HSBC Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 12 speakers on the call.

Operator

Welcome, ladies and gentlemen, to the Analyst and Investor Webinar on the 2024 Interim Results for HSBC Holdings Plc. For your information, this webinar is being recorded. We are now ready to start the webinar. So I will hand over to Noel Quinn, Group Chief Executive.

Speaker 1

Good morning to everyone in London, and good afternoon to those joining from Hong Kong. Today is my last results announcement before George takes over in exceptional leader who understand what makes HSBC special. I'd like to thank my colleagues around the world for everything they've done over the last 5 years, and I wish George every success for the future. I have always been immensely proud of the heritage of this bank and the strategic role it plays in the world. But when I took this job on 5 years ago, we didn't have the financial performance to match our standing.

Speaker 1

My aim was to change that. I believe we've done so and created a strong platform for future growth. This was evidenced by $37,300,000,000 was up 1%. Profit before tax of $21,600,000,000 was stable on the same period last year. This performance enabled continued strong capital generation.

Speaker 1

Our return on tangible equity was 17%, excluding notable items. We've announced $4,800,000,000 of further capital distributions today. This takes the total capital we have distributed by way of dividends and buybacks in respect of the last 18 months to $34,400,000,000 Finally, we've updated our guidance to reflect our increased confidence about the future. We're providing new guidance of a mid teens return on tangible equity in 2025, in addition to the 2024 guidance we already had. We're upgrading our 2024 Banking NII guidance from at least $41,000,000,000 to around $43,000,000,000 We're revising our 2024 ECL guidance to be back within our normal medium term planning range of 30 to 40 basis points.

Speaker 1

And we're reconfirming our 2024 cost guidance of around 5% growth on a target basis. That's despite growth of 7% in the first half, which as George will explain, is mainly due to timing differences compared to last year. The benefits of our strategy execution over the last 5 years are evident in our performance. Before getting into detail on the further progress made over the last 6 months, please allow me to share some reflections on our 5 year The first thing we had to do was to reshape our portfolio. Building on the work of my predecessors who initiated important structural changes, we've continued to exit businesses and client portfolios that were nonstrategic, subscale and unprofitable.

Speaker 1

1st, via organic portfolio reductions, which delivered RWA savings of around $128,000,000,000 and then via inorganic means through disposals. The second and very important strategy, which we commenced at the same time, was to build alternative sources of revenue growth. Within this, we've invested to grow fee income, particularly in areas where we have significant strengths such as Wholesale Transaction Banking and Wealth. We've also continued to invest in our differentiated international From approximately $7,000,000,000 of banking NII for a 100 basis points down 2 to around $3,400,000,000 at the end of 2023 and now down to around $2,700,000,000 today. All of this had to be underpinned by a culture of cost discipline, which we have instilled across the group.

Speaker 1

These savings enabled us to invest in the areas I've spoken about. And this transformation has helped to improve our financial performance. As you know, we delivered a record profit in 2023 and a mid teens return on tangible equity in 2023 and in the first half of twenty twenty four. It has been over 15 years since the group was generating returns at current levels, and we now expect to sustain it this year and in 2025. The other tangible measure of success is capital distributions to our shareholders.

Speaker 1

I'm really pleased that we delivered around $54,000,000,000 by way of dividends and buybacks to our shareholders over the last 5 years, including the distributions announced today. And I'm especially pleased to have paid a special dividend of $0.21 per share earlier this year following the sale of HSBC Canada. I see this payment not just as a financial return, but as a return for the loyalty that our shareholders have shown us over the recent years. Let me now summarize the further progress evidenced in the first half. 1st, Wealth has been a key component of revenue diversification strategy.

Speaker 1

It delivered 2 very good quarters, growing revenue by 12% in total. In Transaction Banking, fee and other income in Global Payments Solutions grew by 4% and in Global Trade Solutions by 1% in a very difficult environment for trade. And revenue for HSBC Innovation Banking was up 4% quarter on quarter as our new global proposition continues to gain traction. 2nd, our scale markets in Hong Kong and the U. K.

Speaker 1

Enabled us to grow profits each year. As we captured new opportunities in both the Corporate and Retail businesses. As you can see, we also have positive growth in other markets, including India, which was up 4% in the first half, and Singapore, which was 2%. 3rd, we continue to grow multi jurisdictional client revenue in both Wholesale and Retail. 4th, we saw good growth in both customer lending and deposits in the second quarter despite what is still a relatively sluggish environment.

Speaker 1

Finally, we've continued to grow the size and duration of the structural hedge to reduce our sensitivity to interest rate movements. George has new disclosures on the expected benefits in his section. All of this progress underlines why we expect to deliver a mid teens return on tangible equity this year and in 2025 as well. Let me get into some more detail. The steps we've taken to change our Retail business model and our continued investment in people and digitization have made wealth a key driver of revenue growth.

Speaker 1

Wealth revenue was up 12% in the first half to $4,300,000,000 and that growth is broad based. As you can see in the boxes on the right side of the slide, wealth fee and other income was up 14%. Private Banking revenue was up 16%. We attracted $32,000,000,000 of net new invested assets. Our New Business Insurance, CSM, was up 77%.

Speaker 1

Moving to the next topic. Transaction Banking revenue was stable in the first half. There was good growth in Payments, which was up 3%. This included growth in fee and other income of 4%. This is a result of the investment we've made to grow and digitize that business, which helped to improve our ranking from a top 4 bank in 2022 to 2 today.

Speaker 1

Foreign exchange was down 8% compared to a strong performance last year when there was very high volatility. And while trade was slightly down in the half, the pace of decline slowed to the point that it was broadly flat in the second And we also And we also increased our market share in trade in Hong Kong to more than 26%. On the next topic, our businesses in Hong Kong and the U. K. Both continued to perform well in the first half.

Speaker 1

Profit before tax in Hong Kong was up 1% on a constant currency basis. While the Hong Kong corporate loan market remained subdued, it was resilient in the 2nd quarter. It's too early to call it a trend, but deposits and investment activity increased, which underlines that the rate differential works in both directions. We attracted 345,000 new to bank customers in the half as we continue to capitalize on significant inflows into Hong Kong from customers seeking opportunities for investment. Profit before tax in the U.

Speaker 1

K. Business grew by 11%, excluding the gain on SVB U. K. Last year. Customer Lending was also up 2%, but our U.

Speaker 1

K. Business is differentiated by its connectivity with the rest of the group. In the first half, we grew the number of U. K. International customers by 8% to 2,700,000 customers.

Speaker 1

We have a strong international franchise. We evidenced this through our multi jurisdictional revenue disclosures in February. And in the first half, we grew wholesale multi jurisdictional client revenue by 4% to $9,700,000,000 And as I said earlier, this isn't just a wholesale story. We're doing more with our international retail and wealth customers as well. We now have 7,000,000 International Wealth and Personal Banking customers with revenue from these customers up 6% to $5,400,000,000 So these are the levers that have put us on track to deliver a mid teens return on tangible equity this year and why we expect to deliver a midteens return on tangible equity in 2025.

Speaker 1

With that, I'll hand over to Georges. Thank you.

Speaker 2

Thank you, Noel, and hello, everyone. Before I get to the Q2 numbers, I'd like to comment briefly on the recent announcement. I'm deeply honored by the trust placed in me to lead this great institution into the future. Many of you may have questions about the future strategy and direction of the group. Although I don't take over as Group Chief Executive until the 2nd September from Knoll, I'm ready to share a few high level thoughts.

Speaker 2

Under Knoll's leadership, we have delivered financial performance and built a strong platform for growth. The strategy of the group is working and I am committed to building on this. The shape of the group is broadly where we want it to be, with the bulk of our capital and other resources deployed in our 4 scale activities. That's Hong Kong, the UK, our international wholesale bank under K, our international wholesale bank under pinned by our leading transaction banking capabilities and our wealth proposition, particularly in Asia. This puts us a very strong position.

Speaker 2

In each of these activities, we have scaled and sustainable competitive advantages, and our strengths are aligned to the needs of our customers. They account for the vast majority of the economic profit we generate today and present some of our most exciting opportunities to grow over the next 5 to 10 years. And together, they are capable of delivering above cost of capital returns sustainably through the cycle. We've made good progress, and we are now in a position to accelerate the pace of execution of this strategy with focus and intensity to continue to grow revenue on a sustainable trajectory to improve operating leverage while maintaining strong cost discipline and prudent risk management and to continue to improve client service and experience. You will also have seen that we have announced this morning that John Bingham has been appointed Interim Group CFO from the 2nd September.

Speaker 2

John is currently our Financial Controller and has outstanding technical accounting and regulatory knowledge and expertise. The process to identify the next permanent group CFO is underway, and I will update you further in due course. Now though turning to Q2. In summary, profit before tax of $8,900,000,000 was up $400,000,000 on the Q2 of 2023 on a constant currency basis. In terms of the drivers, the banking NII run rate was stable on the Q1.

Speaker 2

There was another strong wealth performance while wholesale transaction banking was stable in last year's Q2. Despite cost growth of 7% in the first half on a target basis, we remain on track to meet our 2024 guidance of around 5% cost growth. And there was growth in both loans and deposits in the quarter. On the next slide, so HSBC Canada contributed around $500,000,000 of revenue and around 0 $200,000,000 of profit before tax in the quarter before the sale completed in March. To make like for like comparisons easier, these contributions and some other impacts have been excluded from some of the commentary.

Speaker 2

So excluding notable items and the impact of strategic transactions, profit before tax was up 7% to $9,100,000,000 Revenue of $16,500,000,000 was up $300,000,000 on the Q2 of last year. Excluding notable items and the impact of strategic transactions, revenue was up $800,000,000 or 5% on the Q2 of last year. Banking NII of $10,900,000,000 was down $400,000,000 on the Q1 on a reported FX basis, primarily because of a $300,000,000 reduction from the Canada sale. Excluding this, the banking NII run rate was stable. We're now in a position to upgrade our 2024 Banking NII guidance to around 43,000,000,000 dollars This assumes a $1,000,000,000 contribution from Argentina, which was its reported NII in 2023, although we note that it remains volatile and difficult to predict.

Speaker 2

We're also providing new details to help you understand the expected benefits from the structural hedge. Around $55,000,000,000 of assets are due to mature in the second half of twenty twenty four with an average yield of 2 0.8%. And around $105,000,000,000 of assets will mature in 2025 with an average yield of 2.8% as well. Turning to fee and other income. Wholesale Transaction Banking was stable in the Q2 of last year or up 2% excluding the impact of strategic transactions.

Speaker 2

Within this, Global Payment Solutions had another good quarter, up 2%, as did Security Services, which was up 3%. Foreign Exchange delivered broadly stable revenue compared to a strong quarter last year. And Wealth had another very good quarter underlying that our investment is continuing to drive improved results. Wealth fee and other income was up by 13% compared to last year's Q2. Private Banking was a standout performer, mainly driven by increased customer activity in brokerage and trading in Asia.

Speaker 2

But growth in Wealth remained broad based. Customer growth and improved wealth penetration, primarily in Asia, helped drive growth in investment distribution. Invested assets were up 2% to $1,300,000,000,000 including $6,000,000,000 of net new invested assets in the quarter. And our insurance CSM was $600,000,000 up $200,000,000 on the Q2 of last year. On credit, expected credit losses were $300,000,000 in the quarter, equivalent to 15 basis points of average loans.

Speaker 2

This included $400,000,000 of recoveries and other items mentioned on the slide. Excluding these, ECLs were broadly in line with our normal medium term planning range of 30 to 40 basis points. Stage 3 balances were 2 point 4 percent of customer loans, $1,400,000,000 compared to the Q1. This was driven by Hong Kong commercial real estate book, but there was a limited impact on We are revising our 2024 ECL guidance to our normal medium term planning range of 30 to 40 basis points of average loans. Next, costs grew by 7% in the first half on a target basis, but we remain on track to meet our guidance of 2020 4 cost growth of around 5%.

Speaker 2

2 percentage points of cost growth in the first half came from higher performance related pay accrual and levies. As we explained at the Q1, we have faced the accrual of our performance related pay more evenly this year than last year. We do not expect the total amount of performance related pay for 2024 to be materially different to 2023, so the accrual in the second half is expected to be lower year on year. In addition, the second half of last year included $300,000,000 of levies that we do not expect to repeat this year. We are therefore reconfirming our guidance of around 5% cost growth for 2024 on a target basis, and we remain committed to cost discipline.

Speaker 2

On lending and deposits, there was positive loan growth in the quarter in both the UK and Asia, whilst Hong Kong was broadly stable. Overall, there were promising signs in the first half. Deposits were up 2% with the majority of this in Hong Kong. There was also growth in the UK, Europe and the U. S.

Speaker 2

And the rest of Asia. But it also included the benefits of seasonality in Commercial Banking and a large one off in Global Banking and Markets. So I would encourage you not to annualize the 2% figure. Next, our CET1 ratio was 15%, down 20 basis points on the quarter as strong organic capital generation was offset by distributions in the form of dividends and share buybacks. We have announced a new share buyback of up to $3,000,000,000 which we expect to complete within 3 months and to have an impact of around 0.4 percentage points on our CET1 ratio in the Q3.

Speaker 2

Finally, to recap, our strong first half performance and our confidence about the bank's position enable us to provide new guidance of a mid teens return tangible equity, excluding notable items for 2025, in addition to our existing mid teens guidance for 2020 4 upgrade our 2024 banking NII guidance from at least $41,000,000,000 to around $43,000,000,000 revise our 20 24 ECL guidance to within our normal medium term planning range of 30 basis points and reconfirm our guidance for 2024 cost growth of around 5% on a target basis and a mid single digit loan growth over the medium term. With that, Louise, can we please go to Q and A? Thank you.

Operator

Thank you, Georges. If you find your question has been answered, Our first question today comes from Andrew Coombs at Citigroup. Please accept the prompt to unmute your line.

Speaker 1

Hi, Andrew.

Speaker 3

Good morning. Thank you both for the comments. A couple of questions from my side, one big picture, one into the numbers. Firstly, big picture question. No, you highlighted all the things you could be proud of during the tenure, but perhaps with the benefit of hindsight, be interested in any thoughts you have on anything you might have done differently.

Speaker 3

And then linked to that as well, George, I think you're on the tape this morning talking about accelerating the existing execution. So any tangible examples you can provide on that would be helpful as well. And then in terms of the numbers question, thank you for the additional disclosure around structural hedge. I think you talked about $55,000,000,000 maturing in the second half at 2.8% yield. Is it fair to assume the new positions that you're putting on are probably about a percent higher than that in where the forward curve is?

Speaker 3

So prior to any off debt from adding to the existing structural hedge notional, it's about €500,000,000 of NII uplift. Is that fair?

Speaker 1

Andrew, thanks for your questions. I'll take the first one. Listen, I've got no regrets, Andrew. I think performing this role is an absolute privilege. And look, you never finish with an institution like this, and that's why George is right to come.

Speaker 1

And you always want to do more. You always there's always things you want to improve. There's always investment you can do to grow more revenue, to improve customer experience, improve systems and processes. So there's never a notion of finishing. There's always should always be a notion of continuous improvement and continuous ambition.

Speaker 1

And I think that's probably the bridge from me to George because I have no regrets about the last 5 years. I think we've done a lot of good things and I thank my colleagues for everything they've done. But equally, you should never be complacent and think the job is finished. The job of running an organization as large as ours and with so much opportunity before us to further improve is never finished. And that's the bridge over to George now to take it on to the next level and to continue to execute the strategy.

Speaker 1

So George, hand to you on both of the next two questions, please.

Speaker 2

Thanks, Noel. Yes, Andrew, and he was just echoing Noel and building on that. We've called out some of the key areas of our strategy. I've called out Hong Kong, the U. K, the International Wholesale Bank, which is underpinned by a leading transaction banking capabilities as well as wealth, all of which have demonstrated very strong momentum certainly over the last few years, but definitely over the first half of this year.

Speaker 2

We're confident about the momentum. We're confident in our ability to continue investing in them. And we're confident also we have ample capital to support additional growth. So it's just about getting pace continued pace in the execution of this Andrew, so €55,000,000,000 are expected to mature over the course of the second half at an average yield of 2 point 8%. If I try to reverse engineer your math and if you assume the reinvestment happens at around 3.8% with a 1% uplift, then you get €500,000,000,000 But remember, this is maturities that are happening over the course of the half.

Speaker 2

Therefore, I think you have to average the number and therefore, you have assume half the number as in year 2024 benefit from that structural hedge reinvestment, so say the half of your EUR 500,000,000 you quoted. Also bear in mind that we are increasing the structural hedge subject to market conditions. We've done about $25,000,000,000 in the first half. It's a good estimate of the run rate for the second half. And that is a mild headwind because we're increasing the hedge from higher short term rates into lower longer term rates due to the inversion of the curve.

Speaker 2

So you have to take all of this into consideration when factoring in the impact for 2024 Banking NII.

Operator

Thank you, Georges. Our next question today comes from Amit Goel at Mediobanca. Please accept the prompt to unmute your line.

Speaker 4

Firstly, I was a bit surprised to get the 2025 profitability target, which does seem to be a little bit above consensus. I think consensus is about 14%. So I guess a bit of variation on mid teens, but if that's kind of 2015%, 2016%, 17%. Just curious where you see a bit more upside. Is that mainly on the revs?

Speaker 4

Or can you see a bit more cost control? And then just linked to that, George, as I think in your comments as well, you talked about growing revenues on a sustainable basis. So just curious again how you're thinking about that potentially with some NII headwinds? And then lastly, no, I think you used the term sluggish or subdued a few times when talking about the environment. Just curious when you think that will potentially turn and we can see a more constructive environment for some of those markets?

Speaker 1

Sounds good. Amit, I'll ask George to answer the first one. I think it's probably best on the mid teens and the definition of mid teens and then also maybe sustainable revenue. And then I'll cover the 3rd.

Speaker 2

Very good. Thank you, Amit. So consensus if you adjust consensus for 2025 for the impact of the loss from the sale of Argentina, which by the way, as we communicated now, we expect by the end of the year, therefore, it's more reasonable to assume that, that loss, the recycling of the foreign exchange loss of 5,000,000,000 which has no impact on capital or on distribution, it's fair to assume that impact will happen in 2024. But if you adjust the consensus in 2025, you get to around 14% indeed. Our definition of mid teens is broadly around 14% to 16%.

Speaker 2

So without commenting on the consensus, our mid teens definition is broadly that 14%, 16% range. On the growing revenue on a sustainable basis, let me point you to 3 major indicators, which are going to be important in the way we look at the future. The first one related to banking NII. Banking NII, number 1, has been stabilized partly with the reduction of banking NII sensitivity. If you recall, 2 years ago, we called out $7,000,000,000 to be the impact on banking NII on our revenue for a 100 basis point drop in interest rates.

Speaker 2

That number at the year end was $3,400,000,000 and that number, as we reported it now, is $2,700,000,000 So therefore, we have through activities of structural hedging, but also through other methodology improvements and balance sheet composition, we have reduced the dependency of our earnings and of our banking NII to the impact of flow rates. The second component, again relating to banking NII, is that while for a few quarters we've seen subdued loan growth, in particular in the UK and Hong Kong wholesale markets, we have now seen stabilization. It's early to call it a trend, but we are encouraged by the stabilization we've observed. And importantly, we will be more encouraged to when we see rates coming off in the support they can have for loan growth, in particular in these two areas that historically have been a little bit more sluggish. Other parts of our activity remained resilient.

Speaker 2

Loan growth in South and Southeast Asia remained very strong loan growth in the mortgage businesses in the U. K. And Hong Kong remained very strong. So there is a volume component to Banking NII, which we supported. And as you can see from our capital, we have ample capacity to support loan growth.

Speaker 2

And the 3rd component I will call out is the non banking NII part for earnings, fees and other income, in particular, wholesale transaction Banking and Wealth. You've seen the momentum in these businesses. You've seen the continued investment we've put in these businesses. We believe these in particular in Asia and there's an additional support through our own investments, both technology and people relationship management related to support growth in this area, and we believe the momentum is sustainable. So those are the big broadly three components that we believe will sustain our earnings as we look into the future.

Speaker 1

And Ami, just to come a little bit more elaboration on the sluggish subdued. Listen, I'm not surprised that the corporate loan market is a bit subdued at the moment. I think it's right for that to be the case because in the higher interest rate environment, there's not many corporates out there are is a good position to be in. But as you see interest rates come down, I would expect there to be a pickup in activity. And I suppose what George just said is we started to see the very early signs of that starting to emerge.

Speaker 1

It's very early. It's too early to call it a trend. But I was pleased in Hong Kong that the rate of decline in the lending book corporate lending book in Hong Kong in Q1 reduced dramatically. So we've been declining through 2023, and it actually plateaued in Q2. And there was that's in Hong Kong.

Speaker 1

And then in the rest of Asia, we saw a growth in Q1 and Q2. And in the rest of the world, we saw growth in Q1 and Q2. So Q1 was the first time we saw net growth in corporate lending. Q2, we saw net growth as well. So I think it's encouraging early signs as interest rates come off.

Speaker 1

I see that happening. And the other thing is you've also got to remember there's another side to the Hong Kong market. The deposit market and the investment market is very strong, as you saw in our Wealth businesses. Now the net new invested assets going into the business, I think in the first half of this year, was about $34,000,000,000 if I remember correctly. And I think as rates come off, cash moves into invested assets.

Speaker 1

And I think we're seeing we're a beneficiary of that, particularly in Hong Kong, where rate differentials are playing strongly into the investment market, whereas they're subduing. The rate differentials are subduing the demand for loans in the Hong Kong market. But the rate differential is working in the opposite direction on investments.

Speaker 4

Okay, next question.

Operator

Thank you. Our next question today comes from Joseph Dickerson at Jefferies. Please accept the prompt to unmute your line.

Speaker 1

Joseph, thank you.

Speaker 5

Hi. Thank you for taking my question. Just a couple of quick things. So on the ROTE guidance, if you look in the first half of the year, you've kind of done an underlying number of 17 percent, and that was with some you've had a few credit headwinds, but generally benign. I guess if you think about things like cash moving into invested assets, which should be higher ROE, Your wealth and personal banking ROE is around 31% at the moment.

Speaker 5

You're doing about a 22% UK ROE. I guess, what would hold you back from maintaining that level in 25 and and 26 notwithstanding some some rate cuts? It seems like there's a lot more flex in the model from in your business model. And I know you need to be conservative, but I guess what is it rates that would hold you back lack of activity? And I guess the follow on question.

Speaker 1

I think a fair observation, but I think and we're not being conservative for the sake of being conservative. I think it is too early call a return to volume growth in the corporate loan market in substantial proportions. I think we all expect the rates to come off and cash to move from cash to invested assets. I think we just it's still a bit early in the cycle. There's a lot of uncertainty still out there.

Speaker 1

And I think given our guidance of mid teens, which is somewhere between the 14% 16% range, is fair at this point in time. I think the most important thing we've tried to do over the past few years is deliver each quarter and let each quarter be the base for the future. So I think it's better to set reasonable and sensible guidance, and then we continue to evidence progress against that as quarter by quarter goes. So I don't think we're in the mold as an institution of being overly bullish one way or the other, particularly when there's still quite a bit of uncertainty over there out there. But George, is there anything you want to add?

Speaker 2

Yes. No, I think Noel, you covered it. And just one parameter also just to add is just remember to remove the impact of Argentina with the expected sale taking place at the end of this year in your 2025 assessments.

Operator

Thank you. Our next question today comes from Raul Sinha at JPMorgan. Please accept the prompt to unmute your line.

Speaker 6

Hi, good morning. Good morning. Thank you for taking my questions. I was just trying to dig into some of your commentary around the hedge. I was wondering I've got 2 questions.

Speaker 6

The first one is just trying to understand how the notional size of the hedge is changing in the UK versus the rest of the world. My understanding was that the structural hedging in the UK was quite a mature book. So I wouldn't have expected that to increase in size going forward. And I would think that most of the low yielding refinancings are coming from the UK. But as when we think about the rest of the world, it looks like your structure hedging was more recent.

Speaker 6

So there's probably scope to increase that, but maybe the refinancing yield is a bit higher. Is that kind of right understanding? First question. The second question is just coming to the Hong Kong CRE book and some of the disclosure you've pulled out there. I think $36,000,000,000 of total exposure, 40% of that is unsecured.

Speaker 6

I was just wondering if you could give us a little bit more additional color around the unsecured part of Hong Kong CRE. I think you say it's very good quality, but how you look to manage the risks given the unsecured nature of this CRE book? Thank you.

Speaker 1

Thank you. George, you want to pick up both of those?

Speaker 2

Sure, Noor. So Raul, on the hedge size, we haven't given the specific currency split or balance sheet split. But yes, you should assume the sterling component is one of the largest component in terms of the hedge size. And the U. K, therefore, the sterling component is 1 of the most mature by way of size of hedge.

Speaker 2

But there is obviously still previous hedges maturing. Previous hedges struck at lower yields maturing, and we're able to benefit from the reinvestment of maturing hedges at higher yield. That was still a a stable and the structural hedge reinvestment is playing a role in that. With regards to the rest of the world, it's a story of 2 tales indeed. There's the reinvestment of all structural hedges at higher yields, and that is a tailwind in our banking NII.

Speaker 2

There is also additional hedges we're doing where we can, And these additional hedges are suffering from this is a partial set off or partial offset as a headwind because they're suffering from the fact that curves are inverted, but it's still the right thing to do for the management of our bank remains largely under hedged, and that's due to the fact that the structure of the market does not give us enough instruments to be able to invest in the long term to support hedging. So the Hong Kong dollar would remain structurally under hedged in that sense. With regards to the Hong Kong CRE question, so 40% of the book is of the $36,000,000,000 you mentioned is unsecured. It is typically exposure to large conglomerates with a diversified revenue stream, including revenue streams from activities not related to real estate. 90% of that book today is rated strong and good and literally 0% is in the impaired category.

Speaker 2

We're very comfortable with the exposure we have in that book, and we continue, obviously, supporting our customers through the cycle in this space.

Operator

We will take our next question today from Jeremy Hu at CICC.

Speaker 1

Jeremy, hi. Hi.

Speaker 7

Can you hear me?

Speaker 1

Yes.

Speaker 8

Okay. Good morning, Noel. Good morning, George. My first question is on the non interest income, if my math is correct. My calculation shows that our adjusted non interest income is 5,800,000,000 this quarter compared to 5,300,000,000 a year ago.

Speaker 8

And we had 200,000,000 gross on Wells. Transaction banking is relatively stable. So seems GBM contributed a lot this quarter. So I understand that this business is has seasonality and is volatile, but do you expect that momentum to continue going forward? Or do you think in the second half of last year is relatively a weak comparison?

Speaker 8

Yeah. The second question is a broader one, because I realize now you speak less about focusing Asia these days than you used to and emphasizing more on the global network. Yeah, sometimes in some ways they do intercept, but I'm wondering, do you still focus on exploring some boats on opportunities in Asia and wealth business in the future? And do you have a capital distribution hierarchy or preference among dividend, buyback and growth? Thank you.

Speaker 1

Okay. George, you want to take the first one? I'll give a few comments on the second one and you take the third one on capital distribution.

Speaker 2

Very good. Thanks, Thor. Jeremy, so without giving specific comments on the quarter by quarter specifics in development of our fees and other income component, the growth that you've observed year on year in were mainly driven from 2 areas. The first one is wealth, which is obviously a very strategic area where we continue to invest and exhibited growth. The other one was from markets, in particular from some of the equity business in markets.

Speaker 2

This is coming on the basis of 2 components. 1 is subdued Q2 last year, so there was a base effect which benefited the outlook for Q2 this year. And then the second one is the fact that we've seen more activity and more vigorousness in, if you want, the Asian stock markets, in particular, the Hong Kong stock market. And we're encouraged by this. And if the trend continues, this will bode well for additional activity in this space.

Speaker 2

Let me jump to the 3rd question, and I'll hand over to Noel to conclude on the second one. Capital distribution hierarchy, first, we've committed to 50% dividend payout ratio for this year, which means half our earnings will be earmarked for foreseeable dividend, part of it will be distributed through our interim dividends. The rest will be netted out at the end of the year. After that, we obviously will use capital to support the organic growth of our business. Loan growth, as we said earlier, started to pick up certain areas.

Speaker 2

We are encouraged or we have ample capital to support the loan growth, the appetite we have. We look at bolt on acquisitions or areas that are dead on strategy, but supportive of acceleration of the strategy. That will be part of utilization of excess capital. And any excess beyond that, we will distribute back to shareholders through a rolling series of

Speaker 6

share buybacks. If you

Speaker 2

look at our CET1 ratio today at 15%, based on the guidance we've given for this year and next year, we're based on the guidance we've given for this year and next year. We're confident we will have capacity to deliver on the 3. And I will say the buybacks will continue looking at it on a quarter by quarter basis with the ambition to have a rolling series of share buybacks.

Speaker 1

Thanks, Jeremy. And on your second question, is it an Asia strategy? Is there an international strategy? I think they're interchangeable. I don't think they're mutually exclusive because if you look at what we do at the core of what we've done for 158 years or more is we've connected entrepreneurs and businesses who want to trade with the world.

Speaker 1

That's what we've done from day 1 of HSBC being founded. So we're essentially about helping businesses and individuals trade internationally, invest internationally. Now why are they 1 and the same? Well, a huge amount of the entrepreneurs that we have as clients are based in Asia, they're based in the Middle East, they're based in the East, and they trade with the West, and the West trades with the East. And Asia and the Middle East are high growth markets.

Speaker 1

So I don't think it's an eitheror. I think for us, it's very simple. That is we're internationally driven, and Asia is a hugely connected international part of the world and will remain so going forward. The nature of trade will change, as it has done for 158 years. So I think we use the words Asia and internationalism probably interchangeably, and sometimes it gets people confused.

Speaker 1

We're investing where there is growth and where we have differentiation. There is growth. There is international connectivity. There is differentiation in Asia. There is in the Middle East.

Speaker 1

And we have the same here in the U. K. But fundamentally, at the core, we're an international bank.

Operator

Thank you, Noel. Our next question today comes from Aman Rakhal at Barclays.

Speaker 1

Haman, hi.

Speaker 7

Good morning, gents. Noel, I just wanted to start off and congratulate you on your excellent tenure at HSBC.

Speaker 1

Thank you.

Speaker 6

I

Speaker 7

just wanted to wish you the very best going forward with whatever it is you decide to do. And George, on a similar theme, just to extend my congratulations around your appointment as CEO. I had 2 questions, please, both on net interest income. So a point of clarification, I guess your banking NII guide this year is circa €43,000,000,000 at face value does imply a material step off in net interest income in H2. I just wanted to check, I mean, you're guiding for Argentina being €1,000,000,000 this year, and I think it was the best part of €900,000,000 in H1.

Speaker 7

So is it literally just Argentina dropping out of net interest income in H2 is driving that? And what would really, really help is the kind of momentum of NII in H2 and the extent to which that carries over into 'twenty five. I'm not necessarily looking for an updated guide here. But if I just take again your banking NII disclosure at face value, it's implying a kind of 42,000,000,000 annualized run rate in H2 ex Argentina. What do you think the puts and takes are on that if we were to kind of look a bit further afield beyond this year?

Speaker 7

And then the second question was if I could just get you to update your thoughts around deposit pass throughs. You're obviously noting you've hedged more of your balance sheet now. And what if actually pass throughs were to be, say, 10% lower than what you're modeling in your updated banking and II sensitivity? That would be really helpful.

Speaker 1

George, do you want to take that?

Speaker 2

Yes. Thanks, Norde. Aman, thank you. So on your first question, look, dollars 40 around $43,000,000,000 banking NII for this year is a reasonable expectation. And we're more confident about it because we're already 7 months into the year and somewhat the forward rate outlook has become a bit less volatile than we've experienced in over the last few months.

Speaker 2

Argentina, we have worked with a planning assumption of $1,000,000,000 So within our around $43,000,000,000 we factored in around $1,000,000,000 contribution from Argentina. It is a very difficult to predict number. It is a very volatile number. And therefore, the best of estimate, you can use around 42 and add whatever other expectations you may have for Argentina, but we're sticking with this EUR 1,000,000,000 estimate and the uncertainty. Just for reference, EUR 1,000,000,000 was the banking NII contribution for Argentina in 2023, and this is how we're building the assumption for And and tailwinds facing the banking NII.

Speaker 2

The first one to call out is the rates outlook. We're using the mid July curves, comprise broadly between 12 rate cuts across all the major currencies in the second half. This is the working assumption. The second one is on the structural hedge. So as we called out earlier, you should expect to benefit from the $55,000,000,000 maturing assets in 2H at 2.8% yields, which would be reinvested at higher yields at the prevailing yields in H2, which will be higher, take a 5 year rate as a good benchmark for what rates will be invested at.

Speaker 2

But this is partly offset by the additional structural hedging we are is a reasonable run rate to expect for H2, but will depend on market is a reasonable run rate to expect for H2, but will depend on market conditions in H2. The other components that are playing as headwinds and tailwinds are the balance sheet growth. Balance sheet growth, we continue to see strong growth in South and Southeast Asia. We continue to see resilience in the mortgage books in the U. In Hong Kong.

Speaker 2

But we are now encouraged to see stability in the Hong Kong wholesale book, which has been on a decline for a few quarters. It's early to call it a trend, but it is now it is definitely green shoots when we look forward and it will be supported with rate reductions, as in the balance sheet growth in this space. And then the last one to call out is deposit migration. That's particularly true in Hong Kong. Again, Q1, Q2, we've seen migration at 0% and 1%, respectively, which is 1% overall on the half.

Speaker 2

Just to put it in perspective, this is after full year 2023 where we've seen 12 percent. So again, the trend here is much more encouraging. We're very unlikely to see anywhere near the trend of last year, but it remains a difficult one to predict. Now as you look forward into the full year 2025, we're not guiding on Bank NII, but a few points for you to bear in mind. The first one is please remove Argentina's contribution, again working assumption $1,000,000,000 This is following the planned sale of Argentina to take place before the end of the year.

Speaker 2

2nd, remove the 1 quarter contribution from Canada, EUR 300,000,000 in your NII. Then we've shared that there will be $105,000,000,000 of existing structural hedge assets, which will mature in 2025 with an average yield of 2.8%. So those will provide some tailwind as we reinvest them at higher yield. So beyond that, you can apply your own interest rate assumptions on the banking NII sensitivity we provided. Dollars 2,700,000,000 is the sensitivity you provided across all currencies for 100 basis point drop.

Speaker 2

And you can apply your balance sheet growth assumption. And again, we believe lower rates will be more supportive of growth in balance sheet when you look into 2025. But basically all of that is factored into our guidance for return on tangible equity for 2025 at mid teens.

Speaker 7

Just so thank you very much. My color is excellent. Just around pass throughs, I think earlier this year, you talked about 10% lower beta is adding something like $600,000,000

Speaker 2

Okay. So the banking NII sensitivity to 10% change in pass through rate is around $600,000,000 is remains around $600,000,000 And this is based off an assumption of around 600 $1,000,000,000 of IPCAS. So we can work out the math if you want offline. That number is broadly stable. We're still working on an assumption of a 50% pass through in our banking NII sensitivity.

Speaker 2

2nd, if you look at the cumulative pass throughs, we're broadly around earlier part was much lower than 50%. The latter part was much higher than 50%. It is difficult to predict how pass throughs will work out on the rate cut scenario, and this is why I think 50% remains a good estimate of what it could look like, noting that we don't have recent history of that. I would point you to one thing to be mindful of is in the UK and a number of other geographies, we will have to provide customer notice of at least 60 days before we pass through rate cuts. So there will be a delay in pass throughs on the way down, and that's a 60 to 90 day on average for instance the U.

Speaker 2

K. Thank you, Alberto.

Speaker 7

Thank you so much.

Operator

Thank you, Georges. Our next question today will come from Ed Firth at KBW. Please accept the prompt to unmute your line.

Speaker 9

Hi. Thanks very much and good morning, everybody. Yes, and just echo Aman's comments, and thank you particularly to you, Noel, because it's been a pretty turbulent period where you've been CEO. And I think there were a number of times when if somebody had said you'd be making mid teens returns, I think I would have thought that was delusional. So thank you very much for that.

Speaker 1

Thank you. Thank you.

Speaker 9

Benefits us all. My two questions were the first one was, could you tell me you probably disclosed it somewhere and I've missed it, but performance related pay, I see you assuming that's going to be flat this year. Is it possible to tell us what the total quantum of that is? Because I guess there must be some potential that, that may have to go up, particularly given the revenue So that would be my first question. And then the second one was, to me, if I look at these results, I guess, the standout to me was the performance in Q2 of the Wealth and Private Banking business.

Speaker 9

If I look in the past, it's generally been quite seasonal in Q2, but it seems that actually it's held up pretty flat. So should we that is that like a sort of new base level of run rate? Is that something we should continue into the second half now and then sort of grow on from there? Or was there something about Q2 which held it up better than we might have expected?

Speaker 1

Well, firstly, thank you for your comments. And on your second point on Wealth, listen, I'll give a very personal comment. You normally expect Q1 to be the seasonal high and then a bit lower in Q2 and a bit lower. So actually, Q2 did exceed expectations in terms of seasonality. It was a strong quarter.

Speaker 1

At the moment, I can we tend to be a bit on the conservative side and say, don't base a trend on a quarter or 2. So but I think your assessment that actually Q2 was a strong performance is exactly where we are. It was stronger than probably one would have expected through normal seasonality. I think it is if I talk to the team, they were confident of a good performance. They're seeing good lead indicators.

Speaker 1

I mean, we've taken in, in excess of $250,000,000,000 of net new invested assets just over the last 2.5 years, 2.5 years. And I think we've all got to probably we haven't seen this period where how will cash move from cash to invested assets as interest rates come off. And therefore, I think it is difficult to predict a trend. I think we just got to see it go quarter by quarter, but the lead indicators are good. We've invested in the business over the last few years to put us in this position.

Speaker 1

It was all about getting ready for lower interest rates and being in a position to take advantage of it. We invested heavily in the product lineup for our clients to make sure that if they were going to move into invested assets, they could do so with us rather than another bank. And we invested in distribution. We had good distribution in Hong Kong, but we didn't have as good a distribution in other markets. So we built out distribution in Mainland China, in Singapore, in India and in the rest of the world.

Speaker 1

So I think it's put us in a good position to take advantage of it, but it's too early to call it a trend. But your observation is a fair observation for Q2. It was good. And it's nice to be able to report that. On performance related pay and costs, I mean, I'll let George cover that.

Speaker 1

But we're absolutely committed to the 5%. So

Speaker 2

So we paid $3,800,000,000 through full year 2023 on performance related pay. This is disclosed in our annual reports and accounts. But if you look at how we accrued for that number through the year in 2023, we actually under accrued in the Q1 2023, and then we topped it up at the Q4 to get to that total number. When you look at full year 2024, we are accruing towards a broadly similar number for the full year than for the full year 2020 3. And any decision on the performance performance rate pay will take place in January with the remuneration committee after the full year's performance has been delivered.

Speaker 2

But we are accruing broadly to the same number. The difference is that we're accruing more evenly. So this is why you'll see a higher accrual on a year on year basis in the first half, and you will be seeing a lower accrual in the second half on that trajectory. It is all of this is factored in our cost guidance of limiting cost growth to around 5%. We're confident we can deliver it, and we are on track to deliver

Operator

it. Thank you, Georges. Our next question today comes from Catherine Lay at JPMorgan. Please accept the prompt to unmute your line.

Speaker 1

Catherine?

Speaker 10

Hi, good morning. Hi, good morning. Thanks for answering my questions. I have one question, actually 2, both related to capital. On the capital side, we saw there is a DKK6.4 billion of addition to RWA.

Speaker 10

May I know like what is that related to? I think in the notes is that something related to modeling. So I would like to know like what kind of assumption changes leads to this RMB6.4 billion and is that one off or should we see this ongoing, I would say, additions to the RWA? So this is number 1. Number 2, we noticed some deterioration on asset quality on Hong Kong's Yield book.

Speaker 10

Actually, according to the disclosures, the deterioration seems quite significant as well. Can you explain to us what is the impact on capital? Because we understand that there is limited impact on ECL charges, but mainly reflected on capital. So what is the drag on capital? And then also like going forward, what is your view on Hong Kong CRD in particular for the loans which are already in Stage 3 categories?

Speaker 10

Are you expecting that there will be recovery of loans through disposal of the collaterals or are you expecting the borrowers will eventually make up for the loans? Thank you.

Speaker 1

Okay. Thanks, Catherine. George, you want to pick up those points? Sure.

Speaker 2

Sure, no. Thanks. Catherine, so on the capital, so we've indicated a $6,400,000,000 increase in RWAs due to modeling adjustment. To be specific, we've adjusted the probability of default models for banks globally. And the reason we adjusted this probability for default model for banks is because we wanted to factor in some of the observations and learnings from the March 2023 crisis in the way bank resolution.

Speaker 2

That's specifically true for the U. S. And Switzerland. We've taken those learnings. We've baked them in our modeling, and this resulted in this additional RWA In so far that bank models, probably, chief default, etcetera, are concerned, we consider this to be done.

Speaker 2

If you ask me, well, we continuously look at our models in a general fashion. Look, the next big model update is going to be Basel 3.1 as and when Basel 3.1 becomes live in the various geographies or jurisdictions where we operate. We have not indicated the impact, which we do not expect to be material, but we're waiting to see some of the final rules that are still missing in a number of jurisdictions before we can call out the exact impact to the market, but we don't expect it to be material. In terms of Hong Kong CRE, we've spoken earlier about the 40% that is unsecured with which we remain very comfortable. So your question probably relate to the other 60%, which is the secured credit impaired.

Speaker 2

What's happening credit impaired. What's happening basically is a number of a few of our customers basically are facing some short term cash flow pressure challenges, and this is partly due to high rates. But the balance sheet remains strong and our level of collateralization remains strong. Typically, for this impaired $3,200,000,000 portfolio, the level of collateralization on average is 55% loan to value. So that this is why there is immaterial, if any, ECL impact from the designation to Stage 3.

Speaker 2

In terms of the capital impact, some of depending on which models we're using and what form of lending it is, some of the impact may manifest in RWAs and we've seen a little bit of that in last quarter. Some of it will manifest in EEL, excess expected loss, which will go straight into our CET1. We published these numbers, but by and large, these are immaterial numbers. And again, it's all supported by the fact that we have a very strong level of collateralization against the exposure. As we look forward, first, these customers, the specifically credit impaired customers are current, remain current.

Speaker 2

We expect some of the pressure they're facing to ease as rates reduce and as economic activity in Hong Kong picks up. The in terms of medium- to long term outlook for the sector, we are actually positive. We are confident, 1st in the Hong Kong economy in general to rebound. But in particular for the sector, we expected the sector's pressure will ease in the medium to long term, and we remain confident and positive about this sector.

Operator

Thank you, Georges. We have time for one last question today, and that comes from Gurpreet Singh Sy from Goldman Sachs. Please accept the prompt to unmute your line.

Speaker 1

Thank you.

Speaker 11

Thank you. Can you guys hear me?

Speaker 1

Yes, yes, we're good.

Speaker 11

Okay. Good morning. Noel, first of all, George, congrats. And Noel, congratulations for a new part wherever you choose to be. Thank you.

Speaker 11

Thank you for the helpful disclosures on the hedge, etcetera. I have a question regarding 2 questions, which are pretty much linked regarding falling rates and how does the management see it. First of all, the wealth income, it's an odd cycle with wealth income and AUM growth rates being elevated as interest rates are high. So when they do fall, do we have any precedent as to whether there will be an impact on the wealth income from falling rates or we don't get that much benefit from income. We see right now that lot of mainland Chinese money is also coming out and parking in Hong Kong.

Speaker 11

So that's the first part of the question. The second is lending growth. We have targets for mid single digit. But when we think about modeling banking NII, we have to look at average interest earning assets. So I'm wondering, we have lots of liquidity on the balance sheet.

Speaker 11

If rates do fall and then some of these depositors don't feel incentivized, do we get overall deposit growth not so strong, which in turn leads to average interest earning assets not growing and hence we should not be modeling in average interest earning assets growth at mid single digit. So help us think of that.

Speaker 8

Thank you so much.

Speaker 1

Okay. I think George will pick up both of those.

Speaker 2

Very good. Thanks, Nourd. Grupi, so first, Wealth Income, the way we reported essentially is fees and other income. So the slide I have there for wealth, that's particularly the fees part, which is fees earned on asset under management or on for insurance, in particular, relate to new business CSM. So the impact, if you want, on rates is more about transition of customers from deposits into AUMs.

Speaker 2

So this has been happening. We're seeing some of our deposits move into net new invested assets and transferring if you want to AUMs in our wealth proposition. It is likely on a trend basis that when rates come down and deposit the earnings you can make on deposits reduce that customer may shift some of it into AUMs through our through will be visible now the net new invested assets proposition and then we will be able to service them in the fee space. So yes, there is a component where we do expect more wealth activity to take place as we see deposits being less remunerative, but this is more on a broad trend basis, a direct linkage. We are also benefiting from the structural growth of wealth, in particular in Asia, where we believe the underlying market is growing at very high single digit, if not double digit percent, over the next 5 years.

Speaker 2

And on top of that underlying growth, which we're benefiting from, we are taking market share because of our additional investment in this space. So this is definitely a platform that can benefit from a number of trends that will support the momentum. On your second point, it's a very good point because we talk about balance sheet growth and loan growth, but we have also strong dependence for our banking NII to deposit growth, which constitute the underlying for our average interest earning assets. So we've seen this quarter deposit growing 2%. I caution you not to annualize the 2% because some of it is seasonal, some of it is one off.

Speaker 2

But we have a fantastic deposit franchise. I mean, we're you know us everywhere we operate. We have a very strong balance sheet that's very appealing, and we have a very strong proposition in deposits and transaction banking for both wholesale and retail, which mean that we will continuously look to capture deposits. We continue winning Global Payment Solutions mandates in the wholesale space. We continue being attractive for retail customers and we just shared, Noel shared 345,000 new customers joining our Hong Kong business alone.

Speaker 2

This is in the U. K. In 2023, we added 1,000,000 new customers. So therefore, we do continue seeing a good momentum, underlying momentum to grow our deposits with this very attractive deposit franchise of ours.

Speaker 1

Listen, I think I'd reinforce that and another comment. The trick for us in the past, we were very good as a retail bank. We were very good as a corporate bank. But when customers, whether they were retail customers or corporate customers, wanting to invest in alternative asset classes other than cash, they tended to go to other banks because our product range and our distribution wasn't strong enough. We deliberately set out to invest in our products and distribution capability for wealth, so that, that cash, if it did move, it moved within the bank, not outside the bank.

Speaker 1

One of the byproduct benefits is if you've got a good wealth proposition, you also attract the cash. You keep the cash in the bank as well. They go hand in hand. And so I think look, I think we're in a very different position today in offering wealth propositions to clients. And what we've done is deliberately tried to diversify the revenue stream.

Speaker 1

So it's less dependent on purely corporate banking and retail banking. And there is a continuum from retail and corporate banking into banking the individuals and the entrepreneurs in their personal capacity and doing their wealth management in their personal capacity. And that's, I think, the exciting trend for the future. And I think that's where why we believe that we're well positioned to deliver mid teens ROTEIN next year because we have that diversity and that continuum of offering. So I just want to say that's not a by chance strategy.

Speaker 1

That was a very deliberate strategy to keep both the cash in the bank and the invested assets in the bank.

Operator

Thank you. That ends today's Q and A. So I will now hand back to Noel for closing remarks.

Speaker 1

Well, thank you, Louise, and thank you, everyone, for joining us today. Before we close, I'd like to thank you for your questions and for all the discussions we've had over the last 5 years. I've always enjoyed representing my colleagues when we announce our results, and I'm really pleased that the strong first half numbers announced today demonstrate the improved financial performance that our strategy execution is driven. It's been over 15 years since the group has generated returns at the current levels. And our new guidance underlines that we expect to be able to sustain it through this year and in 2025.

Speaker 1

I wish George, the team and all of you the very best and enjoy the rest of the day. Thank you.

Operator

Thank you, ladies and gentlemen, for joining today's webinar. You may now disconnect your line.

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Earnings Conference Call
HSBC Q2 2024
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