Half Year 2022 HSBC Holdings PLC Fixed Income Earnings Call
One basis points of gross loans for that for the half year stage III loans stable at one 8% of total loans.
And we are flagging that despite the fact that our early warning indicators are not yet showing any signs of stress we have an expectation for ECL charge to normalize towards 30 basis points in 2022.
Onto financial resources, let's start with capital our CET one ratio was 13, six which was down from 50 days at the end of the year the reduction mainly driven by timing differences in fair value of <unk> Securities and <unk> growth, we remain two 9% points.
Above our MDA hurdle.
We are below our target operating range of 14% to 14 in house, we expect the CET one ratio to trunks in Q3, given headwinds that we have previously mentioned on the sale of our French retail business and some other M&A that is completing and we expect strong earnings and management actions.
It will help us lift the capital back into our target range. During the first half of next year.
In terms of liquidity.
It remains the strongest most importantly at legal entity level, but also you can see that in the overall group LCR ratio of 134% and we still have an H Q&A.
On a gross level of about $800 million.
We have a loan to deposit ratio at 62%, which positions us quite quite well actually in the current rising rate.
Our rate environment.
Our MRO ratio.
$28 seven compares favorably to 26% requirement, which as you will see steel the sum of the parts calculation, we intend to continue to operate a prudent buffer over over that minimum.
From a funding perspective now we have made good progress in this year in let's call them interesting markets. We have issued $8 4 billion of senior Holdco and $2 $6 billion of tier two as you would have seen in our deck. We have now increased our funding plan for the year by about seven.
Senior Holdco and $1 billion in tier, two which position us kind of halfway through the overall funding plan at least at this point.
At this point.
<unk>.
The reason for the increase in the funding plan is to offset negative market moves that we have seen that impact the liability value of a rent bumps.
Just to flag that that impact over time.
Wind as those bonds pull to par.
As a consequence of course, we're expecting that this will reduce funding needs in future in future years, all else equal.
As mentioned.
The full year, we continue to expect not to refinance any 81 coals that we may look to make in 2022.
I'm pleased to just have announced literally before this call and exchange offer targeting several of our older legacy to securities issued by our holding company.
You will find an overview of the transaction that has been included any second update.
Data fixed income back on the on the website. The transaction is a par for par exchange offer which is the most logical structure given the practical challenges.
That exists with constant solicitation, New York law.
And we plan to.
We plan to use exchange accounting, which minimizes the cost of the of the exercise for US having said that we're also offering a 35 incentive payment in order to encourage everyone's everyone's participation.
Just to close.
Broader.
Our legacy <unk> legacy capital.
Sure there will be some some more questions about it I just want to remind everyone of our position on those.
We are aligned with the bank of England in our commitment to reducing the stock over time.
However, doing so kind of comment at any cost.
We're willing to take some.
Some cost to exit those position, but as we have flagged in the past.
We have made some historical hedging and accounting decisions that make the economics of thinking let's say the full stack.
Really currently feasible or rational so we will continue to monitor the portfolio.
Further opportunities arise we will take them. So in summary, a strong half year result, with a clear path to.
Solidly returning above cost of capital.
Our financial resources of capital funding and liquidity levels, all well placed to continue growing our business model continues to offer both holders one of the most diverse set of revenue streams in global banking, that's what I thought the same so I'll stop here.
Let's open up for Q&A, I'll hand over to Greg. Thanks.
Thanks, Carlo Yeah, Hi, everyone. So we'll be taking questions I would presume so a little different to our previous setup.
You want to ask a question you can use to raise your hand function youll see at the Boston with the screen and we will open up your line. Please do make sure that when we do that you're on mute.
<unk> tends to leave you muted if you don't there is also the Q&A function the bottom if you'd like to ask one by a tax but of course, it would be great to speak to you in person if possible.
I'll just leave it in a minute and let some of the questions come through.
And so our first question comes from Dan Davis Autonomous.
Done.
Your line is open.
Hi, Greg.
Richard.
Thanks for doing the cooling I'm, taking my questions.
A couple.
The first one.
Issuance plan for this year.
So I hear you on menu do you want to shoot for.
Such refundings next year, However, I guess im looking.
So next year.
Have a potential crew schedules or would you look to 81 markets with tier to essentially get ahead of your refinancing needs next year.
Then.
Secondly.
As expected a few questions on legacy.
You have to see the details of the exchange will come out.
Your comments on the RASM headwinds I would just like to drill down on that a bit more on that and I realize you're probably limited in what you can say I'm just interested by book.
I have told you if they've given you targets to reduce planned per year and then also just on the reasonable economics porting.
It does not.
Your comments on taking a small city one cost do you need to get that back to your kind of CET one target.
Range before you can take <unk> costs as a result of potential legacy calls on <unk> and also if you can give us any guidance as to what is it reasonable that would be really interesting. Thanks.
Hi, Dan Thanks for your questions so at $1 81.
First this year was a transition year.
You might remember that we mentioned that we were overweight 80 ones and underway tier two so this year was rebalancing with the actions that we're taking this year that pretty much brings us in line. So going forward, it's all about maintenance on a refinancing.
To get to your point, there is always a possibility to try to refinance some of the some of the potential quarter for <unk>.
So that is something that we would leave open market conditions dependent.
In terms of the legacy stack.
No. We havent had specific targets from PRA or bank of England about steady has been just more generic discussion.
Way I would characterize it.
<unk>.
Is that kind of every one would rather not have those securities outstanding because they are a little bit.
It's a new sites to have those securities outstanding from a from a reasonable ability perspective and to give you some sort of guidance in terms of cost I.
I guess the best I can do is to give you a sense of how we think about those securities.
And the way I would describe them as there are like two two dimensions.
To the to the equation. The first one is how challenging each of the securities are from a resolution perspective.
And there is a pecking order of those securities. So I would call out that our securities, Florida from the holding companies were the ones that the most the most complex from a resolution perspective, because the ratio from the holding company that do not have the contractual recognition of the bank of England bailing powers.
Hence they create these potential infection rates. So the way we're dealing with those is clearly with the exchange and then to voluntarily they recognized from 'twenty to 'twenty five but then you go from that point on and then and then the rest of the entities are are still a challenge, but they are less problematic than I guess from our holdings.
At once from holding and then you have the others I mentioned, which is which is the cost.
As I mentioned is driven by.
What is the accounting.
On hedging arrangement that we have on those bonds, whether they have significant optionality valued in terms of forward. So when you put those two.
Mentioned together you end up with a pecking order, which is broadly as follows.
First is the holdings company Securities.
Then east.
Subsidiary Securities that are fixed rate instruments that you have the floating rate securities and maybe lastly, you have the legacy.
Legacy tier one securities. So obviously, we are announcing today in exchange for the holdings Securities. We will continue to assess one on one over the other securities to assess.
Cannot mix, but that hopefully gives you a little bit of a guidance of how we are thinking about it.
Thanks, a lot because I just asked on the legacy tier ones coming bottom of the list.
Is that more because of costs rather than kind of the programs they pose.
Predominantly.
Would also say that some of those securities we are able to baleen the guarantee on the securities. So technically it is executable there is some complexity, but it is executable, but yes, you kind of sold given that those securities have been outstanding for a while.
And we haven't called them that economics are not are not particularly attractive.
Okay.
Probably taken too much of your time, but thank you for that that's very helpful.
Thanks, Tom.
Next question comes from Ellie done from Morgan Stanley Elliott lines.
Hi, there thanks for taking my question.
My question is regarding the upcoming AEP one cool.
Five in one quarter in September this year, which is not yet been pre finance.
Considering you've got no plans.
One I was wondering what your thoughts are on this call I know that you're well above your assertion.
Will have 81 intensive MDA in excess of about $4 8 billion.
And my assumption would be that the supervisor would allow you to call. This bond if you wish without refinancing.
Okay.
Yes, hi, Alan Thanks for the question.
We have no impediment in calling that from a from a regulatory perspective.
Your point.
We are as usual in the.
The middle of the KOL periods. So we will take advantage of that period.
We havent announced anything to date, but you shouldnt read anything into that.
We will we will we will continue to assess and we will make an announcement when.
When that is appropriate.
Okay. Thanks.
Alright, Thanks Ali.
A few questions in from Richard Thomas.
Bank of America.
Let me just re read one ounce.
So.
Richard asks about the <unk> situation.
And people are asking a little bit about the.
The potential for HSBC to be broken up I was wondering if you could just maybe run through a summary of Hsbc's current views.
Richard O'connor why don't you take that you are well versed after this week.
Yes, Thanks Connor.
Good afternoon, everyone.
Lowest went too.
So the call.
Yes.
Got it.
We continue to engage with all our shareholders.
All proposals for enhancing shareholder value, we made a number of them.
Announced yesterday, which are going to do that including <unk>.
I'm very firm dividend return announced it and we think that the structure is definitely working.
We're not going to do individually.
So the discussions on the call.
But I think we're set up very clearly yesterday on the slides some of the.
As of which we released in the press.
And at this stage, we don't see it.
There's value to that process versus the very clear.
What you won't coupon I expect you to improve returns improve improve dividends, obviously improved capitalization over the.
Over the coming quarters, and indeed use.
We continue to engage with all shareholders.
We had a further we can say in Hong Kong.
With retail shareholders and the same issues.
We'll discuss that as they were yesterday in the in the.
So I think there is any further richard to discuss over and above what.
We'll discuss it.
Thanks Richard.
The one from Richard Thomas before we move buckets firms, so probably one for you call it on legacy.
Richard says that few of these clients have pointed out to him.
We've changed our stance on legacy between year end and now.
Is that your sense of things that you can call messaging has evolved.
Of course of this year.
No I wouldn't I wouldn't say that we have changed our stance.
Its pretty much its pretty much the same that it was at that point, which is.
It is a combination as we have said in the past or what is the complexity from.
Resolve ability perspective, and a cost so I would just say that we're just providing for the clarity on that and pleased that we're making steps.
Okay.
Thanks Carla.
Next question comes from Robert Smalley, Rob Your line is open.
Please go ahead.
Hi, Thanks for taking my question and thanks for doing the call.
On the call yesterday. It was mentioned that you did a study.
Potential.
The impact of a downgrade and you thought it would be 25 to 50 basis points.
Across the liability stack.
Could you talk about what went into that how you came to that conclusion.
First question second.
As you went over your view Emerald tier two et cetera.
Thing else.
Okay.
Sure.
Now.
Now they can scrub down everything.
Alright.
Brendan.
Yes.
With this in your new strategy funding strategy at the city areas et cetera.
Then third.
Sure.
With an increase in dividends.
It is very clear.
Your equity holders.
And Julia dividend and really a lot of them depend on dividend from the stock, particularly retirees could.
Could you talk about.
Potential tension between increasing the dividend.
And the needs.
Desires debtholders.
Sure.
There that will continue to be covered particularly.
Liability stack becomes more expensive.
<unk>.
Thanks for those questions, Rob maybe I'll ask.
Greg to cover the first question on the cost of that debt stack, yes, sure tie rods.
Analysis is effectively taking down the debt.
Debt.
If you take a hypothetical splits of the group and you split the Asia business away from the rest of the group.
And that kind of let's call it rest of world co.
Rest of World co versus its peers in its current rating arguably isn't sustainable.
You are arguably nacho to lower than current ratings today when you look at the peer group.
When we look across not just the debt liabilities, but also the broader funding base about group does currently benefit from that ratings premium that's the kind of funding differential that we thought could filter through.
So on your second question on an efficiency I mean, we have we have looked.
As deep as possible.
I'll get into the questions that were posed on the potential options, we havent found.
<unk> for efficiencies.
Naturally when you hold a group together.
Separating that there are some natural.
Synergies and efficiencies around this and Thats really what dominates that dominates the analyses that we described yesterday and that Richard just just highlighted.
In terms of your third question on on.
On the trade off of the reliance on dividends and the overall.
Capital management.
I think it was last year when we when we changed our our capital policy. Historically, we used to have a fixed dividend component and what we have made now is a payout which is linked with the profitability of the group. So we think that that is a sensible way of balancing.
All of these requirements so to the extent that the company's highly generative than our our dividends will increase to the extent there isn't they will decrease so it creates like natural stabilizer that we think is probably.
Probably the best way of balancing all that.
I'm, calling in for David.
Let me just add to that.
Look clearly in the second half of the year, we fully intend to get back into the low.
40% of food and often range.
Let's kind of set the previous pivotal policy was a fixed policy, which didn't really cover earnings.
<unk> growth appropriately.
We think this policy.
Does do that and it does allow for and if we can achieve our return targets with 12% plus the group will be substantially cash flow generative and there'll be there'll be.
Good.
Good policy to keep the dividends bank to fund growth, but also to ensure that.
Debtholders have virtually no capitalization and liquidity very solid funding and liquidity, which <unk> been very conservative stance and we fully commit to that.
Okay. Thanks for the complete answer and thanks for doing the call.
Thanks for the questions Rob.
So the next question comes from the line of Robert Thomas.
Your line is open.
Alright Thats typical.
Just had a question on how you how you're thinking about.
Calls on not just tier twos, but also part of your senior stack I mean, I think looking at the markets right now there's a lot of extension risk priced into even some of the senior enbrel.
<unk> bonds and I just wanted to see if you could walk us through how you assess.
Determining economic value in those calls.
You were looking at possibly letting those.
Go up to maturity, how do you assess.
What the value of that extension would be is it a.
Simply.
Part of the liquidity, then or would you need to replace it with MRO.
Hi, Hi, Robert Thanks, Thanks for the question so for senior foreseeing that.
The cold period that we have is really really short.
Those calls are designed to optimize the treatment of those of those securities from a from an MRO perspective until.
Right.
<unk> basically been able to reduce if you want the balance sheet. When it is no longer effective so the intention intention for all those east.
Is to call them, right, where all the MRO transaction.
The intention.
Obviously, it is not something we would guarantee but it is not designed to be to be valuable for us to call them.
So that's what I would say into in terms of the senior thank you.
Thanks very much.
Great. Thanks, Rob.
We've got a question coming in from Phil.
Sorry.
Okay.
From <unk>.
Deca failure lines.
Everyone.
Yes, we can hear you thanks for taking the call, making the call and thanks for taking my questions I guess to the first.
On your China real estate exposure.
Hi, I wondered a little bit.
I mean, you took some provisions this quarter, but do you think this will be sufficient for the long run and at that point in terms of issuing new senior bonds, which currencies would you prefer at the moment do you just look.
Which currency would be cheapest or.
Factors, playing a role as well thank you.
Hi, Phil Thanks for the question Richard you want to cover China Real estate, yes, things again because of the Esa, but I will just add a few additional comments.
As you know.
The sector came under stress from the signal from last year.
And we've taken cumulatively.
Around $900 million of prisons.
On average three in a minute.
Sure.
We kind of move those rigs in the first half of the year.
$102 million each quarter.
Some medium sized developers go to stage III.
So it's fair to say that sense is obviously go through them.
Issues at the moment.
However, the Chinese authorities are trying to stabilize.
The issue in terms of.
The development and.
And looking at the burn upfront or some of that nature.
Our sense is that.
We've taken the appropriate purchase at this stage when you look at the second half.
We do think that term within our <unk> guidance, which we gave you a state of.
Towards 30 basis points.
For the full year 'twenty two.
We'll be further.
Charges from trying to CRE as.
First impairment issue matures.
Probably of the same nature, we saw in the first half revenue in dollars or even slightly more.
And indeed.
If a loss.
It gets into further issues in <unk>.
Maybe to rent a minute we'll talk.
So we do think it's an issue which will be ongoing.
Thank you.
Very much.
Controllable from a group perspective, given it's a relatively small part of the group. So those advances will be offshore book is about $12 billion.
Only about <unk> of the.
Good flows move offices.
I think the authorities and join the Altra staples tissue.
Clearly.
There will be.
There will be.
Further further developments in the signal off the year.
That's really all gone stage central cases for some further provisions of about the same.
But mainly due to the first half or maybe slightly more.
We mentioned very carefully.
And we think.
We will resolve it but I think it will take some time I think this will take some time to resolve over the coming year or two so Tom can you just miss our guidance.
And let's see let's say are we getting from them.
And Phil for your second question.
I mean, ideally we would try to match the.
Issuance has to our natural currencies because that avoids some of the volatility in the capital stack that you have seen this quarter for it for example.
So we have about 51 or so percent of our <unk> are in dollars or pegged currencies. Then the next one down Sterling, which is about 17% and then the remaining third.
In a combination of all of the other currencies, so that would be kind of the dream treasure.
Treasurers.
Unfortunately, the market is not quite there the market is predominantly a dollar market. So invariably what we've tried to do is we try to take pressure off the dollar markets and try to diversify as much as possible and we will look largely at that.
In a currency agnostic fashion. So we always are keen to try to diversify so this year. What we have done is we have done suite C and sing dollars.
In addition to eurozone and dollars.
Last year, we'd need CNA hawkeyes.
And also as we see so we try we try to diversify away from dollars, putting variably given the large funding pool in the U S. We ended up doing more in the U S than proportionate and we want to.
Thanks, Phil.
Next question comes from the line of James Hyde of Pgi add James Your line is open.
Alright, well I hope you can hear me.
So.
First question is I just want to have some more color on the risk.
Risk weighted asset reduction measures for H to understand France closing of disposal is one but what is it about.
Continuing this more collateral taking is it more about offloading clients that don't meet our ROE targets.
Sure.
And.
I mean this was ongoing.
So how you are going to accelerate the switch was the impression I got from the call.
Secondly.
Oh I.
I see from at least the Bloomberg share Register there are a few more Chinese institutions in there.
I was just wondering if you'd be on Ping an has have any Chinese institutions.
Openly given support to current strategy.
<unk>.
Thanks, Thanks, James So to your point the <unk> approach is one that is dynamic.
We look at it all the time given the temporary nature that the temporary depression I, let's call that we have seen on the on the CET one.
Ratio, we have decided to accelerate somewhat some of those and the focus is really on less profitable less franchise clients alongside potentially some hedging opportunities that we have on some of the <unk>. So that is that is the bulk of the of the actions that we.
We are looking at at the moment in terms of the Chinese.
Institutions, Richard you went out you want to cover that.
Yes.
Sure.
Hi, Jim.
So as the limits what I can say, because obviously showed rich.
Most of the public.
Consumer individual shoulder positions.
Expecting too.
What I would observe is clearly there is a Hong Kong Shanghai stock connect.
Data on that.
And.
You can see that.
The vast majority of our position.
When you look at the Pentagon filings as the PM position is not just again when you do the math because cola.
<unk>.
Taking advantage of that.
To obviously invest in Hong Kong in Hong Kong.
Scope, which we obviously very much welcome.
But more generally when you go to the shareholders the Bloomberg Webster.
Then you will see a very large number of institutions in China and Asia on the register and we very much welcome that.
And the.
Clearly we are dual listed in both Hong Kong and the UK.
And we're a key member of the hang Seng Index and therefore, we welcome.
<unk>, including mainland China institutions and home infusions on our share Register.
And indeed part of the success of Hong Kong over the last few years has been the massive growth in the asset management industry in Hong Kong.
Well over 70 to 80.
Finally, China.
Parent company asset managers now based in Hong Kong Investor Newsy investors necessarily.
This species, so Jim I wouldn't take it any more or less than that.
Very much it's a little too much well can we very much welcome.
The China asset management industry in Brazil.
Really.
And being part of our share register so take it.
<unk>.
Okay. Thanks.
Just another one for Carlo.
I sort of surprised about the extent to which the market value of the liabilities effects enbrel because from an accounting perspective.
<unk>.
It's a lot of it is amortize cost. So I just wonder is it currency more than anything else.
That's caused the stepped up issuance rather than <unk>.
Fair value.
With the spread related to fair value.
Yes, Tim.
I mean first of all the impact the impact over the quarter was about $7 billion about $4 billion of that was interest rate and about 3 billion of that was FX. So it was a combination of both.
It is it is a curiosity of.
Morrell.
The valuation in wage regardless of the accounting treatment you de facto from an MRO perspective, you fair value it as a whole and regardless of the way you are hedging it as well because the hedges that you may take from an interest rate perspective are not daily level from a.
From MRO perspective.
What you do is you determine how much cash.
Capital you would be able to generate when you bail in those securities and that is the fair value at the moment. That's why it is exaggerated and Thats why perhaps it is more is larger than you would've thought.
Thanks Carla.
Really instructive I didn't realize that thanks.
That's it for me thanks.
Thanks, Jim.
A quick opportunity for any any any less people to raise their questions.
Just given some of the other piece.
<unk>.
Yeah.
Greg just say we go to.
Q&A, one dose of 30 basis, because it was going to come join us real estate balance.
Balanced fund was this pre that.
What I would say is that.
Our guidance for 2020.
Towards 30 basis points and yes, it does take into account.
Our central view on.
On on issues of the China commercial real estate market. So just cover that one which can be very Q&A.
Thanks, Rich and we've got another question from Livia <unk> from <unk>.
Your line is open.
Olivia.
Okay.
Okay.
Okay technical difficulties.
I guess I think we are.
We're out of questions. So how much color, yes, yes, Richard so.
And Greg just has to clarify my answer to the accounting treatment. So so Greg why don't you have a goal because I think I said more.
More perhaps like a few things a little bit more so yes.
Jim.
On the on the palms, so well if you put a bond and amortize cost relationship. If you put if you put a hedge on it but it's at a fair value hedge relationship.
What you do then is your fair value of the bond from an accounting perspective for a rate moves in it.
You can imagine when rates go up the bond liability value goes down that's reflected in MRO from an accounting perspective, then the swap liability of course goes up by the same amount. So you don't get a capital benefit.
<unk> of course isn't by available so it doesn't benefit your your umbro.
Effectively the mechanics.
Okay. Thank you.
I mean, thanks, everyone for joining today.
I hope they call was useful for all of you. If you have any further questions plus pick it up with Greg and the team.
And you.
You will see updated materials on the web with the information about about the exchange. Thanks very much until next time.
Thank you Rob.
Sure.