $170 billion.
Well on our way towards our target of up to a trillion dollars by 2030.
The next slide shows why we confidence of keeping Justin costs stable in 2022.
And our ambition is to keep cost growth to around 2% in 2023.
Despite strong inflation headwinds.
It comes down to three things.
First.
Good cost discipline across the whole group.
Second our efficiency leavers.
We're reducing the global real estate footprint, reducing our global reach out infrastructure.
Using more automation and reducing our operations headcount.
We still only partway through these journeys with an ambition to achieve even greater savings.
Finally.
We will continue to see the impact of our current transformation programs into next year.
The flow through benefits into 'twenty two 'twenty three are also a big component.
It will be an important help to offset inflation.
This brings me to expectations for the rest of 'twenty to 'twenty, two and 'twenty to 'twenty three.
I've explained how we've structurally reposition the business to achieve higher returns once rates normalize.
Despite the uncertainty in the macroeconomic environment.
We're expecting at least $37 billion of net interest income in 2023.
Which is a significant uplift on the 31 billion plus dollars we expected in 2022.
We're aiming to keep cost growth at around 2% in 2023.
Which we fully expect to be able to do for the reasons I have explained.
Given all of this we are materially upgrading our returns guidance.
We are confident of achieving our return on tangible equity of at least 12% from 'twenty to 'twenty three onwards.
As a result, we are also providing more specific guidance of a 50% dividend payout ratio for 2023 and 2024.
We aim to restore the dividend to pre COVID-19 levels as soon as possible.
And we will also revert to quarterly dividends from 'twenty to 'twenty three onwards.
I'll speak to a few more slides at the end, but let me now hand over to Ewen to take you through the numbers in detail.
Thanks, Noel and good morning, or afternoon, all as an older market said, it's really great to be in Hong Kong for these results. We had another strong quarter of reported pretax profits of $5 billion.
While down 1% on last year's second quarter the smile.
Strong core operating performance.
Compared to the second quarter of last year.
Adjusted revenues were up 12%, including net interest income up 20%.
With operating expenses flat, we had 12% positive jaws.
Adjusted pre tax profits were up 13% and profit attributable to ordinary shareholders were up 62%.
Credit conditions remain benign in the quarter E sales were a $448 million net charge.
Pay it with a net release last year.
We benefited from a 1.8 billion deferred tax asset credit in the quarter, reflecting a recognition of brought forward tax losses in the U K given the improved profitability outlook. We now expect our 2022 effective tax rate of around 10%.
Reverting to a more normalized effective tax rate of around 20% in 2023.
To remind you for 2022 dividend modeling purposes. Please exclude the DTA gain and the French law some disposal.
Noncash significant items, but includes a $3 $4 billion of cost to achieve we expect to spend this year and other significant items.
Our core tier one ratio was 13, 6% our tangible net asset value per share was $7.48 down 32 cents on the first quarter, mainly due to FX impacts, but also to the fourth quarter 2021 dividend payment.
And we've announced an interim dividend of nine cents per share obtuse answer on the first half of 2021.
On the next slide there was a strong adjusted revenue performance across all our global businesses.
Wealth and personal banking revenues were up 5% overall and up 19%. If you exclude several hundred million dollars of adverse market impacts in insurance.
Underlying this personal banking had a strong quarter revenues up 20%, reflecting both rate rises in balance sheet growth.
Commercial banking was up 19% with growth across all core products future improved margins and balance sheet growth and.
And revenues driven by collaboration with global banking and markets.
Global banking and markets revenues were up 15%, mainly due to global markets and security services and global liquidity and cash management.
Net fee income was down 4% decline in fees from wealth and investment banking was partly offset by the $100 million increase in global liquidity and cash management and trade fees underlying the benefit of our diversified business model.
On slide 17, net interest income was $7 5 billion up 20% against last year's second quarter on an adjusted basis on rights. The net interest margin was 135 basis points up nine basis points on the fourth quarter and up 16 basis points.
Third with the fourth quarter last year as higher asset yields more than offset increased liability costs.
And on volumes, we had underlying volume growth in the quarter or 5% annualized, but we saw a decline in average interest earning assets due to FX.
Based upon current FX on the consensus rates outlook. We now expect net interest income of at least $31 billion for 2022.
And at least $37 billion in 2023, as we return to a more normalized rates environment.
On the next slide we provide some buildup to our net interest income forecasts on the rights of assumptions as I said, our forecast that I are based on current FX rates on the current consensus rights outlook.
As you know, we fly with pass through rates at the moment, but we expect these to increase going into 2023.
On volumes, we're forecasting mid single digit volume growth in 2023.
Turning to slide 19, we reported a net charge of $448 million of emails in the quarter or 17 basis points. This included a further $140 million related to our mainland China commercial real estate portfolio.
Outside of this one specific portfolio the overall quality of our book remains good.
Stage three loans as a percentage of total lines remained stable at around one 8%.
At this stage, we're not seeing signs of Farley has stretched across all our key early warning indicators and defaults in July remained low.
But we continue to monitor the situation closely.
While the first half ECL charge was only 21 basis points. We continue to expect a sales to normalize towards 30 basis points of average loans for the full year.
With the core driver if there's the risk of further deterioration in forward economic guidance, rather than any sharp upturn in stage three losses.
Turning to the next slide second quarter operating expenses were stable versus the same period last year as cost savings and reduction in accrued variable probably offset the continued increased investment in technology and growth.
We made a further $500 million of cost program savings during the second quarter.
With an associated cost to achieve a $600 million.
As Noel said, we remain on track for stable adjusted operating expenses this year.
Assuming FX remains at June levels for the remainder of 2022 that would be around 30.
$5 billion of operating expenses.
We're also on track to achieve the top end of our three year five to five and a half billion cost savings target and now expect to see a further $1 billion of cost savings from this program flight three to 2023.
Which will be a material mitigate against the higher inflation, we're seeing.
As part of this cost program. We've now spent $4 $6 billion of our $7 billion cost to achieve budget that ends in the fourth quarter.
We still expect to spend the remaining $2 $4 billion during the second half of this year.
For 2023, despite the inflationary trends, we're staying we're still aiming for cost growth of around 2%.
The environment is highly volatile, but we do not unchanged or allow the yield curve to we cannot commitment to cost discipline.
Turning to capital on Slide 21, our core tier one ratio was 13, 6% down 50 basis points on the first quarter.
This included underlying risk weighted asset movements from lending growth.
And data and methodology enhancements.
Post tax fair value losses through other comprehensive income as interest rate rises and increased threshold deductions as core tier one capital fail.
We expect our core tier one ratio to fall further during the third quarter. This includes the announced sale of our French retail banking operations, which based on current FX rates is expected to have an impact of around 30 basis points.
We expect core tier one to recover materially in the fourth quarter back towards 14% given additional capital management actions, we're now taking.
And then be back within our 14% to 14.5% target range during the first half of 2023.
So in summary, this was a strong quarter, we're firmly on track to achieve significantly improved operating performance returns and distributions from 2023 onwards with interest rates rapidly normalizing in a post COVID-19 recovery in most markets, we're seeing strong revenue growth.
Up 12% on a year ago.
With continued cost discipline, where we've achieved a 12% operating jaws this quarter.
While not complacent the experience of our credit portfolio remains benign.
Based upon the normalization of interest rates with at least 37 billion of net interest income in 2023, and the continued core operating performance improvement, we're driving we're raising our expectations for 2023 and beyond our return on tangible equity of at least 12% and on the <unk>.
Back of this we expect to see a material uplift in distributions from 2023 onwards.
With that back to Noel for a few closing comments.
Thank you and.
Yeah.
I'd like to end with a few slides before Q&A.
When we began to accelerate our strategy in February 2021.
One of our four strategic pillars was to focus on our strengths.
I should've seen from the material today.
Throughout our history, we have no greatest strengths and our ability to bridge capital and trade flows between the major economic blocks of the world.
We're the world's leading trade bank.
One of the largest payments providers globally.
I'm one of the largest FX houses in the world.
And even as trade flows have changed and supply chains have shifted we've.
We've taken market share in trade.
Because our network means we can go wherever trade goes.
We also commands a 20% wallet share of wholesale banking client business from Europe , and the middle East and the Americas into Asia.
Outside of revenue our international model has also started delivering synergies in our cost base.
Particularly through Digitization, where we can build once deploy globally.
At much lower costs.
And there are also capital and funding synergies through the greater diversification of our portfolio.
On the Interconnectivity within it.
In the past investors cannot fully assess all that value.
Because parts of our portfolio dragged down the overall returns below the cost of capital.
So the work we have done over the past few years to tightly control costs.
Reduced capital allocated to low return domestic orientation businesses.
And increase the investment in higher growth higher return geographies in Asia.
And in businesses such as wealth.
Will allow us to demonstrate the value of our international strategy much more clearly.
As this evidence in our forward guidance of at least 12% returns in 2023 and beyond.
International connectivity is core to our entire value proposition.
From clients to employees.
And has contributed to our improved returns.
45% of our wholesale client business is booked cross border.
And a large proportion of the revenues booked domestically.
For wholesale clients.
Comes to us because of the business, we do for those clients overseas.
And we will continue to grow that number.
Similarly in wealth and personal banking.
International is the most attractive and fastest growing segment.
I product like global money and all wealth platforms.
Which some of all which are some of our highest return propositions.
Are specifically designed to capitalize on our international connectivity.
For our retail and wealth customers.
You will continue to see more propositions from us in this space.
And that's because the average international customer revenue is around double the average domestic only customer.
In addition in a highly competitive talent marketplace, especially in Asia, Our international Nathan is core to our employee value proposition.
And how our colleagues think about us.
There has been a debate recently about our international model.
And specifically whether alternative structural options would create more value for our shareholders.
As you would expect we have considered many of these options over recent years.
More recently, we have updated our analysis with the benefit of independent third party financial and legal advice.
It has been our judgment not alternative structural options will not deliver increased value for shareholders.
Rather they would have a material negative impact on value.
And our current strategy is the fastest and safest way to get to higher returns and dividends, we all want to see.
Yeah.
When considering different structural options for the bank.
We need to make judgments on a range of factors, which.
Which we think would materially impact valuation outcomes.
Clearly the primary factor is about disruption to under.
And the potential loss of the international synergies I just highlighted.
But it's not only about synergies.
There are significant costs and execution risks that would need to be considered for any alternative structural option.
Past experience in the market as evidenced that Carbonite is a relatively small European bank in a single market.
Can take more than $2 billion.
And even then has a high risk of failure.
So you can understand the risks of standing up separate entities for a franchise of all size.
I won't go through all the points on the slide.
Suffice to say the costs are material.
There would be significant execution risk over a three to five year period.
When clients employees and shareholders would all be distracted and impacted.
And there are obvious stay one risks around capital distribution.
Client exits.
Another point that comes up with investors in this discussion.
These are geopolitical positioning.
As a global bank, we engage and maintain strong relationships with governments and regulators around the world.
Our international role.
Our importance to global trade.
On all homes in London, and Hong Kong underpin our relationships in both hemispheres.
And our customers have trusted us for 157 years to help them to navigate the world.
As it has changed.
I am puts in the factors that we consider when assessing alternative strategies in the public domain. So all our shareholders can understand the value of our international structure and our strategy.
So in summary.
We've explained today, how our strategy will generate significant value for our shareholders.
We remain focused on our strengths of.
Of which international connectivity is at the top.
Our U K and Hong Kong franchises are performing very well.
And we are shifting capital to areas with the strongest returns.
We're managing costs tightly.
And we expect to at least $37 billion of net interest income next year as rates normalize.
We're simplifying and digitizing the bank.
We are engaging and we'll continue to engage with all our shareholders.
We share their desire for improved returns.
I understand the importance of dividends to them.
We think the best sites, the best and safest way to improve returns is to focus on our strategy.
Which we are confident we will deliver.
Our return on tangible equity of at least 12% from 2023 and.
And materially increased distributions.
With that can we please open up for questions.
Thank you Mr Cohen.
I'd like to ask questions today on the line. Please press star one on your telephone keypad.
Please ensure that the mute function on your telephone is switched off.
On your question has been answered you may remove yourself from the queue by pressing star two.
Once again to ask a question. Please press star one please ensure that the mute function on your telephone is switched off.
At this point I'll hand, the call over to Mr. Richard O'connor will host a Q&A over to you Sir Thank you operator.
Most of the questions from the audio lines today, we have a few analysts and investors in Hong Kong.
Four are far from the lines, although I'll see if anybody raise their hands.
Microphone two to come around and hopefully get some questions from Hong Kong can I, just ask everybody to limit themselves with normal two to two questions.
But with that operator, well go straight to the first question. Please.
Okay.
Thank you. Our first question is from Raul Sinha.
Okay.
J P. Morgan your line is open Sir.
Good morning, everybody and welcome.
Good morning.
Got it.
On the capital markets.
Thank you.
Great.
That's helpful.
Welcome to Eagle Ford.
Hum.
Mhm.
Okay.
And then.
Okay.
Good morning.
All the actions.
Okay.
Okay.
Thank you Martin.
Bye bye.
Hum.
And then looks like a lending strategy.
Thanks.
Sure.
Yes.
Thank you Christine.
Christine.
Sure.
Thanks, Joe.
Yes.
I was wondering if you might be able to 711.
Sure.
Thanks.
Hello.
Sure.
Okay.
Absolutely.
Good morning.
Okay.
Thank you I'll ask you to take both of those questions do with capital first and then your questions around cost of execution and alternative strategies.
Yeah, well the line wasn't perfectly clear so I'll do my best.
On.
Capital I think the first part of it was sort of understanding the moving parts on the rebuild of capital.
Yes for them.
First off the 13.6, obviously, we've given you the M&A impacts that we expect in Q3.
In addition to that we are taking probably about 20 to 30.
Basis points of incremental capital actions that we previously haven't talked about with the market, which you should expect a call.
Come through in the second half of this year.
We all say remember that under the bank of England PRA rules, we have to accrue dividends at the top end of our 40% to 55% payout ratio.
In the first half effectively the core tier one ratio is understated because of that accrual and there's a catch up that you'll see in Q4.
So we do think that will trough.
Next quarter or a bit below where we are we'll be back close to 14%.
By a full year will be back within range.
14 to 14 and a half.
During the first half of next year.
And then your question on buyback. So then links into that which is.
You should not expect us to be doing buybacks until we're back within our core tier one range of 14 to 14 and a half which.
Yeah, you can imply from that will be more back end loaded next year as a result.
Thank you and just before I get to the data out on or go to the specifics of the U S.
Just on the alternative structural options I think what you got to take into account there is a combination of impacts.
There is a negative impact on the revenue synergies that we've identified in the paper.
There was a negative impact on some of the funding and capital synergies that exists in the group is well diversified.
There was a negative impact on the cost of executing them, which are one off costs.
And then there are some ongoing cost impacts in terms of the funding costs.
Less diversified group split into two would be <unk>.
Higher than the funding cost over those diversified group.
And then there are some ongoing running costs that you didn't.
It's the totality of that though you've got to look out and not any one item and there are many judgment calls to make in that equation, but whatever way you balance those judgment calls, we believe that the safest and fastest route to generate increased dividends and increase returns is the strategy that we're pursuing we have given you guidance.
Ah sorry, our schedules in the pack and in the appendix to help you understand some of the factors that need to be considered.
But I think that so I don't think there's any one cost item that I think is more relevant than the other breach the package and then you got high execution risk because suddenly give that comp complex nature can take three to five years with uncertain.
Outcome.
Full regulatory approval and for Investor approval.
Yeah, I mean, just to give a bit more color color around some of the numbers.
There is.
No said if you just look at the sort of one off costs associated with setting up a structure.
If you were to have a separately listed.
<unk> subsidiary, you would have to be able to demonstrate that you had standalone.
Systems.
Which would probably take three to five years to construct.
We'd run into the probably yeah billions of dollars to be able to do that.
You have a $40 billion of Enbrel stack currently sitting in our Asian subsidiary all of which is downstream from the parent.
Again that would be a three to five year issuance program required.
To reissue all of that Enbrel out to the public markets and effectively do a liability management exercise on that excess umbrella sitting at the group.
And then you would have either a you would have potential tax impacts because of triggering capital gains tax implications as you did the restructuring and other one off costs associated with effectively recreating.
Our standalone business here here being Hong Kong, where I am today.
And then you go into the ongoing dis synergies.
For example in the slides we showed you that off the $20 billion of wholesale revenues.
45% of them relate to international customers.
Yeah, you can run your own math, some what portion of that $9 billion would be at risk, but it wouldn't be immaterial.
Yeah, you would have to effectively jeep locate corporate functions and it ran cost that we get global synergies on today, you would lease group purchasing power.
Benefits that we get today.
We think you would have to operate our Asian business at a higher core tier one ratio.
As a standalone business because it doesn't it wouldn't benefit from the group support that against today.
Is that the HP I know it does take into account.
There's about $100 billion of.
One our tier one.
Tier two capital sitting in the rest of the group.
We think if you were to break out the Aegean subsidiary, there's a significant risk that the rest of the group with D right from a ratings perspective.
Yeah, one notch downgrade on that 100 billion. Yeah. We think is it 25 to 50 basis point impact per annum.
And our U K business holding company today, he has a number of tax benefits.
<unk>.
Has far better withholding tax arrangements with the rest of the world.
Compared to Hong Kong.
And we also get a tax shield on them.
<unk> headquarter costs in the U K.
And then you go into the complexity of execution, you know all of the timelines point to three.
Three to five years in that three to five years, we would have to prioritize it.
Change in respect of the separation rather than change in respect of the core business.
Reg approval in about 25 jurisdictions.
Yes, there would be questions around indexation, yeah. We're currently fully indexed in both markets.
Yeah. The U S. Dollar clearing we don't think would be available to the Asian subsidiary and we don't think that we would readily be able to get a dollar clearing license for the Asian subsidiary as we've seen with all of those so as not to say is I think when you package all of that up in terms of.
Costs to implement complexity to implement an ongoing synergies yeah. We just really struggled to come up with any form of value case that we could put in front of shareholders.
Next question please.
Thank you. Thank you. Our next question is from noninterest Tullow from Autonomous your line is open hi, Madison.
Hi, guys.
Thank you very much.
The loan mix the negatives that could go.
I wondered if maybe you're experiencing.
One of the considerations in the public domain.
If you could discuss.
On the other side of that nature.
Potentially the breakup fee.
It's possible that you could see faster growth.
Sure.
Okay.
You've got the valuation that students can you just explain with computer.
Got it.
Yes.
Thank you.
I mean, I think we're already seeing strong growth from the execution of the current strategy.
We're already very focused on the growth opportunities in Asia, you can see that in Hong Kong, our commercial banking businesses had very strong growth here in Hong Kong and globally. Our trade business is up 20% of revenue. So I think to be honest minus we've already factored in strong growth opportunities in Asia, and we are deploying more and more capital into Asia.
So I think it's for US we've already got that growth scenario and factored into the current plan and then your second point was.
Yeah round rewriting rewrites.
Yeah, So look I mean just to complete.
Can you imagine a different business plan for Asia, Yes, he could manners, but you would have to work through all of the capital funding liquidity implications on risk appetite limit.
Locations of that there's been some suggestions that we could accelerate growth in some areas, but that that would come with a change risk appetite and therefore change capital funding and liquidity implications that we.
We've started to work through but again, we don't we think the overall net dis synergies outweigh any of those positive synergies.
Yes, you could speculate that there could be a re rating of the Asian business. If it was separated out.
Equally we think they would be a D rating.
The rest of the world.
So when we've looked at those two together, we haven't been able to convince ourselves that theres, some kind of magic structural alternatives that delivers a re rating for the overall group.
Thank you.
Richard next question please.
Thank you. Our next question is from Makena Credit Suisse. Your line is open.
Hi, Good morning, everybody. Thank you for taking the question.
Congratulations on consensus numbers.
Jules come true so strongly.
I've got two questions. Please.
So my first question.
The analysis.
All the strategic options.
Drosky is there anything that you can forward.
Incremental to this strategy.
The process that you've gone through in the past couple of months.
Improved cost efficiencies would move to the upper end of the range, you're talking about 20 to 30 basis points of additional capital actions.
I was hoping you could add.
We'll cover.
Specific to them very cute.
Yeah.
And how you're thinking evolved.
And.
My second question is on.
Deposit beta.
So one of your top.
Thanks Lisa.
Statements like question.
From Cowen.
Accounts to time deposits.
Hey, John .
Some updates.
On how youre thinking about that.
As we look forward. Thank you.
On your first point I'll, just answer that and I'll pass to you after the second point.
I mean, we're very determined to improve the performance of the business.
I called feedback that says the business hasn't performed well over the past 10 years. We tell you that's a hearts and have done and are very committed to trying to drive our capital efficiency into the business. So we constantly look at parts of the portfolio, they're all strategically less important and are underperforming.
And we're determined to continue to drive that efficiency and so the capital allocation of the business.
On the specific point of the additional capital management actions. We've taken I think that's in response to the CET one impact of the Mark to market on the Treasury book.
That's in addition to mitigate the downturn in the CET one as a consequence of that.
But we are confident that the capital build coming from higher profitability will start to reboot CET one towards the end of this year and into next year, but those capital management actions in response to structural considerations that more in response to our near term capital management action.
It sees those actions are.
Tactically important on right things to do but they're not strategically damaging to the franchise of the bank, where we're not having to turn off good strategic growth.
We're able to take those actions waltz pursuing our strategy.
I think what you can see in the results that I as an attempt by us to be clearer on what the strategy is.
Giving you more disclosure around the international connectivity of the business.
You know clarifying what we thought was it was a significant gap to our internal views on dividend potential for 'twenty, three and beyond versus where consensus was.
What we tried to do is if you want to clarify that strategy a lot clearer that.
We're pursuing.
Okay on the deposit beta is.
Yeah, we are seeing currently very little migration to time deposits so far.
Remember that actually a significant part of our book is actually not time deposits.
Sure.
But I think if you look at previous cycles, you would expect.
Yeah migration to a kid as interest rates continue to arise.
Yeah as we've said previously the modeling that we've done and the interest rate sensitivity is based on a 50% pass through right.
We're well below that at the moment.
We do think it will rise from here and part of the reason that arises because of migration.
Thank you okay.
We'll take one more question from the lines of work just checking with Hong Kong see if there's any last questions next question. Please.
Thank you. Our next question is from Andrew <unk> from Barclays. Your line is now open.
Good morning, good afternoon now.
Richard.
Okay.
On your net interest income guidance. Thank you so much for giving US 37 $37 billion.
I'd like to make assumptions that you're making.
Behind that I think I laid out.
Slide 18.
Marketing policy rates.
And I guess does it pretty healthy debate amongst the nicely.
But we actually Brett.
Level of interest rates.
Thank you.
Hey, Dan.
The weekend.
To what extent.
Right.
As part of that.
But at the moment.
With that.
Alrighty ambitions.
Yes.
Seven.
Hi, guys.
If you didn't quite get that.
Best of luck.
Thanks, Rick for example.
And the second question was just around Capex.
The actions that you're taking.
The CET one ratio.
This target range.
At this level.
How are you thinking about that.
Compare that to you.
There's a pretty handsome gaslog around from other banks.
At this point.
Towards your target level that sounds great.
Is there anything.
We're hoping for from the regulated strong tape out target level down.
Thank you. Thank you I'll ask you to answer both of those questions. Yeah on the NII guidance a couple of things I mean, you should assume that yeah, we've got a bit of fat and that.
When we're guiding to at least 37 billion.
Secondly, I think.
Remember as.
Interest rate rise continue to rise deposit betas will continue to rise and say if you don't get that final.
I urge you all in interest rate at the back end then.
Yes, we're already modeling very high deposit beaters at that time, so the implicit impact on the net interest income is a lot lower than what you might think.
So yeah, we run various scenarios and are comfortable based on a range of scenarios at the moment that we will be able to deliver.
37 billion, but obviously it is a very material change in rights, we'll reassess that and we've given you the interest rate sensitivity. So you can run your own numbers.
On capital.
Yeah look I think there is a debate at the back end of 'twenty three in 2020 for whether we.
We can adjust our core tier one ratio.
If you think about where we've been in the past.
Yeah, we've been making a very big investment and generally into our stress testing capabilities into our recovery and resolution capabilities, which you don't see from the outside.
We also didn't have the returns in the past you know the combination of the returns that we had and a very high payout ratio that we had in the past. We just didn't have the same capital flexibility that we expect to have from 2023 onwards.
I think it's important before we engage the regulators in that discussion that we get back within the range, but I think once we're back in the range there should be some modest ability to adjust.
Adjust down way, we're targeting on core tier one, but I would say that's back end of 'twenty three 'twenty four for discussion.
Any time, we have one question from Hong Kong, if you wait for the Mic and give your name and institution. Please. Thank you. Thanks for taking the question. This is a good <unk> with Goldman Congratulations on a good set of numbers I have two quick questions. Please first is on the prime rate in Hong Kong and then the mortgage cap that you would effectively be hitting all.
The mortgage borrowers starting next month, if I'm not mistaken so what could be the efforts to narrow that prime minus.
And hence to lift the effective GAAP for the mortgage borrowers and how <unk> how much of that can we do before we see kind of deposit migration as you and you've talked about and then we ran into that question of raising the frame interest rates and then once they are raised will it be symmetrical with the savings deposit rate.
Does it.
A symmetrical that's the first question sorry for being a lender in this one and then secondly, simple on the credit cost so as of now I see China, CRE still contributing nearly 30% of the total provisions at some point. During this year early next year, it's going to roll off I mean, China is going to be.
We aren't going to book CRE lawsuits to later, Nicky right and so I still see the guidance on the second half of 40 basis points versus first half 'twenty. So how much of the typical hallmark HSBC conservatism goes into that thank you.
[laughter] I'll tell you that as a compliment traditional HSBC conservative as some of the others.
Something good to be accused of.
Let me, let me deal with the China, CRE and then I'll ask you to do with the prime rate and on the mortgage cut.
<unk>.
Lisa.
We've used.
The ECL charge in the first six months.
Is a positive outcome.
And.
But the economy is still uncertain. So I think it would be unwise of us at the half year stage to start factoring in the first half performance as a trend for the full year and therefore it is appropriate.
To guide to a higher second half charge given the level of uncertainty.
And I think we'll update the Q3 and clearly we'll know the answer of Q4, but it would be unwise to thinks that the first half trend is something that can roll forward into the second half our expectation at the moment is the forward economic guidance, we'll probably continue to worsen and therefore, there's more likely to be staged wallet.
Stage two provisions in the second half of the year, rather than necessarily us having a line of sight to stage three so it's a build of of ECL in the second half I think he is going to be more run stage, one and stage two as economic forecast.
<unk> to deteriorate and forward economic guidance is factored in so that would be the view on on the ECL.
Happy to be conservative at this stage.
You and you want to cover Prime rate I'm sure you don't want to come with that knowledge.
[laughter] I mean, just to add on <unk>, we haven't said, they're going to be <unk> 40 in the second half, we said that they are trending towards a yearly average of 30 <unk>.
Yeah that would be the highest rate, we would expect them to be in the second half.
On.
The prime right not for everyone in the room here in Hong Kong, who understands this but for everyone who's not in Hong Kong and.
Yes, the mortgage market here.
Yeah, it's typically priced off one month LIBOR plus a spread.
The borrower is outside have an option to shift from that right to what's called the best landing right minus a margin.
Today, there's two Reits are broadly in line with each other maybe even I would say most of our mortgage brokers tip again to the latter I the best lending rate modest margin.
Provides a lower right to customers than.
One month, LIBOR, plus the spread which adding them.
The.
And that rate is set daily and calculated daily and the customer doesn't need to do anything it just happens automatically that they switch from one rate to the other.
About 12% of our portfolio.
Is subject to the mortgage cap, but I would say that.
Given the movements in the last month or so that's likely to trend materially higher to most of the portfolio.
Over the next couple of months.
Look I'm clearly not going to sit here and give guidance on what we're going to do with the base lending right.
Historically, historically going back I think for 20 years, the best lending rate has moved in line with the best savings right.
So.
We have seen slightly lower.
The margins in the past, but no discounts being applied to the Beiswenger right.
That's obviously one until we have it.
If we were to change the best lending right.
And the best savings right followed in tandem.
That would be economically worse for us given that we have a larger deposit surplus.
And we'll see a big ahead higher savings rates the benefit we'd get from rising the lending rate.
But clearly this is all subject to competition and we're not going to discuss it on a par.
Cool.
Okay. Thanks, I'll come back to Hong Kong.
<unk> will go back to what Airlines next next question operator please.
Thank you. Our next question is from Andrew Coombs.
Line is open hi, Andy.
Hi, guys good morning.
Question.
At this time.
In fact, one.
Thank you.
Got it.
I don't want to move on.
Sure.
Okay.
Yeah.
Okay.
Got it.
Right.
Hi.
And just to clarify.
Right.
Thank you Robert.
Yes.
Yes.
Yes, absolutely.
Great.
Right.
Got it.
One average room spending.
Round one.
Disconnect.
Got it.
Right.
Yeah.
Yes.
Matt.
Thank you.
Yeah on the second one I had is just <unk>.
Interest ending assets FX suggested if you talk to.
Research team afterwards that we exited.
Give you a sort of.
FX adjusted.
Average interest also some lower liquidity balances in the quarter as well.
On the NII guidance.
I hate, giving your NII guidance I thought I was doing well could I could give it.
But we're not going to go in and get go on and give your deposit beta assumptions as part of that.
Look we said through the cycle, we expect it to be 50 basis points, we've said that deposit betas, so far I think of being in the Twenty's.
Say you should assume that there is a material ramp up in deposit betas as rates go higher from here.
Okay.
Yes.
Please go ahead.
Yes.
Okay.
Next question operator please.
Thank you. Our next question is from Martin Lee.
Alan Sachs. Your line is open.
Hi, Martin.
Good morning.
First of all for.
Any comments on that.
Yeah.
Yeah.
Great.
Question on structural hedging.
Just wondering.
I wouldn't change the works with government.
A majority of transformation.
Yeah.
Okay.
Hum.
Okay.
Yes.
Okay.
Thank you.
Okay.
That's helpful.
Okay.
Okay.
More.
You've called out in our performance.
I was just wondering.
Right.
John .
Great. Thank you driving that strength.
Yeah.
Yeah around structural hedging Martin.
I mean look first firstly the nature of our book.
With.
Here in Hong Kong, where it's different difficult to extend if not impossible to extend duration and given the nature of the.
Defaults by some of the asset base here, we can't buy longevity.
In Hong Kong dollars.
And secondly on the asset side. The trade book is very short dated too. So yeah, we do typically have.
More.
Interest rate sensitivity than most of our peers, having said that we relative to what we could do we are structurally under.
The hedged.
Yes, we have for example started to as some of the hull to collect in Sao portfolio.
Is beginning to mature we've materially increased the whole to collect portfolio.
During the quarter.
And you should expect that to continue.
So I think we will slightly increase the level of structural hedging overall in the bank over time.
To reduce some of the interest rate sensitivity, but given the nature of the balance sheet. I think you should assume that we will continue to have higher interest rate sensitivity than peers, even after we've done that.
On the outperformance of the UK business, which I think was the second question look I mean, I, just think again Stewart and team.
Doing a really really good job at the moment.
Yes, I'd, taking very a suite of actions against that cost structure I think costs were down.
8%.
Q2 on Q2.
Yeah, we've always.
<unk> told you that we're structurally underweight in some segments like mortgages we.
We had 7% mortgage growth.
Year on year in Q2.
The commercial business is going well at the moment in the U K.
Post Brexit we are the only bank in the UK of any size that can really deliver an international network to customers.
As customers change the nature of their international businesses, where ideally place to service that sorry.
Okay.
Obviously credit conditions in the U K at least for US continued to remain relatively benign.
Just another statistic on the UK year to date, the U K business has held more than one signs and overseas customers.
So refinance properties in the U K.
In the first six months of this year.
And then on the other side of the equation and I'm really pleased to say that the U K business.
Offered great support they've helped more than 5000 Ukrainian settlers.
Two the UK open a bank account with us. So I think what you are looking at is a broad base of activity in the digital world.
U K is now on boarded 40000 clients also HSBC kinetic.
Which is.
Fully mobile digital proposition for Smes full range of product suite, the largest accounts home hemo.
Cards lending overdrafts.
Livings accounts.
And they are onboard at 85% of those customers who've been on boarded within 48 hours on the customer satisfaction is currently sitting at 92%. So I think you've got a broad base of actions that Ian and the team have taken in the U K.
Cost.
Cost revenue generation products enhancements digitization.
The international clients on the domestic clients and I think there's a lot of good work being done there and it's starting to pay dividends.
Another question from the order along please.
Thank you. Our next question is from Gary stemming from BNP. Your line is open.
Okay I got it alright.
Good morning, everyone and thanks.
Thanks for taking questions.
Strong cash collections and if you could elaborate.
During 2014 contract in the second half from those so any revenue that might have.
Sure.
We're taking those actions now multiple switches.
Naturally.
Yes.
Councillor Paul.
Images P&L beneficiary.
Ultimately net positive.
Roger Thank you quickly.
Buyback next year.
Didn't have certain bond in the or anything else.
Just a question.
Great. Thanks for the color on the guidance.
Yes.
I just wanted to.
The market right now.
Rob would you still see that.
And that's beneficial to progression.
Capstone volume given is it mix.
Yesterday.
Two questions for patents growth et cetera.
How much incremental sure you'd still see.
Roger.
Market.
Thank you.
Yeah look on capital actions.
That.
Mainly.
Benefit <unk>.
Bye.
It will have a somewhat modest impact on them.
<unk>.
On the P&L, but yes, we do think when we think about the balance of considerations.
Heading in to yeah, probably tougher economic conditions in 2023.
The right thing for us to do is to accelerate our capital ratios to being back within chaga.
So yeah, we're happy to accept some impact on income in order to achieve that but we do think that the.
Return analysis that we're riding on those incremental actions make sense and we're not doing anything that.
Gary's into what I'd describe as franchise and payment pairing actions.
On NII I think it is market dependent so here in Hong Kong, there's probably very little benefit that we would derive from interest rates going higher than what's implied in forward curves at the moment.
But I think in other markets definitely there would be a value.
And I still think that we're structurally good to see.
Yeah, if you think about the last couple of years.
In 'twenty.
'twenty one.
Net interest income was slightly under $27 billion.
Yes over two years, we're generating an extra $10 billion of net interest income.
Which more than offsets any incremental <unk> costs, we could see or.
Or higher higher cost because of inflationary issues.
I still think there's some ways to run even based on forward curves before you start seeing and payments.
Materially tick up.
I think the other thing that's important to remember.
Yes.
Probably applies to all the banks.
While our customer base on the retail side is mainly affluent.
Yes.
They are savings rates go up materially during <unk>, so they're all sitting quite liquid with good cash reserves at the moment.
Evo side, we've seen credit card spending pick up but people are still mainly rolling their credit card balances.
We don't have any particular credit yeah difficult credit exposure on the retail side.
That I would call out with the customers sitting with good.
Cash balances and now in the mainstream corporate side, the global corporate sector has effectively been deleveraging for two and a half years.
In most parts of the world corporate loan growth is being well below GDP nominal GDP growth. So again corporate balance sheets are unusually healthy.
For what would be at this point in a cycle facing a downturn.
Yeah. So for all those reasons I think.
If interest rates went higher other than Hong Kong I think we would sort of view that as a positive for us.
Just checking any any further questions in Hong Kong.
So I think we have time for one more.
From the auto lines and then we'll hand back now to sum up. So your last question was on the audio lines. Please.
Thank you and our last question is from Tom Rayner from Numis. Your line is open.
Hi, Tom.
That's helpful Keith.
Hi, everyone.
Thank you Jonathan.
Guidance.
Good afternoon.
Yes.
Yes.
Possibly back now.
Okay.
Interest income that's one Burger King.
Yeah.
In terms of the main drivers.
<unk> instructions.
Okay.
Chinese GDP.
Okay.
On the same pace.
Will that happen.
Tom you know how much you and like giving guidance on NII now youre asking him to give guidance on <unk> as well.
So if my Chief accounting, if my Chief accountant was here, we'd be running dangerously close to giving a profit forecast.
But the other thing I would say is when you when you run your calculations for 23 days.
Think about all of the one offs that we've had this year, including the negative insurance.
AMC, you that won't repeat or shouldn't repeat next year. So.
But I'm.
I'm not going to give you anything on an NOI forecast, but.
Troy.
Yeah.
Yes.
On the training related.
Hey, guys.
I think.
Sure.
Okay.
Sure.
I think what.
What we are all going to factor into our future thinking is.
Take here in Hong Kong, there should be some points of rebound in wealth management activity that will drive higher fee income.
There should be some stage a rebound in capital market activity.
Should drive higher fees for JV and N.
But it's too early at the moment to predict exactly how much of that will come back and when it will come back but you could argue if you look at the if you look at the P&L of the retail bank WPB for the first six months.
Revenue growth from what you've found is that the retail bank and has driven strong growth from NII, but has been subdued on its fee income.
And then if you can start to get the fee income coming back as economies reboots and wealth management activity re establishes itself. Then you should start to see a growth in NII.
Non interest income, but it's too early to predict what that will be and we're not going to give guidance on it.
Alright.
Thank you.
Well. Thank you very much for all of your questions and for giving US your time.
To close with a few comments, we all confidence of significantly improved value for our shareholders.
Our repositioning of the business is gaining traction.
Our international connectivity remains our greatest strength.
We have got costs under control.
Interest rates are normalizing.
All of this means we are on track for our best financial performance in a decade.
12% returns plus in 2023 on higher dividends for our shareholders.
Richard and the team are available to you. If you have any further questions, but in the meantime have a good afternoon or morning.
Thank you very much for joining us.
Thank you.
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