Full Year 2022 HSBC Holdings PLC Earnings Fixed-Income Call
It's quite quite well in this higher rate environment.
Speaker 1: Surface 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.
Speaker 1: From a funding perspective, we expect to issue a similar amount of growth to the one we issued last year, targeting $70-20 billion of local seniors, $4-5 billion in tier 2s, and about $2 billion in 81s.
Speaker 1: On legacy capital, good progress in 2022. We reduced the stack by over $4 billion. We will continue to monitor the market for cost effective options to manage the stack 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-played to continue growing, and we believe our business model offers one holder's one of the most diverse sets of revenue streams in Tolo Bankie. On that note, let's open the call for QLA. I'll hand over to Greg.
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 for questions and you can also ask a question.
Speaker 3: You want me to help you, sorry, but where are you?
Speaker 2: Shall we move on to Dan Davis from Autonomous?
Speaker 4: Silence.
Speaker 2: Afternoon. Hopefully you can hear me. Yeah, we can hear you. Thanks, John . Success. 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. Well, this decision taking on an economic basis, you mentioned before the call that the market wasn't.
Speaker 5: change there. And then just focusing on the make holes. 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 CT1 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 be?
Speaker 1: for the three questions. On the 81 call 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 versus a coal.
Speaker 1: automatically reach in the full amount. Second, what is the full amount that we need upstanding and whether we're going to have a period of time or an amount of standing to replace that coal which is smaller and as a consequence there is a cost of carry 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 we decided to call 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 securities are 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-law 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 valuable rights. So those are the first priorities.
Speaker 1: Second, we have the HPE, the numbering fence bank fixed rates tier 2s, then we have the discus and then we have everything else. So as you saw, we progressed along the first two buckets last year and those buckets continue to be the most important and will progress down.
Speaker 2: Thanks Dan. So we've got some questions in from Lee, I'll just read them out, I've spent 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 at 2025?
Speaker 2: And also linked to that, should we assume that the 45 billion of tier two 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 the 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 that those amounts over the next few years to avoid a big cliff risk in 2025 and that's incorporated into the four.
Speaker 1: to five billion that we're flagging for 40 years, 40 years too. 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.
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 spending and you divide them in a five to seven year average maturity.
Speaker 1: you end up with an annual amount of issuance, which is not that decimate our tool what we are doing this year and that includes also also the tier tools somewhere between let's say three to five billion on a stable basis every every year. Richard, do you want to comment anything else? Especially on the first part? Yeah, on the very good question. Clearly.
Speaker 6: We can do a bank bargain, for example, on UK, with the European Bank versus our big peer banks. And we do so with the same in the Gwchey-Vinam, same in India, Switzerland, China, and obviously in our home market on Hong Kong, versus other large Hong Kong banks. But the two large resorts at the group level, there's no one.
Speaker 6: As Carlos said, there's no one sort of direct or towards the direct ears in trade. We've obviously got three or four banks who are also global, but much more than that, we're double the size of them too. That's all, but it's one type of banking.
Speaker 6: especially up in the city and then you go down to our piers who are lots more than us. You won't see me yet but just so you're aware the peer group forum...
Speaker 6: What we managed to propose 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 another one that counts. 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 the securities with LIBOR-based coupons, should we be expecting LIBOR consent solicitations to be announced by June 30th?
Speaker 1: So Lee, as we have said before, we have no intention of leaving investors with libraries without offering them a modern alternative.
Speaker 1: That is of course depending security by security when that impacts you. In the case of the of the DISCO specifically, there is a more a closer time frame for us to look at that so you should expect something imminent from us.
Speaker 1: in terms of offering 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.
Speaker 2: Thank you, question Lee. The next question is from Rob's Lawley from UDS. Rob, your branch now will be held.
Speaker 7: Hi, thanks for taking my questions and doing the call. First on net interest margin developments.
Speaker 7: We've seen and you're projecting continued strong growth in the margin, even with a 50% pass through of an increase in rates. Could you talk about the development particularly Hong Kong versus the UK?
Speaker 7: 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 in anything that changed there. And then finally on the ECL charge,
Speaker 7: 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 of 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 components of the rates that haven't reprised, the rates that we have seen so far that haven't reprised yet in our bookstores. So that's the tailwind. There are some potential additional rate moves that are still in the tailwind. And effects calculations gives us about half a billion upside versus when we flagged that spring.
Speaker 1: more than 36 billion. Conversely there are a few headwinds. The headwinds are potential increases in past throughs. Our past throughs so far have been inside the 50% long-term averages. We're expecting from this point on.
Speaker 1: pass throughs they 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.
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 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 surplus liquidity in each of the entities that looks at what that liquidity should be and and then we look at what the surplus in each of the entities is and then we lay out a framework that looks at how we deploy that liquidity, how do we invest that liquidity, or how do we reduce that liquidity.
Speaker 1: Deploying and investing are not appropriate. Deploying is about business opportunities. Investments are at the margin if you have the liquidity, what you can do without increasing the risk profile for the bank. And then reduction is about offering different products to our clients.
Speaker 1: and potentially finding their company 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. Richard, you want to cover China, you have been booked.
Speaker 6: The other thing I just expect is on a bottom-up basis that you're right to some extent the 600 million on China's CRE is based on a sort of bottom-up view of our particular borrowers and their particular situation and circumstances and then clearly we then look at it as an overall provision coverage.
Speaker 6: level. Is that sensible? What's the downside scenario? What are the, what appears to be responsible? So as we said this morning, we're comfortable with that charge as of 31st of October . And we also said that the situation in that sector has improved.
Speaker 6: 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 logical in that sector but more positive. The rest of us know what to say really.
Speaker 6: 30 bits, broadly spread. UK, a pretty normal charge. Mexico, a pretty normal charge. Those are our big books. So again, broadly split between retail and wholesale. No big tool trees in there, or no big sort of overlays or what are called FEG, adjusted forwarding current guidance adjustments. So a pretty standard course of all the book outside the.
Speaker 7: the China still already 600 million charge which we call out separately. 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.
Speaker 6: over the next several quarters. Well, we got it to 40. 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 sort of economic circumstances at the moment with high inflation.
Speaker 6: and so on and so forth. Some companies go 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 Sea already is with Mexico already.
Speaker 6: We've been making 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 of the world has found itself in the last months.
Speaker 2: Thank you. Thanks, Ron. So we've got some more questions submitted over chat. So from Rob Thomas at T-Rogue Price.
Speaker 2: Rob asks, outside of China, Cree, 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? How does this transaction occur and what's the timing?
Speaker 6: On the first look, as you would expect, our two big books are books in Hong Kong.
Speaker 6: And the UK, clearly in Hong Kong, it's the Hong Kong books, China CRE, which has been the issue. The book outside of that has been very, very, very solid and remains so during 2022. And so clearly whilst we're obviously boxing on the market it's a big.
Speaker 6: The big market for us has had economic difficulties in the last year. Touch wood, it seems to be coming out of those difficulties with reopening pretty strongly, albeit it's still only days there, but certainly all the signs are positive in terms of Hong Kong recovery during 2023 and beyond. And a lot of other people in the UK.
Speaker 6: And again, it's really we watch them on small businesses and smaller mid-sized companies, the most sector, some of whom have cash flow difficulties. As you're aware, a fair chunk of the small business market is government guaranteed.
Speaker 6: but even there and we're obviously watchful. So those are the areas where we watch all else where in the world. I suppose it's the US and Credit Risk, particularly the company of the figure sector. You can get one or two of those. It's quarter, but I would say.
Speaker 6: I'd say those are the major points which we're watching at the moment. In terms of Canada, nothing to add to, we only just announced it a month or two ago. We're working through the regulated processes as you would expect and that's on track with nothing more to say. I would expect us to give you a more fulsome update on why we're on the process. For more information, visit www.fulsomes.ca
Speaker 6: probably at the half year. We continue to think that it will take much of 2023 to work through all the various regulatory and other processes we've got to work through.
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 for notices for jumpers in retail? But you would have thought that corporates would have been the most volatile in the stage 2 balances.
Speaker 6: Yeah, I mean the methods of the logical chain on UK mortgages, not that the flag is just a methodology change. UK mortgages do form well for us, very solid S class. So really again, and it's explained in an important account in more detail. It's more of a technical change than any other.
Speaker 6: wouldn't flag anything there particularly, you know, more or less concerned but that is all very well for us. And nothing but to say again in stage two in wholesale obviously you've seen some of the China CRA book go from stage two to stage three during particularly Q4.
Speaker 6: but also some in Keithway as well. But nothing else to call out there in terms of anything more than normal quarterly volatility in the wholesale stage 2 area.
Speaker 2: Thanks for those questions Paul. Just a reminder if you do want to ask a question over the phone, please do raise your hand. Otherwise we have some more questions submitted over text or was Italian.
Speaker 2: Ellie I think we've answered a couple of the questions that you submitted, but there's a couple here that we should cover so Ellie says I noticed that your 81 issuance plan is 2 billion and it's less than total redemptions for all the 81 calls you have this year Given you've been operating above the official 81 level of regulators. Happy
Speaker 2: for you 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 pockets specifically with in terms of regulatory requirements right there is a tier one pocket.
Speaker 1: So we look at the Tier 1 in totality. The amount of Tier 1 that we're issuing this year in comparison to the calls is indeed part of the plan to normalize the total amount of the AT1 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 foreseeing to be 21 cents.
Speaker 1: After that, it's going to be a combination of additional buybacks and investment for growth. We haven't quite decided what the proportion of the last two are. That's the way we're thinking about it.
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 via the usual channels if you have any further follow-up questions.
Speaker 2: Perfect. Okay, so that wraps up the call. So thank you very much everyone for dialing in and for your questions. Please be let us know by the usual channels if you have any further follow-up questions. Thank you.
Speaker 3: The recording has stopped.