Full Year 2022 HSBC Holdings PLC Earnings Fixed-Income Call
Speaker 1: percent and hence we have a meaningful deposit surplus which positions us quite well in this high rate environment.
Speaker 1: Our MRL ratio is at 30.1%, which compares very favorably to our 26.4% requirement. We intend to continue to operate with a proven buffer over that minimum. From a funding perspective, we expect to issue a similar amount of gross debt to the one wasted last year.
Speaker 1: targeting 70 to 20 billion of all co-seniors, 4 to 5 billion integer 2s, and about 2 billion in 81s.
Speaker 1: on legacy capital, good progress in 2022, we reduced the stock by over $4 billion. We will continue to monitor the market for cost effective options to manage the stock down over time. So in summary, a good year, the group now becoming very capital generative.
Speaker 1: Our capital funding and liquidity positions leave us well placed to continue growing and we believe our business model offers bondholders one of the most diverse sets of revenue streams in global banking. On that note, let's open the call for Q&A. I'll hand over to Greg. Gregllularity is heavily regarded byicing with your personal information lieutenants
Speaker 2: Thanks Carlo, hi everyone. As we did last time we'll be taking questions over Zoom. If you want to ask a question please can you raise your hands to signal that you want to ask a question and you'll need to ensure your line is not muted when we come to you. I'll just give everyone a minute to signal the questions and you can also ask a question via the...
Speaker 3: Lee, we can't hear you, sorry.
Speaker 2: Shall we move on to Dan Davis from Autonomous?
Speaker 4: Afternoon. Hopefully you can hear me. Yeah, we can hear you. Thanks, Del. Great. Congratulations on the results and thanks for taking my questions. I have three. Just wanted to touch upon the 81 call, the dollar 6.25. Of this decision taken on an economic basis, you mentioned before the call that the...
Speaker 4: whether anything's changed there. And then just focusing on the make-holds, you've talked about economics there in the past as well. I'm just wondering if you can provide a guide as to what sort of P&L or C2I impact you'd be willing to book. And I guess I'm looking at the exercises that you've done so far and kind of thinking of one to two points that you've kind of paid. Is that reasonable or should we expect that you'd maybe take a...
Speaker 1: to start.
Speaker 1: Yes, the decisions that we make are on economic terms. Now the way that those economics are calculated are a little bit more complex than just calculating the PV of the transaction. So broadly speaking, what we do is we take into account three components. One is the PV of a coal...
Speaker 1: versus automatically reached in the full amount. Second, what is the full amount that we need of standing and whether we're going to have a period of time or an amount of standing to replace that coal which is smaller and at the consequence there is a cost of care that we are.
Speaker 1: And third, it was what is the impact on the future spread and the Asian markets. When you put all those things into account, it's a little bit of an art rather than a full science. We put all those things together and we come up with the results. And you saw…
Speaker 1: on the back of that, that was the status quo, the transaction. That's probably all I can say on that one. In terms of legacy, you might remember from previous calls that I described that I think of these in two dimensions. There is a dimension which is how complex the security design from a resolution perspective.
Speaker 1: and on the second dimension is what is the call of taking those securities out. So when you put all those two dimensions together, we ended up with a pecking order that has, broadly speaking, four buckets.
Speaker 1: The first pocket is the holding company near low securities. Those are in the first pocket because they're out of our resolution entity, the holding company. And there is a lack of contraction rights of recognition of the Bank of England.
Speaker 1: valuable right. So those are the first priorities. Second, we have the HPE, the numbering fence bank fixed rate tier 2s. Then we have the discos and then we have everything else. So as you saw we progress along the first two buckets last year.
Speaker 1: And those buckets continue to be the most important and will progress from that priority list.
Speaker 1: Third, on synthetic LIBOR, all I would say is at this stage the consultation on synthetic LIBOR hasn't concluded so we'll have to wait for that before we can do anything about it.
Speaker 2: Thanks Dan. So we've got some questions in from Lee, I'll just read them out, I've spent some time and some trouble joining. So firstly he asks a high level question, with all the changes in the business model in recent years, which banks do we regard as our main peers?
Speaker 2: Additionally, what's the plan for the 4.3 billion of legacy that loses capital value in 2025?
Speaker 2: And also linked to that, should we assume that the £45 billion of Tier 2 will be a normal run rate over the next few years?
Speaker 1: Thank you. Thanks very much Lee. On the first question.
Speaker 1: HSBC stands pretty much on its own in the type of business model that we have. So we don't quite see ourselves having a very comparable peer around the globe. What we do is we look at each of those markets and we compare ourselves versus more local peers.
Speaker 1: with of course the caveat that the value of our franchise is actually international connectivity. So it's difficult pretty much to give you a few set of views that you can compare it against.
Speaker 1: In terms of the legacy securities losing value in 2025, what we're doing is we are pre-funding those amounts over the next few years to avoid a big cliff risk in 2025.
Speaker 1: and that's incorporated into the four to five billion that we're flagging for this year for Tier 2. And then on your third question, looking forward, and I would say this more broadly across all the components of the stack, we are now more or less at a level where the distribution of the stack is increasing.
Speaker 1: of the different components of the stack are pretty much where we think they should be. And from this point, we are about refinancing and financing growth. So if you take the current amount of sending and you divide them in a, I don't know, five to seven year average maturity, you end up with an annual amount of issuance, which is not that.
Speaker 5: market for example our UK Rinspense Bank versus our big peer banks and we do so, same in what we call GBM, same in interest rates in China and obviously in our home market in Hong Kong versus other large Hong Kong banks. But the short answer is at the group level there's no one market.
Speaker 5: As Carlos said, there's no one sort of direct or totally direct peers in trade. We've obviously got three or four banks who are...
Speaker 5: who are also global but much more than us, we're double the size of them too. For example, pleased when it comes to banking.
Speaker 5: especially up in the city and then you go down to pairs who are lots more than us. You won't see it yet but just so you're aware the peer group forum.
Speaker 5: What we managed for purposes has changed this year and there are more Asian peers within it so we have made a few changes to peer group to make it more Asian centric as the centigraphy for the bank moves more to Asia. So that's under the water counts. Don't have a look at that.
Speaker 2: Yes, sure. And one last piece of Lee's question. So he also asks, as it relates to securities with LIBOR-based coupons, should we be expecting LIBOR consent solicitations to be announced by June 30th? So Lee, as we have said before, we have no intention of having a
Speaker 1: of leaving investors with a library without before offering them a modern alternative.
Speaker 1: That is of course depending security by security when that Impact view in in the case of the of the disc specifically that there is a more Closer timeframe for us to to look at that. So you should expect something imminent from us in terms of offering
Speaker 1: remediation for those. The form of that offering is still under discussion. We haven't concluded what is, but you should expect something in that regard. Thanks for your question Lee. The next question has come from Rob Smalley from UBS. Rob, your line should now be open.
Speaker 6: Hi, thanks for taking my question to doing the call. First, on net interest marketing development.
Speaker 6: We've seen and you're projecting continued strong growth in the margin, even with a 50% past drew of an increase in grades. Could you talk about?
Speaker 6: the development particularly Hong Kong versus the UK. I think that some of your peers in the UK are seeing peak net interest margin now, and where are you seeing growth in yours? That's the first question. Second UK related again.
Speaker 6: You have a lot of liquidity at the bank. Any other plans to deploy it in any other way? I know that the easy answer is if we could, we would have already, but anything that changed there. And then finally on the ECL charge,
Speaker 6: 600 million for Mainland China, 800 for the rest of the book. Could you talk about the methodology there, whether there's idiosyncratic risks in there, how much of that is model driven and how you came to that number? Thanks.
Speaker 1: Thanks, Rob. Thanks for the questions. So let's start with NII.
Speaker 1: So, as you saw, we had NI for Q4 of 9.6 billion. If you annualize that number, it gives you about 38 billion of NI. We had a lot of questions earlier today as to what should be our guidance for NI for the full year.
Speaker 1: And what we have said is we haven't changed our guidance. What we are saying is that we are flagging more than $36 billion of NII for 2023.
Speaker 1: The way we think about it is there are a few tailwinds and there are a few headwinds.
Speaker 1: On the tailwind side we have still a component of the rates that haven't reprise. The rates that we have seen so far that haven't reprise yet in our books, so that's a tailwind. There are some potential additional rate moves that are still in the tailwind and effects calculations.
Speaker 1: gives us about half a billion offside versus when we flag that more than 36 billion.
Speaker 1: Conversely, there are a few headwinds. The headwinds are potential increases in pass-throughs. Our pass-throughs so far have been inside the 50% long-term averages. We're expecting from this point on.
Speaker 1: the pass throughs start to become closer to 50%, which implies more than 50% from this point on. An additional tailwind, an additional headwind is also on the migrations of clients from savings accounts to time deposits that is particularly relevant in the home.
Speaker 1: in terms of the UK market is...
Speaker 1: There is starting to see some sign of competition in the UK market, but it is still far from what we see in Hong Kong. So at the moment we are quite confident with the guidance that we have given.
Speaker 1: In terms of liquidity, indeed we are a bank that ends up having a lot of liquidity.
Speaker 1: What we have done over the last few years is we have become very deliberate about our liquidity management, which clearly is helping us in this up cycle, having surplus liquidity in this increasing rate environment is a competitive advantage.
Speaker 1: But broadly speaking, we created a framework to look at surface liquidity in each of the entities that looks at what the liquidity should be. And then we look at what the surface in each of the entities is. And then we lay our framework and looks at how we deploy that liquidity. How do we invest?
Speaker 1: for the bank and then reduction is about offering different products to our clients and potentially finding intercompany solutions. So we put all those things together, we are quite active. I would say given the current rate environment the reduced dimension has become less of a priority than it was when we started this a couple of years ago.
Speaker 5: Richard, you want to cover China? Yes, I do. And you have your book? Yes, I do. The things you are charged with, you expect on a bottom-up basis, but you're right to some extent, the 600 million on China's salary is based on a sort of bottom-up view of our particular borrowers and their particular situation.
Speaker 5: and circumstances and then clearly we then look at it at an overall provision coverage level is that sensible what's the downslope scenario what are what are what are what appears to be so several several surveys we sit small and we're comfortable with that charge at 31st of December .
Speaker 5: And we also said that the situation in that sector has improved. Since the year-end it's still very early days. I think there's still a lot to work through, but I think you've seen positive policy developments in the last couple of months, whereas in Q4 you did see some deterioration. So it's still very watery in that sector.
Speaker 5: The rest of the book, not much to say really. 30 bits, broadly spread. UK, a pretty normal charge. Mexico, a pretty normal charge. Those are our big books. Again, broadly split between retail and wholesale. No big tall trees in there or no big sort of overlays or what are the big WANTED Shirt.
Speaker 5: So a pretty standard quarter for the book outside the China CRE 600 million charge, which we called out separately.
Speaker 6: So can we assume that the go forward of ECL from a model driven basis without anything idiosyncratic should be in around 30 basis points, you know, over the next several quarters.
Speaker 5: Well, we've got a 40, and as you know, our sort of guidance range, if you like, is 30 to 40. So we're at the top end of that range. That reflects a difficult economic circumstance at the moment with fine inflation.
Speaker 5: and so on and so forth. Some companies are going for a CAFTO, difficulty staying in the retail sector. So that's the reason why we've struck it at the top end of the range. Obviously China CRA is with Mexico already has...
Speaker 5: We've made provisions there over the last 18 months or so. So 30 to 40 is our guidance range and for now we're sticking at the top of that range given our caution early in the year and given the economic circumstances which much as well has found itself in the last months.
Speaker 3: Thank you. Thanks, Ron.
Speaker 2: So we've got some more questions submitted over chat so from Rob Thomas at T. Rowe Price and Rob asks outside of China, Korea are there any areas of particular concern that you're monitoring closely and also can you update on the progress of the sale of the Canadian business?
Speaker 5: How is this transaction to occur and what's the timing? On the first look, as you would expect, our two big books are books in Hong Kong and the UK. Clearly in Hong Kong it's the Hong Kong Books China CRE, which has been used. The book outside of that is Be Noth.
Speaker 5: very, very, very solid and remains so during 2022. And so clearly whilst we're obviously watching on the market, it's a big market for us. It has had economic difficulties in the last year, touch wood, it seems to be coming out of those difficulties with reopening.
Speaker 5: pretty strongly, albeit still only days there, but certainly all the signs are positive in terms of Hong Kong recovery in 2023 and beyond. And I'll let people get to UK. And again, it's really we watch them on small businesses and smaller mid-sized companies.
Speaker 5: the most sector, some of whom have cashflow difficulties. As you're aware, a fair chunk of the small business market is government guaranteed, but even there we're obviously watchful. So those are the areas where we're really watchful, elsewhere in the world. I suppose you see guests in great risk.
Speaker 5: sector, you can get one or two of those each quarter, but I would say those are the major points which we're watching at the moment.
Speaker 5: It's sort of a kind of nothing to add to when we just announced it. Months or two ago, we're working through the regulatory processes as we would expect. And that sort of track was nothing more to say. I would expect us to give you a more full, somewhat greater weather on the process, probably at the half year.
Speaker 5: We continue to think that it will take much of 2023 to work for all the various.
Speaker 5: or very regularly in other processes we've got to work with.
Speaker 2: Thanks for the questions, Ralph. Another question submitted via text has come from Paul Fenelitao from StockGen. I think Paul, we covered your first question, but on the set of the other two, specifically on stage two, a big jump in total balances but no change in provisions. Why is that?
Speaker 2: And also what can we expect for the remainder of the year? All notice is the job is in retail. But you would have thought that corporates would have been the most volatile in the stage 2 balances.
Speaker 5: Yeah, I mean, it's a method of a lot of cool chain on the UK mougies, not the flag, it's just a methodology to change. UK mougies do for well for us, for a sort of S class, so really, and it's explaining the born accounting in more detail. It's more potential chains than the Yalza wouldn't flag anything there particularly.
Speaker 5: we know of more or less concern but that is all very well for us. And nothing but to say again in stage three in wholesale, obviously you've seen some of the China CRA book go from stage two to stage three during particularly Q4.
Speaker 5: but also some in key to it as well. But nothing else to call out there in terms of anything more than normal quarterly volatility in the wholesale stage of the area.
Speaker 2: And thanks for those questions Paul. Just a reminder if you do want to ask a question over the phone please do raise your hands. Otherwise we have some more questions submitted over text from Ellie down at Mormon Stanley. Ellie I think we've answered a couple of the questions that you submitted but there's a couple here that we should cover.
Speaker 2: Erie says, I noticed that you're 81 instruments planned as 2 billion and it's less than social redemption for all the 81 calls you have this year. Given you've been operating at both the official 81 level and regulators, happy to use to reduce your 81 bucket in calling all of those and not replacing.
Speaker 1: Hi, Eddie, thanks for the question. Yes, the answer is yes. There isn't an 81 bucket specifically in terms of regulatory requirements, right? There is a tier one bucket.
Speaker 1: So we look at the tier one in totality. Our the amount of the tier one that we're issuing this year in comparison to the calls is indeed part of the plan to normalize the total amount of the 81 stack to the levels that I flagged. We think we are comfortable with.
Speaker 1: That's a creative connection between one area and another which we don't quite connect at all. The way we think about the Canadian proceeds is priority one is to pay an extraordinary dividend that we are forcing.
Speaker 2: Perfect. Okay, so that wraps up the call. So thank you very much, everyone, for dialing in and for your questions. Please do let us know by the usual channels if you have any further follow-up questions.
Speaker 2: Okay, so that wraps up the call. So thank you very much everyone for dialing in and for your questions. Please do let us know via the usual channels if you have any further follow-up questions. Thank you.
Speaker 7: The recording has stopped.