Q3 2022 HSBC Holdings PLC Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference call for HSBC Holdings Plc's Q3, 2022 results for your information. This conference is being recorded at this time I will hand, the call over to your host Mr. Noel Quinn group Chief.
Executive you may begin sir.
Thank you and good morning in London, and good afternoon in Hong Kong.
Thank you for joining our third quarter results call.
<unk> is going to lead the financial presentation, but I want to start <unk>.
My first talking about the leadership changes we've also in ads.
We've now spent maybe three years transforming HSBC.
While there's still work to do we are in a much better place to accelerate self lunch performance and deliver stronger returns.
As we approach the end of our three year transformation program myself and the board has taken the opportunity to review the composition of the GEC with Eni, So long term succession planning.
As a result, we have today and is that.
Joe Joe Henry will take over as group Chief Financial Officer on the first of January 2023.
Greg <unk> will take on the role of CEO of GBM permanently effective immediately.
You and will therefore step down as group CFO on this 31 December and will leave the bank in April 2023.
I want to put on record my thanks to you and for everything he has done drilling these thomas'.
He played a key part in creating and executing our transformation and growth agenda over the last four years.
He helps their H SBC through the Covid pandemic.
He has been fundamental in reshaping our portfolio globally.
Proving all our capital efficiency.
And embedding disciplined cost management across the organization.
He has also driven the transformation agenda within the finance function reshaping and strategic direction.
Encouraging innovation.
Building the team's engagement levels.
He's been a great professional.
Has contributed much to the bank.
And I wish him the very best for his future career.
I want to emphasize we remain absolutely committed to delivering our strategy and the 2023 targets, we announced with our Q2 results.
There is no change to my commitment as a consequence of these people moves.
Turning to Q3.
I'm pleased with our third quarter performance.
All regions performed well with particularly good performances in the UK, the middle East and Southeast Asia.
We delivered a double digit return on tangible equity for the nine month period.
Excluding significant items.
And we remain on track to achieve our financial targets in 2022 and 2023.
We've also kept a tight grip on costs and are driving greater efficiencies across the organization.
Lately.
This is important in an unpredictable and challenging external environments.
But it's also a sign that our Digitization strategy is working.
Our work to structurally reposition the business and invest in areas of growth continues to gain traction.
We are in a much better position at the start of the new interest rate cycle. As a result, with the actions we have taken our capital efficiency portfolio rationalization organic revenue generation and cost control.
We can also see in wealth for example that we're building a strong earnings platform for the future.
Over the last 12 months, we attracted lights your $1 billion of net new invested assets.
With $32 billion in the third quarter a lot of them.
Clearly I expect you to ask about M&A activity, when we get to the Q&A section of todays call.
As a result, we've given some more information about our Canada business in the appendix.
I'll now hand over to Ewen to take you through the details.
Thanks, Noel and good morning or afternoon all.
As Noel said these are a good set of results reported pre tax profits in the quarter of $3 $1 billion.
While down on last year third quarter. This was due to the $2 4 billion dollar revenue impairment associated with the disposal of our.
French retail bank.
Adjusted pre tax profits in the quarter increased by $1 billion or 18% to $6 $5 billion.
<unk> a strong net interest income performance of $8 $6 billion.
It's up $2 billion in last year's third quarter.
We had higher ECL, so this quarter $1 $1 billion or 43 basis points.
This primarily reflects increased economic uncertainty in the U K.
Together with further provisioning for China commercial real estate portfolio.
Operating expenses are up 1% year to date against the same period last year.
And up 5% on last year's third quarter due to higher technology investment and different timings for variable pay accrual.
We remain on track to deliver broadly stable costs this year.
Our core tier one ratio was down 20 basis points to 13, 4%.
Including and around 30 basis point impact from the loss on the French retail bank disposal.
We continue to expect to be at the bottom end of 514% to 14.5% target core tier one range during the first half of 2023.
That's why that second quarter results Nolan I said, our current strategy is the best and safest Y H O improve returns with.
With strong revenue growth driven by rising rates and volumes and tight cost discipline.
With these results our strategy remains firmly on track.
Good underlying growth across all of our businesses.
With operating costs remaining broadly stable year to date.
And then the annualized reported return on tangible equity of nine 2%.
Adjusted revenue was up $3.1 billion or 28%.
As the positive impact of rate rises works were reflected in our strong net interest income performance.
And noninterest income of $5 $7 billion was up $600 million or 13% on last year's third quarter.
Despite a 400 million dollar insurance market impact charge in the quarter.
<unk> were at $1.1 billion net charge compared to a net release of $600 million in last year's third quarter.
We now expect an ECL charge up around 30 basis points for this year.
Lending was down 2% on the second quarter and deposits down 1%.
But excluding the impact of the reclassification of the French retail bank as held for sale.
Lending and deposits were probably $5 billion.
Our tangible net asset value per share of $7.13 was down 35 cents on the second quarter.
Due to negative effects and adverse fair value movements.
Turning to slide four we're seeing good organic growth across all of our global businesses as well as the benefit of rising rates.
Wealth and personal banking revenue was up 25% with a good personal banking performance.
Personal banking revenues were up $1 $4 billion on the third quarter last year.
Due to higher rights and balance sheet.
There was a good underlying performance and while due to the strong insurance and private banking performance.
While revenues down, 9% or 200 million due to adverse market impacts in insurance a $400 million.
We remain very confident in the guys to higher wealth franchise, we had $91 billion of net you invested assets in the last 12 months.
Including almost $32 billion in this quarter.
So our investment is building a strong future earnings platform.
Commercial banking revenue was up 14% with global payment solutions, formerly known as G. L. C M.
Benefiting from higher rights to.
Together with continued strong underlying bryce.
Global banking and markets revenue was up 16% market and security services revenue was up 20% due to market volatility.
Global payment services solutions, and global banking up a 100%, partly offset by lower capital markets and advisory activity.
On slide five net income net interest income was $8 $6 billion up $2 billion versus last year's third quarter.
This was primarily driven by higher rates and was strong across all regions and businesses.
On rights. The net interest margin was 157 basis points up 22 basis points from the second quarter.
Putting us back at pre pandemic levels.
We now expect net interest income around $82 billion for this year.
And at least $36 billion in 2023 compared to the previous 37 billion dollar guidance.
Relative to the second quarter, we are upgrading our assumptions on a like for like 2023 revenues by around one $5 billion on a constant currency basis.
Including $1 2 billion for FX movements.
And at least $1 $3 billion of planned higher cost of funding for the trading book.
With this benefit being reflected in higher trading income and noninterest income.
And as dollar for dollar, but with lower net interest income.
In addition, given the unprecedented speed of interest rate rises we've been saying this year.
What do you believe we're being cautious on our planning assumptions across deposit beaches deposit migration.
Asset margins from here.
The FX movements have a similar impact on costs with 2021, adjusted operating costs of $32 billion.
Lighting draw around $30 billion using year to date average FX rates.
And around $29 billion. If you were to use September average rights.
Given the slower growth, we now foresee we now expect low single digit lending growth and by 2022 and 2023 before returning to previous expect expectations of mid single digit growth from 2024 onwards.
On the next slides noninterest income was $5 $7 billion up 13% against last year's third quarter.
Net fee income was down 11% the decline in fees was largely due to lower capital markets and advisory levels and global banking and markets.
And lower equity market activity in Hong Kong, and wealth and personal banking.
<unk> phased in global payment solutions were up 18% in commercial banking and up 8% in global banking and markets.
Other income was up 49%, including a novel strong FX performance in the quarter.
On the next slide we reported a net charge of $1 $1 billion or 43% of <unk> in the quarter.
This included $600 million of modeled stage, one and two provisions and I realize.
$400 million of stage three lines and.
And $100 million of write offs.
There was a $300 million charge in the UK, including $200 million of additional allowances for heightened economic uncertainty.
$400 million also relates to the mainland China commercial real estate market.
Around two thirds of which a stage one and two provisions and the remaining third our stage three.
The overall quality of our loan book remains good.
Stage three loans as a percentage of total customer lines of stable up one 8%.
In terms of outlook, we expect an ECL charge of around 30 basis points for this year.
And for 2023, we now expect <unk> to be at the higher end the 530 to 40 basis point planning range.
But with a higher degree of volatility around those guidance given the uncertain market outlook.
Turning to slide eight we've had three quarters now a relatively stable cost year to date and.
And we continue to expect cost to be broadly stable on last year.
Within that third quarter adjusted operating costs were 5% up on the same period last year.
Driven by continued investment in technology and timing differences in the variable pay accrual versus the third quarter of 2021.
We made a further $600 million of cost program savings during the third quarter.
Cost to achieve spend of around $700 million.
The formal three year program gains this year.
We now expect to spend between $6 5 billion and $7 billion slightly lower than our original $7 billion CGI jogger.
But the expected cost savings from the program remain unchanged at around $5 $5 billion by the end of this year.
Rising to around $6 $5 billion of cost savings by the end of 2023.
We continue to target around 2% adjusted cost growth for 2023.
With an ongoing focus on active cost management to mitigate inflationary pressures.
Turning to capital on slide nine our core tier one ratio was 13, 4% down 20 basis points from the second quarter.
This includes the sale of our French retail banking operations, which had an impact of around 30 basis points.
And further negative reserve movements through other comprehensive income due to higher rights.
Reported risk weighted assets were down $23 billion on the second quarter.
Principally to FX movements.
We've now achieved our year end ambition of at least $120 billion of cumulative W.
<unk> size.
With modest fair those saves still expected in the fourth quarter.
We expect core tier one to now recover strongly in the fourth quarter back towards 14%.
This reflects a number of factors including.
The formulaic impact of our dividend is accrued during the year.
We accrue at the top end of our payout range. So have already accrued 28 since year to date.
And additional capital management actions, we've been taking to offset the negative OCI movements.
Please remember that this is not guidance of our full year 2022 dividend intentions. The Devon. The CRO is purely a formulaic calculation that will true up the full year based upon the results and outlook at the time.
We continue to expect to move back to the bottom end of our 14% to 14 and a half the same target call Jay one range during the first half of 2023.
And to consider buybacks in the second half of 2023 onwards.
So in summary, these were a good set of results.
Earnings diversity across the group.
It's in all of our business lines.
And continued strong control on operating costs.
Despite a weakening credit outlook or credit quality remains strong.
For 2023, we're upgrading like for like revenue assumptions.
We continue to target around adjusted cost growth of around 3%.
And we expect to be at the bottom end of our target core tier one range in the first half of 2023.
Finally, after another quarter of good progress, we remain confident of delivering our targeted 12 plus percent return on tangible equity in 2023 and beyond.
We expect a 50% dividend payout ratio by 2023 and 2024.
Supplemented by active capital management, it's a surplus capital beyond us.
We've included a slide on Canada in the Appendix say you can see the shape of the business and the tangible equity within a.
We've also included slides on mainland China commercial real estate on the Hong Kong line book.
With that Elmira, if we could please open up for questions.
Thank you Mr Stevenson.
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Our first question is from the line of Mr. Omer Keenan from Credit Suisse. Your line is now open.
Hi, everybody. Good morning, Thank you very much for taking the questions and.
Best of luck for the future Ewen.
Car T cells question on.
Capital planning and on the provision scenario.
So just on capital planning.
Could you give an update on on where H SBC is on the tactical lots of UA measures.
That's all meant to get the core tier one ratio.
Up to above.
14%, so it would just be.
Good to have an idea of of all of that.
And just.
Just given the focus on on real estate prices and in the U K and Hong.
Hong Kong and mainland China.
Would it be possible to give a sensitivity in terms of ultimate your way.
Mike migration.
Hello real estate prices.
And in 2023 for example, water for 10% to 15% across the board <unk>.
Reduction in real estate prices with with me Paul to be waived.
And.
My other question on on asset quality.
Could you give us a little bit more color on on the guidance for full year 'twenty three I guess, there's lots of moving parts between stage stage three and.
Moving towards the downside the downside two scenario so when you're thinking about the FY 'twenty three guidance being at essentially 40 basis points.
What sort of assumptions are in the <unk>.
<unk>.
<unk> do you want to pick up those points directly and Omar. Thank you for your questions.
Look on capital planning I guess, yeah, various clouds to that I mean, firstly I touched on when I speak about the.
Yeah, the technical nature of how we accrued dividends share EMEA. So we've accrued 20, I'd say so far this year.
That will be very limited drag.
In Q4.
From dividend accrual.
Secondly.
Yeah, we've largely completed the 120 billion program that we committed to I think there'll be.
Better have a carry through in 16 4 billion.
And on top of that going back to Q1, we did implement a.
Series of ABA, instead of a tactical measures too.
Support the cocoa K, one given the maintenance we were saying.
Driven by the ICI losses, and the impact that was having on capital we're already seeing some of that benefit come through.
The Q3 results and there'll be incremental benefits in Q4, but.
I would say that we.
Yes, you should say material improvement in the core tier one ratio in the fourth quarter.
And then yes, it will be back at the bottom end of the core tier one range by.
The middle of next year.
Oh, sorry, then supports the buyback comments for the second half of 2023 because.
Well at that point, where the 12% plus return on tangible equity and.
And a 50% payout ratio.
We've signaled that we expect.
Low single digit.
Loan growth next year, yeah that means the business at that point is very capital accumulative.
On the second question on the real estate crisis.
I have to hand, what the a 15% impact would be on ratings migration across the book, but perhaps I can get you to follow up with the IR team. Afterwards, there there is quite a bit of detail in the pillar three document, but I think that I can help you sort of step through to try and estimate what that impact.
Good day.
And then on asset quality for 2023.
Well, Firstly I think yes, we do expect on the China commercial real estate book to continue to say.
Yeah, some losses coming through that portfolio through 'twenty three it still feels like we've got some ways to guy.
Before we're going to get stability and an improvement in the China property market.
For the UK, Yeah, that's probably the market with the biggest delta around at the moment is the U K.
Yes, we have already in some way it's front end loaded.
Potential was stage three losses for 2023 with forward economic guidance adjustments that we've made.
During the third quarter.
And above and beyond that look I think we're just being reasonably prudent with the guidance at the moment.
We didn't say 40 basis points, we said to the higher end of 30 to 40 basis points. So I think when we look at consensus sitting at slightly higher than 40 basis points at the moment, but we're not.
We're really trying to change that guidance.
But yeah. When you think about the World next year I think it's also important to recognize that.
Places like Hong Kong, and China are likely to have.
Better economic performances in 'twenty three 'twenty two.
For us when you think about our business mix.
Yes, we have got a blend of some parts of the world are seeing improved economic performance next year.
I don't know if you want to add any other comments Sean.
I'll just reiterate the fact that despite the guidance to say at the top end of the 30 40 basis points, we still committed to the delivering 12% push roti. So it's affordable within the royalty guidance, we've given you.
And we're all building stage, one and stage two provisions now in anticipation of potential lawsuits turning into stage three losses in 2023, so we've taken a prudent position on balance sheet positioning as well.
Next question please.
Thank you.
Thank you. Our next question is from Rob Noble from Deutsche Bank. Your line is now open.
Good morning, I was wondering if we could just walk through the.
NII guidance.
So youll, saying $37 billion has gone down $1 2 billion FX my understanding of the trading book funding cost because that was already within your previous NII sensitivity. So rates have gone up and I would have assumed that your NII should qualify.
By more than what.
And what you're guiding to so the 36 billion looks.
Quite low today. So I was wondering if you could.
Walk us through your thoughts on that please.
Okay.
Yeah sure.
I'll do my best.
Okay.
And I've gotten sun.
Yeah, there's a sort of.
The technical side to the gardens, yeah. It is on the walk from the second quarter.
Yes, firstly as you've noted we've had FX adverse FX movements of $1 2 billion.
And our planning assumption is that right moves will increase the cost of funding.
In the trading book by at least $1 $3 billion.
Yes, the cost of funding will be a drag on net interest income, but will have a dollar for dollar improvement in trading income in noninterest income.
So relative to the second quarter, we think we're guiding like for like revenue guidance up.
By at least $1 5 billion.
Even though the non on the net interest income guidance is down by $1 billion.
So on the non technical side, we thank God.
Net interest income assumptions at the moment are cautious.
Yes, I think increasingly the interest rate sensitivity tables that we show you.
Less helpful. Because they are based on a 50%.
Deposit beta.
Yeah, given the relatively unprecedented speed and rate rises that we've seen relative to recent history. I think we are being deliberately cautious in key assumptions, we're assuming in that guidance is very high.
Deposit betas.
Elevated levels of migration out of noninterest bearing parent camps and contraction of asset margins in some areas.
We'll obviously see how this plays out in the coming quarters, but I would say at the moment, we are trying to be deliberately cautious on that.
Guidance and I would now like for like we have increased the guidance by around $1 billion.
And just for clarity the cost of fund in the trading book.
Is the inherent in the Q2 numbers.
So that cost has increased by $1 3 billion. So we said increase on the Q2.
It's an offset between NII non NII, so although the costs on NII.
Is higher by $1 three the benefit re emerges in the non NII.
$1 three re emerges.
Okay and then the other thing is just all decided tonight, which was in my comments, but if people missed it was that the FX impact will also have a corresponding impact on operating expenses.
The 2021 costs were $32 billion that.
That translates to $30 billion on average FX rates year to date and $29 billion. If we would've used September averages. So I do think where consensus is sitting at the moment looks too high relative to those numbers.
Thank you just to just follow up on the.
On the NII. So the trading book funding costs go up but you've effectively assumed that the banking book dozens benefit at all from incremental rate rises in <unk> in Q4.
Is that right.
Yeah.
Implicitly.
And that is the assumptions I think that's broadly correct.
But as I say I think within our planning assumptions at the moment.
Yes, very cautious assumptions across.
Deposit betas.
Uh huh.
Deposit migration than asset margins.
And I think again that answer is more nuanced. If you go to the individual legal entity level I think probably in Hong Kong.
We are getting towards.
<unk> NIM.
During the fourth quarter I think.
And some of the other markets I still think there is.
Further expansion of NIM.
Alright, Thank you very much.
Thank you. Our next question is from Joseph Dickerson from Jefferies. Your line is now open.
Good morning. Thank you for taking my question you and you cited weakening credit outlook could you just discuss for us.
To help us dimension, a little bit a couple of things in terms of for instance, how a strengthening dollar plays on credit cost in your Asia footprint, and then Relatedly if I look at the Hong Kong Interbank liquidity is down to about 100 billion H K D and the H K M. A has been active in defending.
The peg it's not a.
Zero chance that.
The peg could break and I guess, what would be the consequences.
For the bank and that some.
That event from a particularly from a credit.
Standpoint, if you could help us think through those two dimensions that would be helpful. Many thanks.
I think let me take the second question first if I can and then you and you take the first.
We do not believe there is any risk to the peg us. So we believe the peg the hate U K law.
Have sufficient capabilities to defend the peg and thus a lot of scenario that we envisage.
Yes. Thank.
Part of the question Joe.
Yes, we don't think there's when we look across the portfolio in Asia, there's any meaningful impact from stronger U S. Dollar.
Apart from potentially in smaller markets for example, in Sri Lanka, but that's not all dollar related.
But yes at a sort of big macro level, we don't think the strengthening dollar has a material impact on us as we look out on credit quality across the region.
That's very helpful on both points. Thank you.
Next question please.
Thank you. Our next question is from the line if I had Kumar from Redburn. Your line is open.
Thank you.
Alright.
For taking my questions and good luck.
With your future career, just a couple of questions from me. The first one was just back on impairments and I'm sure. The story my understanding but.
When you look at the 300 million CRE overlay into 200 million U K overlay if I look at your overall coverage ratio on your loans to customers with.
Pretty much flat at one 1%, which is about the same as <unk> in FY 'twenty one.
I would have expected that to go up is a lot of the provisions you were taking or just reserves roll.
<unk> underlying delinquency, so why hasn't that coverage ratio steps.
Couple of other moving parts, obviously may rise helps in underlying delinquencies driving my first question.
And my second question just following on from an earlier question. When you talk about your greater than 14% guidance on CET. One from first half 'twenty three have you factored in potential risk migration from higher loan losses, falling CRE within that or if we saw increased migration without.
The risk to that greater than 14%.
<unk> guidance from 123, thank you.
Yes.
Second question.
Yes.
A factor then.
A view on what the economic outlook is and what the impact on ratings migration would be as a result of that.
And you can see what our assumptions are on the macro outlook from our.
First nine scenarios, so yes, clearly within that in some markets. There was an element of ratings migration that we built and John W. I forecast some capital forecast.
They on the.
On your question on impairments I mean it.
I guess, it's hard to answer the question on a on a macro level on the commercial real estate portfolio in.
China, we have definitely increased.
The level of rigor provisioning against that portfolio.
Yes.
They.
Yeah.
And then on the UK again, I'm sort of struggling to get my head around the sort of Tyco. The provisions we had at the beginning of the year because of Covid.
And putting back of provisions that we're now putting back on I think net net we put more on the U. K then we took off at the start of the year.
So.
But look I'll get the IR team to follow up with you on the specifics but.
I think on the two portfolios that were sort of most focused on at the mine on provisioning.
Provisioning levels are higher than where they were at the beginning of the year.
I don't think there are some currency impacts on <unk>.
All the balance sheet as well.
But the IR team can follow up on the.
Cool thanks, guys.
Thank you. Our next question is from Yelp.
Thank you. Our next question is from Yafei Tian from Citi. Your line is open.
Good morning.
Good morning, and all the best.
Two questions. The first one is just to follow up on that revenue and cost guidance to make sure I heard it correctly, assuming constant currency revenue is $1 5 billion high yeah.
I guess cost guidance hasn't really moved to 2% inflation does that imply on the pre provision.
You're guiding for one 5 billion.
P. P. L. P. Today, so far.
Just one SEC.
Second question is around the exit of Canada business.
To many other markets.
He says he is exiting Kennedy is actually quite a profitable market.
So just wanted to understand what is the rationale for that.
Okay.
Strategically I think that's it.
Okay.
Any further market that you have been hearing David Thank you.
You and John will take the first one I'll take the second.
Yeah, So look.
Thanks, you've got you've got our guidance exactly spot on.
Currency basis revenues at one $5 billion <unk> change in the cost guidance.
On a pre provision level.
They are.
It shouldn't be a $1 5 billion increase and if you think about the guidance that we've given that eye on <unk>, but even after.
<unk>, they still should be a <unk>.
This improvement on guidance.
On a pre tax basis.
Thank you <unk>.
Let me explain some of the rationale as to why we're considering alternative options on Canada.
Firstly youre absolutely correct. The business has performed well and is performing well with the return on capital above our cost of capital on a very strong recovery post COVID-19, let's team has done an extremely good job.
The rationale for considering alternative options are as follows.
Our market share in Canada is <unk>.
About 3%.
And second it's largely a domestic business the international connectivity between our Canadian business, particularly in wholesale banking.
Supply chain finance.
Is less internationally connected than many other markets that we operate it.
And then thirdly, we've had strong interest in our business.
From the point of view of other banks looking to buy it.
We clearly have.
You have to consider on behalf of all shareholders is the value that they would attribute to that business significantly greater than the value of holding a profit stream within HSBC and we're testing at this point in time by looking at the strategic options. Our assessment is there is a reasonable probability that.
The value will be significantly accretive.
And therefore, it's right, though we consider that option.
Particularly strategically as I said our market share.
Is in the 2% category the international connectivity over that business is relatively low.
So thats why we are giving serious thought to an alternative strategy for Canada.
I emphasize the management team in Canada have done an excellent job.
Then you asked me the question on do I consider Sami valuation for other markets and clearly we always look as a management team and the performance of our businesses.
The value in all hands relative to the value. We know there is also the strategic importance.
So we do do that but at the moment, we're only looking at commencing a process on Canada.
I can probably anticipate your second question. So let me deal with that now in Mexico.
And.
If I do the same analysis on Mexico.
I'll start with a market share analysis with you.
Depending on the product line or customer segment, we have somewhere between 7% and 7% market share of the business in Mexico.
So we're much stronger market share position.
We have strong growth being achieved in our Mexican business at the moment with significant upside potential and I think that's particularly true as we believe there is an international bank in Mexico.
Relative to other competitors our position as an international bank is being enhanced.
Yeah.
Thirdly.
We believe that the supply chain Interconnectivity between Mexico, and the rest of the world in the U S will actually increase in volume of business and business opportunity because it is an important manufacturing base into the U S.
So the core of what we do and we have a very strong market share position in retail banking in the U S. In Mexico with strong interconnectivity between retail and corporate banking in Mexico as a result of the payroll services.
And therefore, we also believe that we've got strong shareholder value accretion potential by holding our business in Mexico. So we're not going through a similar process on Mexico. We think we will we have good opportunities to continue to grow that business is starting from a stronger position on its not my intention to sell Mexico.
So hopefully that was a.
A reasonably comprehensive answer.
As and when we make a final decision on Canada, We will update you on the outcome of that process.
Are you.
Thank you Praful.
Okay.
Next question please.
Thank you. Our next question is from Tom Rayner from Numis. Your line is open.
Yes, Thanks John .
Everyone Hi that.
Can I just ask on the cost target for next year. Please to 2% in 2022 acres. They have on appreciate it's a pretty tough target given the inflationary environment even.
You said in your.
Chatter at the start that it was gonna need active cost savings to deliver.
No you pointed out you and was very key in terms of the cost transformation and installing disciplined cost management. So I guess my question is now the CFO is leaving is a is that hitting the target may become more dependent on patent back investment rather than finding additional cost savings.
I can get I can respond to that very categorically there will be no easing of tool in our cost discipline I'm, absolutely committed to that cost target.
You guys did a tremendous job on driving cost discipline into the bank, but I sure that agenda and on <unk>.
Richard So that agenda.
As we said in the past, we've got a headline target of 2% around 2%.
We know that that's challenging in a high inflation environment, but we also know we've got cost savings coming through next year from the transformation program, we've already embarked upon.
That's the equivalent to 3%, it's about $1 billion of flow through savings. We also know we're identifying additional cost savings opportunities through further simplification further digitization and.
The organizational.
Change and that can add to the 5% underlying capacity to pay so I'm not going to pretend in a high inflation environment with <unk>.
I'm also going to be remain absolutely committed to delivering that.
Thank you and for all of the Great work you've done on instilling those disciplines in the bank, but I will make sure those disciplines remain and are committed for the future. So theres no weakening in that target.
Okay. Okay. Thank you and best wishes to you and whatever you do next.
Thanks, Joe.
Keith.
Yeah.
Yeah.
Yeah.
Next question please.
Thank you. Our next question from Manus Costello from Autonomous your line is open.
Hi, Matt.
Good morning, guys.
I actually I just had a couple just to.
Triple clarify cost target for next year, the pace of which the notes to 2% growth comes from is the 29 billion FX adjusted.
The $30 billion.
How does the year to date.
FX average rate is that correct.
Yes.
Caution I would put around that Madison is that exchange rates bouncing around so that that was true at the end of September whether it remains true by the end of the year, we'll see.
Sure so on an FX adjusted basis.
But the thesis is correct, but we will we're not trying to play games with FX in setting that target.
Yeah, no it wasn't entirely clear from the release this morning, given the way you've given the number of it.
The 29 is the current starting point.
My second question is actually about the commercial real estate outlook in China. When I look at your disclosures, you'll taking much higher impairment on your Hong Kong on your Hong Kong boot exposures.
In boots exposures.
All the additional 400 million of impairment you've taken this quarter, mostly related to Hong Kong boot.
And why is Hong Kong, so much worse risks.
The Hong Kong book.
Could really accelerate away from you if you've taken about 8% to 9%. So far of the book is in patent could that be materially higher.
Kind of structural problem with your lending agreements in Hong Kong.
Yeah, Yeah the Wow.
Okay.
Booked in Hong Kong, it's it's the offshore component of the China commercial real estate portfolio manner.
Yeah, we bought just under 20 billion of exposure just.
A $7 billion of that is onshore in just over 12 billion of it is offshore.
The offshore book is definitely are weaker than the onshore book.
Yes.
They.
So I would say if you look at the sub standard.
<unk> disclosure on substandard unimpaired.
Yeah, which is about 35% from memory at midyear on the offshore broken about 3% on the onshore book. So you can see in that very very different asset quality considerations. Yes. There are a lot of the policy support.
That's going through in China or is definitely providing a lot of support for the onshore portfolio.
Providing a lot of quick liquidity support for the onshore portfolio and in some cases, it's a question of whether that liquidity for regulatory reasons can be used to support the offshore book.
Yes, we do expect there to be.
Yes.
Provisioning against they offshore book, but yeah to keep that in context.
Well billionaires is an eye.
Yes, one trillion line portfolio. So it is just over 1% of total exposure, we have as a bank, but no I don't know if you've got other comments.
I think it's a fair assessment they offshore book is a different risk profile to the onshore.
But our clients on our onshore portfolio is a relatively high quality tier one tier two city orientation book.
But what we've got to work at it is how the policy measures benefit not just the onshore business the offshore that's still an evolving picture.
And therefore, we've got to keep that under close review.
Should we consider the offshore book.
This point to be essentially unsecured.
Not able to get access to liquidity measures and questions over collateral as it affected in unsecured book that you've got up Shlomo.
Relative to the onshore book it is less secure than the onshore book. So there is a fair assessment.
But is it fair to say that the onshore policy measures will not benefit the offshore book now that's not a fair statement.
We have to see on a client by client basis, how much of the onshore liquidity support.
And then support that company's ability to service the offshore book, So I wouldn't have a complete separation between on and offshore it will be client by client dependent.
So I wouldn't describe it is unsecured.
Yes, the onshore brokers typically secured against specific properties.
Offshore book has.
Less specific security, but there is security on the underpinning that portfolio.
But yes, but it's not secured.
Definitely no unsecured it sits somewhere between those two.
Got it thank you very much guys.
Next question please.
Thank you. Your next question is from the line of Martin <unk> from Goldman Sachs. Your line is open.
Hey, good morning.
Hey, How're you doing let me first of all earlier comments.
Thanks, Stephen for calibration over the years and there will be patients with more questions.
If I could just have two one on <unk>.
Pass throughs and one on on asset quality I was just wondering in term.
So pass throughs.
On your comments were on hospitals being more benign compared to us.
Assumptions.
You have made earlier on but yeah. I was just wondering have you seen any meaningful signs of attrition.
Core markets Hong Kong.
And U K ring fenced bank in terms of pounds of current accounts into higher yielding accounts, you see something which is I started to trend higher and could imply higher pass throughs going forward and secondly on asset quality I was just wondering.
What are the main ramifications are you seeing higher mortgage rates in the U K will have I think most recently mortgage rates.
Headline has increased the level of around 6% and I was just wondering from your UK business perspective.
What are the main implications so for mortgage rates are at such a level. Thank you.
No don't want me to go Yeah, Yes. Please please do so on a look on the pass through.
Levels Martin.
<unk> been I.
I guess below your expectation so far but I think they have been rising and as I said in our guidance.
Yes.
But some reasonably conservative assumptions and cautious assumptions on where deposit betas guy who changed from hair, but implied in that comment is materially higher than 50% to what we've seen to date.
And again, hence why I would caution on that.
Uh huh.
On using our.
Net interest.
Interest rate sensitivity tables at this point because they are based on a 50% deposit beta, which I think are becoming increasingly less relevant as we get to higher rates.
We haven't seen.
Any yes.
Material attrition, where we are.
Seeing is migration out of noninterest bearing current accounts and savings accounts and we're starting to see that trend now in Hong Kong pick up a bit given where rates are.
But again just as a reminder, typically if you looked in previous cycles.
Uh huh.
Our extent of deposit migration out of our.
Noninterest bearing current accounts as being well below the sector averages in Hong Kong.
On asset quality.
Again, the bulk in the U K, it's typically a mix of two year and five year fixed.
So I yeah, the impact of that device higher rates will take time to roll through the book.
Yeah they they.
Typically stress when we put them on the rights of up to 7%.
Yeah, and if he you can look at our <unk> nine modeling.
Yeah, and look at the downside what unchanged scenarios.
If you want to look at the potential sensitivity, we have to higher provisioning levels. If you want to take some more adverse scenarios on the outlook for the U K.
But yeah, we think as we said today.
Yeah, what where we're not complacent about it but when you think.
Yeah from most of our customers buy as high rights are affordable given all the stress analysis, when we put out on when nice lines, we'll put wrong.
Thank you very much.
Thank you.
Our next question is from Raul Sinha from JP Morgan Your line is open.
Hey, Rob and good afternoon, everybody. Thank you so much for taking my questions and my best wishes to you and is well.
Normally if I can start with a follow up on.
Your commentary around Canada, and Mexico, and just trying to understand.
Reaction function to any incoming capital proceeds that you might generate.
From an M&A M&A.
How would you think about.
Capital deployment, if you were to reach a position in <unk>.
Excess would you consider further acquisitions I think that's one of the comments you made publicly.
Or should we expect that the majority of capital that is generated from these disposals should.
It should be returned to shareholders and the reason I ask this because I think historically HSBC has linked.
And the various share buybacks too specific disposals.
So I was just wondering whether you might be willing to link any subsequent disposal generated copper proceeds to.
Direct share buyback.
And I guess the second question I have is.
Remaining on it.
Instrument.
I was just wondering.
Obviously, we've been expecting a recovery in wealth.
In Asia for a while and things are obviously still challenging on the ground.
I was wondering if you could update us in terms of your thoughts around how much.
Hum.
How the business is positioned going forward and whether or not you see any structural challenges arising.
From recent developments in terms of growth. Thank you.
Thank you thanks Rahul.
Let me deal with Canada.
Canada rights in the first let's.
It looks like you're still very early in the process on Canada. So I don't want to be too definitive on use of proceeds.
Clearly.
There would be an expectation.
And elements.
A significant element of the proceeds there is I don't want to hang onto excess capital. So as we get back into our target range of 40% to 45%, which we got to do without the benefit of Canada.
Then if we were to low to kind of disposal then on top of that you would clearly have excess capital sitting at the group.
It would be reasonable to assume that we may retain some of that capital to fund future growth with emerging 'twenty 'twenty four and beyond.
But a good proportion of that capital would be available for distribution I don't want to give too much guidance on that at this stage, let us get through the process on Canada.
I have no intention to hang on to excess capital over and above our target range.
Unless we see good opportunities for profitable growth. So I think it would be a reasonable expectation to expect so.
Distribution of that capital back to shareholders in some form.
On wealth management.
I think on Asia, we are seeing the Hong Kong market reopening activity levels domestically are increasing we are seeing the Hong Kong market reopened internationally. So I think the prospects are far better for 2023.
I've been throughout 2022, so I would expect activity levels to increase but what you will also hopefully see is a more stabilization in the equity markets. So the investment environment has not been very supportive.
Particularly in Asia.
Though at the same time as the activity levels have been suppressed.
I think if we start to see a stabilization of the market there'll be an increased appetite to use alternative investment products.
And what I referenced in my opening comments is.
We're building the platform for future earnings growth from well by continuing to accumulate net new assets.
As we talked about in the last 12 months, we've accumulated 91 billion of net new assets.
91 billion, given the suppressed market situation and the investment appetite at the moment.
Not yet producing good earnings, but it will do in the future that is a platform for future wealth earnings while we continue to accumulate and I liken it to what we did in the deposit book we.
We still accumulated deposits from good operating accounts, particularly in wholesale banking and retail banking noninterest bearing operation of tonnage and we did that during the times when they weren't earning a revenue stream.
Now, we're getting the benefit of that and Thats exactly what were now doing on wells, we continue to expand customer acquisition asset acquisition in order to pillar build a platform for future revenue growth.
You.
Next question please.
Thank you we have time for one more question from under car from Barclays. Your line is open.
Good morning Gents. Thank you.
Do you want to.
Good morning.
And look forward to hearing what you do next.
Can I just squeeze in two questions. Please sorry to come back to net interest income.
But the guidance for next year.
Really struggling to make sense. So I do appreciate there is a greater than symbol.
Symbol, that's sitting in front of that but.
But.
If I was just mechanically take your 32 billion gallons. This year, the Q4 exit run rate.
We only run rate.
Annualized.
36 $36 billion for next year.
I mean, you're basically assuming absolutely.
Mental rate benefit in your.
Thanks, Yeah.
The assumptions that must sit behind that must be extremely conservative I. Appreciate you talking about features above 50.
Could you. Please can you help us just understand a bit more exactly.
Is there something we're missing in the extent to which those numbers are conservative.
And secondly.
I wanted to actually if you had an update for us on the path to vie for 17 on on your P&L.
I'm mindful that we have with some kind of two months away actually from the implementation of it.
You've given us some guidance before could you help us understand the kind of the.
The impact on them.
<unk> fees and costs. The reason I'm asking is because your fee income performance. Your noninterest income performance in Q2 is actually quite robust if I add back in the $600 million of.
Mark to market.
So that you had.
Annualizing at quite a healthy clip.
I need to understand how much I should be taking off that.
For 2017 to walk out with consensus next year isn't the right price anything you can help us with that would be really appreciate it.
Yeah.
One of them to start to start without for 17, okay.
<unk>.
Yeah, well, it's sort of been on Oakwood phase at the moment with some of the.
Modeling off for a seven day numbers in terms of your forecast than some of the Salon first full.
Hum.
And.
Yeah, we're not able to we're giving our guidance at the moment based on our first four rather in line for 17.
Look I think we are going to be in that sort of.
Unsatisfactory position for a few quarters as we work to give you.
Yeah survive for a 17 adjusted view of the world in the coming quarters.
But just to repeat what we said a couple of quarters ago.
Yeah, we expect.
Our reported earnings to be down by around <unk>, I think as part of that you need to adjust out the impact of MCU.
And we expect <unk> to be down around $3 billion.
The net impact.
Right.
As a result of that to be relatively de minimus. So I think yeah.
Latest internal numbers, we're looking at is around 10 basis points of impact on 'twenty three royalty, but those numbers are still sort of being worked on.
I appreciate it's an unsatisfactory position for all of you.
We are working.
As we can to get to a position where we can provide you clarity you better clarity on when we can we will.
The market.
Just on the.
The comments on you know the math, so four times now and to get to 36 I think.
You do need to add the $1 $3 billion on top of that for the switching to trading income that is an uplift in the guidance that we're giving.
And in addition to that.
Annualized rate of 36 side I think we would say 37 three you placed 86 on your maths.
And then I sort of revert back to the conservatism or caution on other assumptions, we're making.
Okay.
Yes. The reason for that is just yeah. We genuinely think we are pricing a relatively unprecedented.
Period, given the sharpness of rate rises that we've seen.
And we are generally trying to be cautious on giving you guidance says.
Over the next couple of quarters, but you know if.
We find going into Q4.
Yes, our assumptions can be upgraded I'm sure, Georgia is now we'll be talking to you about that at full year results.
Thank you so much.
Be tempted to go ahead for your expectations for noninterest income next year based on your current understanding of.
Some momentum.
Right.
Okay.
Some point I think we'll be accused to providing a profit warning when we're giving you guidance on net interest income noninterest income and costs.
Sure.
Yes, probably born and they allow you to at least marvell on one of those items.
That's fair.
Yeah.
Thank you.
Thank god, but I mean, setting aside if you think about the trends in noninterest income. This year I mean, I think you do need to add back about $1 billion like for like.
Hum.
And insurance AMC you.
Yeah, and I think some of the other line items. When you guys for summit clearly benefited us this year.
Some have significantly underperformed yeah. When you go through the global banking and markets P&L, There's a lot of pluses and minuses in performance this year.
We've talked about well and the depressed conditions for Wow this year, but even just on a pure technical bases I think you need to add $1 billion back for the insurer and same to you.
Yeah, and I think if you look at the underlying fee growth.
Or are they the non NII, we're seeing very strong global markets performance in the volatile markets. We've seen suppressed event based fees because of the low activity in M&A and capital markets.
We can each have a view as to whether some of that event activity will come back next year, but there is a probability that there is an element of that going to be coming back next year and.
And you're going to have a continuation of good good fee growth.
G L <unk>, a global payment solutions in both C. M. B G. B N N I don't see that trend decline and I see that trend continue in <unk>.
Fee generation there.
And as I said earlier my expectation is there'll be an opportunity for some growth in our fees around wealth management as both activities and markets start to pick up in investment starts to flow back into alternative asset classes. So.
But it's it's unpredictable at this stage, we'll have to see how next year goes but.
But I think there are some elements of our fee performance that are going to be in jewelry.
Thank you so much.
We thought if I can just share some closing remarks I'd appreciate to firstly, thank you very much fool join.
Joining the call today and your questions.
It's a closed just a few summary comments, we had another good quarter with underlying growth in all businesses.
Positive impacts of rate rises and continued tight cost control.
We remain on track to hit all of our financial targets, including a rotary <unk> of at least 12% from 2023 onwards.
I want to reassure you there will be no change in our strategy or our commitment to cost discipline as a consequence of the people changes we've announced today.
I want to reiterate my thanks to you and for all that he has done for the bank over the past four years on the support is given to both myself personally.
As I entered the CEO role on the advice and guidance. He gave me and also the support is given to the wider team within HSBC.
Welcome George into the new role in the first of January .
On a scale of support and assistance in George taken on that new role and I wish him all the best in that regard.
Thank you I'll speak to you again with our full year 2022 results if not before have a good morning or afternoon.
Thank you, ladies and gentlemen that concludes the call for the HSBC Holdings plc Q3 2020 results you may now disconnect. Thank you very much.
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