Half Year 2022 HSBC Holdings PLC Fixed Income Earnings Call
Stage three 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 58 at the end of the year the reduction mainly driven by timing differences in fair value OCI securities and some arguably they growth we remain two 9% points.
Above our MDA hurdle, although we are below our target operating range of 14 to 14 in house, we expect the CET one ratio to trucks 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 will help us lift their 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.
The rate environment.
Our MRO ratio.
$28 seven compares favorably to 26% the requirement, which as you will see steel the sum of the parts calculation, we intend to continue to operate a prudent buffer over that.
From a 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 <unk>.
<unk> 7 billion in 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 on.
Broader.
Legacy <unk> legacy capitalized as I'm sure there will be some some more questions about it I just want to remind everyone of our position on those.
Align 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.
Not really currently feasible or rational so we will continue to monitor the portfolio.
Afforded 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 bondholders one of the most diverse set of revenue streams in global banking, that's what I thought of saying so I'll stop here.
Let's open it up for Q&A I'll hand over to Greg.
Thanks, Carlo Yeah, Hi, everyone. So we'll be taking questions I would presume so a little different to our previous setup.
And if you want to ask a question you can use to raise your hand function youll see at the bottom of the screen and we will open up your line. Please do make sure that when we do that you're on mute. So I think so.
<unk> tends to leave your 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 a person if possible.
Just leave it in a minute.
And let some of the questions come through.
And so our first question comes from David Autonomous.
Done.
Your line is open.
Hey, Greg.
Hello, Richard.
Thanks for doing the call and taking my questions.
Coupled with the first one is just.
One issue is planned for this year.
So I hear you on new initiatives.
Such refinancing next year, However, I guess im looking.
So next year.
Heavy 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.
To see the details of the exchange will come out.
I hear your comments on the rough habits, 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.
Interested by book.
The PRA have told you if they've given you targets to reduce planned per year and then also just on the reasonable economics, putting.
It does not.
Your comments, we're 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 costs on <unk> and also if you can give us any guidance as to what is reasonable and that would be really interesting.
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 to your tools. 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 and refinancing.
Two or three or four there is always a possibility to try to refinance some of the some of the potential for next year. 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.
Is that kind of every one would rather not have those securities outstanding because they are a little bit.
It's a new uses to have those securities outstanding from a from a reasonable ability perspective and to give you some 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 dimensions.
To the to the equation. The first one is how challenging each of the securities are from a resolution perspective.
There is a pecking order of those securities. So I would call out that our securities 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 bidding 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 theyre less problematic than I guess from our holdings.
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.
Hedging arrangement that we have on those bonds, whether they have significant optionality valued on surface 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, then you have the floating rate securities and maybe lastly, you have the legs.
Our 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.
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 one screen bottom of the list.
Is that more because of cost rather than kind of the programs they pose.
It 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 that 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, Thanks for taking my question and my question is regarding the upcoming 81 cool.
<unk> in one quarter in September this year, which has not yet been pre financed.
Considering you've got day plan.
One I was wondering what your thoughts are on this call I know that you're well above your assertion level of 81 intensive MBA 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, Ali Thanks for the question.
We have no impediment in calling that from a from a regulatory perspective.
Point.
We are as usual in the middle of the cold 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 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.
People are asking a little bit of about the potential.
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.
Thanks Connor.
Good afternoon.
Lowest went too.
So the call.
Yes.
Morning.
We continue to engage with all our shareholders.
We will process for enhancing shareholder value, we made a number of them.
And Thats as yesterday, which are going to do that including <unk>.
Very firm dividend return.
And we think that the structure is definitely working.
We're not going to do individually.
So the discussions on the call.
So I think we're set up very clearly yesterday on the slides some of the issues, which we released in the press.
And at this stage, we don't see.
There's value to this process versus the very clear.
What you won't co planning strategy to improve returns.
<unk> improved dividends, obviously improved capitalization over the.
The coming quarters and years.
So we continue to engage with all shareholders.
We had a further mix and say in Hong Kong.
With retail shareholders and the same issues.
We'll discuss that as they were yesterday.
And so I think there is any further richard to discuss over and above what was it.
Yes.
Those discussions.
Thanks Richard.
One for Richard Thomas before we move back to the phones. So I'm, probably one for you call it on legacy.
Richard says that.
<unk> clients, who pointed out to him.
We've changed our stance on legacy between year end and now.
Is that your sense of things how do you think our messaging has evolved over the 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.
Yes.
It is a combination as we have said in the past or what is the complexity from 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 with the with the SEC.
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.
What went into that how you came to that conclusion. That's first question second.
As you went over your view.
Tier two et cetera.
Thing else to come out.
Okay.
Neither can scrub down everything.
Alright.
Brendan.
Yes.
When you look at this in here and new strategy funding strategy at the subsidiaries et cetera.
Then third.
Yes.
With an increase in dividends.
It is very clear.
Your equity holders.
<unk>.
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.
Or is that.
There that will continue to be covered particularly.
Liability stack.
Thanks.
Thanks for those questions Rob.
Maybe I'll ask.
Greg to cover the first question on the cost of that debt stack, Yes, sure Hi, Rob So.
Analysis is effectively based on that.
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 rest.
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 of that group does currently benefit from ratings premium that's the kind of funding differential that before could filter through.
So on your second question on efficiency I mean, we have we have looked.
As deep as possible accordingly.
Into the questions.
We're posed on the potential options, we havent found.
Opportunities for efficiencies.
Naturally when you hold a group together versus separating that there are some natural.
Synergies and efficiencies around this and Thats really what dominates dominates the analyses that we described yesterday on that Richard just highlighted.
In terms of your third question on on.
On the trade off of the reliance on dividends on 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 that it is and they will decrease so it creates like natural stabilizer that we think is there.
Probably the best way of balancing all that.
I am 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 ethanol.
Food and often range.
That's kind of set the previous technical is it was a fixed policy, which didn't really cover earnings.
Our purple and 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 give dividends bank to fund growth, but also to ensure that.
Debtholders have furnished we'll look at capitalization and liquidity very solid refunded liquidity, which would do.
Very conservative stance.
We're fully committed 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 Robb.
Your line is open.
Alright, thanks chemical.
I just had a question on how you how you're thinking about.
Calls on not just <unk>, but also part of your senior stack I think looking at the market right now Theres a lot of extension risk priced into even some of the senior enbrel.
Enbrel bonds and I just wanted to see if you could walk us through how you assess.
Determining economic value.
Those calls.
We're looking at possibly letting those.
Go out 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, and thanks for the question so for four senior foreseeing that the.
The cold period that we have is really really short so those coals are designed to optimize the treatment.
Those of those securities from a from an MRO perspective until.
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.
To call them right for all the MRO transaction.
Tension.
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 in terms of the senior thank you.
Thanks, so much.
Alright, Thanks, Rob.
We've got a question coming in from Phil.
Sure.
Okay.
From <unk>.
Failure lines.
Yes.
Yes, we can hear you great. 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.
You took some provisions this quarter, but do you think this will be sufficient for the long run.
And at.
At that point in terms of skewing, you 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 again.
Again, because of the Esa, but I'll just add a few additional comments.
As you know.
That sector came under stress from the signal from last year.
And we've taken cumulatively around $900 million of prisons.
On average for aluminum.
Sure.
I'm sorry.
Fundamentals of prism in the first half of the year.
$102 million each quarter.
Some major developers.
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 developments.
And looking at the pump.
Some of that nature.
Our sense is that.
We've taken the appropriate pieces of the stage when you look at the second half.
We do think that term within our ECL guidance, which we gave you a state of.
Towards 30 basis points.
For the full year 'twenty two there will be further.
Charges from trying to CRE.
The impairment issue matures.
Probably of the same nature, we saw the first Australian dollars or even slightly more.
And indeed if.
The philosophy.
It gets into further issues into theirs.
Maybe $200 million.
So we do think it's an issue which will be ongoing and we think it's very 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 or thereabout.
Only about <unk> of the.
It will flow through advances.
I think the authorities in China are trying to staples tissue, but clearly.
There will be.
There will be.
Further further developments in the signal off the year, and that's where the art gun's stage Central case is for some further provisions of about the same.
And then as you did in the first half or maybe slightly more.
We're watchful, we mentioned switch very carefully.
And we think that.
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 I'll give you just miss our guidance.
And let's see where we go from there.
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 this quarter for it for example.
So we have about 51 or so percent of our RW A's are in dollars or pegged currencies there.
And the next one down is 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 shred.
Treasures.
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 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.
<unk>.
Last year, we made Cna's hawkeyes.
And also as we see it.
We tried to diversify away from dollars, but invariably given the large funding pool in the U S. We ended up doing more in the U S that proportion that we want to.
Thanks, Joe.
Next question comes from the line of James Hyde of <unk>.
Your line is open.
Alright, 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 are the is it about.
Continuing this.
More collateral taking is it more about offloading clients at the MISO Roe targets.
And.
And there are others.
This was ongoing and I'm, just wondering how youre going to accelerate the switch was the impression I got from the call.
Secondly.
Oh.
I see from at least the Bloomberg share I just there are a few more Chinese institutions in.
I was just wondering if you'd beyond pin gone have have any Chinese institutions.
Openly given support to current strategy.
Thanks.
Thanks, Thanks, James So.
To your point the <unk> approach is one that is dynamic.
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 have.
We are looking at at the moment in terms of the Chinese.
Institutions, Richard you went out you want to cover that.
Yes.
Hi, Jim.
So as the limits what I can say because of the showed which the.
<unk> public.
And just to show the positions, we would expect them to.
Overall, what I would observe is clearly there is a Hong Kong Shanghai connect.
And early data on.
You can see that.
The vast majority of our position.
When you look at the Pentagon filings as the PM position, it's not just again when you do the mast capital.
A couple of other institutions.
If I can move on.
To obviously invest in Hong Kong in our Hong Kong.
Scope, which we obviously very much welcome.
But more generally when you go for the children the Bloomberg Register.
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 <unk>.
Clearly we are dual listed in both Hong Kong and the UK.
And were a key member of the hang Seng Index and therefore, we welcome in fusion.
Fusions, including mainland China institutions and home infusions Minoshe, we're just done 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.
Mainly China.
Parent company managers now based in Hong Kong invest and Susie investors necessarily investing this PC, so Jim I wouldn't take it any more or less than that.
Very much it's somebody who we emerge well can we very much welcome.
Some of the China asset management industry.
Natalie <unk>.
And be part of our share Register so.
For it please.
Okay. Thanks Richard.
Just another one for Carlo.
Are you sort of surprised about the extent to which the market value of the liabilities effects enbrel because from an accounting perspective.
There is 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.
Sure.
Fair value.
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.
Valuation in wage regardless of the accounting treatment you the factor 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 novel from from MRO perspective.
What you do is you determine how much 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 is more is larger than you would've thought.
Thanks Carla.
Really instructive I didn't realize that.
That's it for me thanks.
Great. Thanks, Jim.
Just a quick opportunity for any any any less people to raise their questions.
There are a few seconds.
Im.
Greg just saying we're going to.
Q&A one does the 30 basis, because it was going to come join us real estate talent.
Maryland fund or is this pre that.
What I would say is that.
Our guidance for 2020 series towards 30 basis points and yes, it does take into account.
Our central.
Central view on.
On on issues of the China commercial real estate market. So just a couple of that moment is can be very Q&A.
Thanks, Rich and we've got another question from Livia <unk> from Citi.
Your line is open.
Olivia.
Okay.
Hello, Greg.
Okay technical difficulties.
I guess with that I think we are.
We're out of questions. So how about 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 do put abundant and amortize cost relationship. If you put if you put a hedge on it but it's in a fair value hedge relationship.
What you do then is your fair value of the bonds from an accounting perspective for rate moves and as 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.
Of course isn't pay available so it doesn't benefit your MRO.
Effectively the mechanics.
Okay. Thank you.
I mean, thanks, everyone for joining today I.
I hope they call was useful for all of you. If you have any further questions plus pick it up with Greg.
Our team.
And.
You will see updated materials on the web with the information about about the exchange. Thanks very much until next time.
Thanks, Rob.
Sure.