HSBC : 3Q 2022 Presentation to Investors and Analysts - Transcript

Transcript

Investor & Analyst Call

Q3 2022 Results

25 October 2022, 08.30am BST

NOEL QUINN, GROUP CHIEF EXECUTIVE: Thank you, and good morning in London; good afternoon in Hong Kong. Thank you for joining our third quarter results call. Ewen's going to lead the financial presentation, but I want to start by first talking about the leadership changes we've also announced.

We've now spent nearly three years transforming HSBC, and while there's still work to do, we are now in a much better place to accelerate our financial performance and deliver stronger returns. As we approach the end of our three-year transformation programme, myself and the board have taken the opportunity to review the composition of the GEC, with an eye to long- term succession planning. As a result, we have today announced that Georges Elhedery will take over as Group Chief Financial Officer on 1 January 2023, and Greg Guyett will take on the role of CEO of GBM permanently, effective immediately. Ewen will therefore step down as group CFO on 31 December and will leave the bank in April 2023.

I want to put on record my thanks to Ewen for everything he's done during his time with us. He played a key part in creating and executing our transformation and growth agenda over the last four years. He helped steer HSBC through the Covid pandemic. He's been fundamental in reshaping our portfolio globally, improving our capital efficiency, and embedding disciplined cost management across the organisation. He has also driven the transformation agenda within the Finance function, reshaping its strategic direction, encouraging innovation, and building the team's engagement levels. He's been a great professional, has contributed much to the bank, and I wish him the very best for his future career.

I want to emphasise we remain absolutely committed to delivering our strategy and the 2023 targets we announced with our Q2 results. There is no change to my commitment as a consequence of these people moves.

Going into Q3, I am pleased with our third-quarter performance. All regions performed well, with particularly good performances in the UK, the Middle East, and south-east Asia. We delivered a double-digit return on tangible equity for the nine-month period, excluding significant items, and we remain on track to achieve our financial targets in 2022 and 2023. We've also kept a tight grip on costs and are driving greater efficiencies across the organisation. Clearly, this is important in an unpredictable and challenging external environment, but it's also a sign that our digitisation strategy is working.

Our work to structurally reposition the business and invest in areas of growth continues to gain traction. We are in a much better position at the start of the new interest rate cycle, as a result of the actions we have taken on capital efficiency, portfolio rationalisation, organic revenue generation and cost control. We can also see in Wealth, for example, that we're building a strong earnings platform for the future. Over the last 12 months, we attracted $91 billion of net new invested assets, with $32 billion in the third quarter alone. Clearly, I expect you to ask about M&A activity when we get to the Q&A section of today's call. As a result, we've given some more information about our Canada business in the appendix.

I'll now hand over to Ewen to take you through the details.

EWEN STEVENSON, CHIEF FINANCIAL OFFICER: Thanks, Noel, and good morning or afternoon, all. As Noel said, these are a good set of results - reported pre-tax profits in the quarter of $3.1 billion. While down on last year's third quarter, this was due to the $2.4 billion revenue impairment associated with the disposal of our French retail bank. Adjusted pre-tax profits in the quarter increased by $1 billion, or 18% to $6.5 billion, reflecting a strong net

interest income performance of $8.6 billion. That's up $2 billion on last year's third quarter. We had higher ECL first quarter - $1.1 billion, or 43 basis points. This primarily reflects increased economic uncertainty in the UK, together with further provisioning for our China commercial real estate portfolio.

Operating expenses are up 1% year to date against the same period last year, and up 5% on last year's third quarter due to higher technology investment and different timings for our variable pay accrual. We remain on track to deliver broadly stable costs this year. Our common equity tier 1 ratio was down 20 basis points to 13.4%, including an around 30-basis- point impact from the loss on the French retail bank disposal. We continue to expect to be at the bottom end of our 14% to 14.5% target common equity tier 1 range during the first half of 2023.

At our second-quarter results, Noel and I said our current strategy is the best and safest way to improve returns, with strong revenue growth driven by rising rates and volumes and tight cost discipline. With these results, our strategy remains firmly on track - good underlying growth across all of our businesses, with operating costs remaining broadly stable year to date, and an annualised reported return on tangible equity of 9.2%. Adjusted revenue was up $3.1 billion, or 28%, as the positive impact of rate rises were reflected in our strong net interest income performance; and non-interest income of $5.7 billion was up $600 million or 13% on last year's third quarter, despite a $400 million insurance market impact charge in the quarter. ECLs were at $1.1 billion net charge compared to a net release of $600 million in last year's third quarter. We now expect an ECL charge of around 30 basis points for this year.

Lending was down 2% on the second quarter and deposits down 1%, but excluding the impact of the reclassification of the French retail bank as held for sale, lending and deposits were both up $5 billion. Our tangible net asset value per share of $7.13 was down 35 cents on the second quarter, due to negative FX and adverse fair value movements.

Turning to slide 4, we're seeing good organic growth across all of our global businesses, as well as the benefit of rising rates. Wealth and Personal Banking revenue was up 25%, with a good Personal Banking performance. Personal Banking revenues were up $1.4 billion on the third quarter last year due to higher rates and balance sheet growth. There was a good underlying performance in Wealth due to the strong Insurance and Private Banking performance. While revenue was down 9%, or $200 million, due to adverse market impacts in insurance of $400 million, we remain very confident in the growth of our Wealth franchise. We had $91 billion of net new invested assets in the last 12 months, including almost $32 billion in this quarter, so our investment is building a strong future earnings platform. Commercial Banking revenue was up 40%, with Global Payment Solutions, formerly known as GLCM, benefitting from higher rates, together with continued strong underlying growth. Global Banking and Markets revenue was up 16%; Markets and Securities Services revenue was up 20% due to market volatility; and Global Payment Solutions in Global Banking was up 100%, partly offset by lower Capital Markets & Advisory activity.

On slide 5, net interest income was $8.6 billion, up $2 billion versus last year's third quarter. This was primarily driven by higher rates and was strong across all regions and businesses. On rates, the net interest margin was 157 basis points, up 22 basis points on the second quarter, putting us back at pre-pandemic levels. We now expect net interest income of around $32 billion for this year, and at least $36 billion in 2023 compared to the previous $37 billion guidance.

Relative to the second quarter, we are upgrading our assumptions on a like-for-like 2023 revenues by around $1.5 billion on a constant currency basis, including $1.2 billion for FX movements, and at least $1.3 billion of planned higher costs of funding for the trading book, with this benefit being reflected in higher trading income in non-interest income, and is dollar for dollar with lower net interest income. In addition, given the unprecedented speed of interest rate rises we've been seeing this year, we believe we're being cautious on our planning assumptions across deposit betas, deposit migration and asset margins from here.

The FX movements have a similar impact on costs, with 2021 adjusted operating costs of $32 billion translating to around $30 billion using year-to-date average FX rates, and around $29 billion if you were to use September average rates. Given the flow of growth we now foresee, we now expect low-single-digit lending growth in both 2022 and 2023, before returning to previous expectations of mid-single-digit growth from 2024 onwards.

On the next slide, non-interest income was $5.7 billion, up 13% against last year's third quarter. Net fee income was down 11%. The decline in fees was largely due to lower Capital Markets & Advisory levels in Global Banking and Markets, and lower equity market activity in Hong Kong in Wealth and Personal Banking. Flow fees in Global Payment Solutions were up 18% in Commercial Banking, and up 8% in Global Banking and Markets. Other income was up 49%, including another strong FX performance in the quarter.

On the next slide, we've reported a net charge of $1.1 billion, or 43% of ECLs in the quarter. This included $600 million of modelled stage 1 and 2 provisions and overlays, $400 million of stage 3 loans, and $100 million of write-offs. There was a $300 million charge in the UK, including $200 million of additional allowances for heightened economic uncertainty. $400 million also relates to the mainland China commercial real estate market, around two-thirds of which are stage 1 and 2 provisions, and the remaining third are stage 3. The overall quality of our loan book remains good. Stage 3 loans as a percentage of total customer loans are stable, at 1.8%. In terms of outlook, we expect an ECL charge of around 30 basis points for this year, and for 2023 we now expect ECLs to be at the higher end of our 30-to-40-basis-point planning range, but with a higher degree of volatility around this guidance given the uncertain market outlook.

Turning to slide 8, we've had three quarters now of relatively stable costs year to date, and we continue to expect costs to be broadly stable on last year. Within that, third quarter adjusted operating costs were 5% up on the same period last year, driven by continued investment in technology and timing differences in the variable pay accrual versus the third quarter of 2021. We made a further $600 million of cost programme savings during the third quarter, with cost to achieve spend of around $700 million.

The formal three-year programme ends this year. We now expect to spend between $6.5 billion and $7 billion, slightly lower than our original $7 billion CTA target, but the expected cost savings from the programme remain unchanged, at around $5.5 billion, by the end of this year, rising to around $6.5 billion of cost savings by the end of 2023. We continue to target around 2% adjusted cost growth for 2023, with an ongoing focus on active cost management to mitigate inflationary pressures.

Turning to capital, on slide 9, our common equity tier 1 ratio was 13.4%, down 20 basis points on the second quarter. This includes the sale of our French retail banking operations, which had an impact of around 30 basis points, and further negative reserve movements through other comprehensive income due to higher rates. Reported risk-weighted assets were down $23 billion on the second quarter, principally to FX movements. We've now achieved our year-end ambition of at least $120 billion of cumulative RWA saves, with modest further saves still expected in the fourth quarter. We expect common equity tier 1 to now recover strongly in the fourth quarter, back towards 14%. This reflects a number of factors, including the formulaic impact of how our dividend is accrued during the year. We accrue at the top end of our pay-out range, so have already accrued 28 cents year to date, and additional capital management actions we've been taking to offset the negative OCI movements.

Please remember that this is not guidance of our full-year 2022 dividend intentions. The dividend accrual is purely a formulaic calculation that will true-up at the full year, based upon the results and outlook at the time. We continue to expect to move back to the bottom end of our 14% to 14.5% target common equity tier 1 range during the first half of 2023, and to consider buy-backs from the second half of 2023 onwards. In summary, these were a good set of results, good earnings diversity across the group, growth in all of our business lines, and continued strong control on operating costs.

Despite a weakening credit outlook, our credit quality remains strong. For 2023, we are upgrading like-for-like revenue assumptions. We continue to target adjusted cost growth of around 2%, and we expect to be at the bottom end of our target common equity tier 1 range in the first half of 2023.

Finally, after another quarter of good progress, we remain confident of delivering our targeted 12%-plus return on tangible equity in 2023 and beyond. We expect a 50% dividend pay-out ratio for both 2023 and 2024, supplemented by active capital management for surplus capital beyond this. We've included a slide on Canada in the appendix so you can see the shape of the business and the tangible equity within it. We've also included slides on mainland China commercial real estate on the Hong Kong loan book.

With that, Elma, if we could please open up for questions.

OMAR KEENAN, CREDIT SUISSE: Good morning. Thank you very much for taking the questions, and best of luck for the future, Ewen. Can I please ask a question on capital planning and on the provision scenarios? So just on capital planning, could you give an update on where HSBC is on the tactical RWA measures that are meant to get the common equity tier 1 ratio up to above 14%? It would just be good to have an idea of that.

Just given the focus on real estate prices in the UK and Hong Kong and mainland China, would it be possible to give a sensitivity in terms of RWA migration to lower real estate prices? In 2023, for example, what a 10% to 15% across-the-board reduction in real estate prices would mean for RWAs?

My other question is on asset quality. Could you give a little bit more colour on the guidance for the year '23? I guess there's a lot of moving parts between stage 3 and moving toward a downside, or downside 2 scenario. When you're thinking about the FY23 guidance being at essentially 40 basis points, what sort of assumptions are in that? Thank you.

EWEN STEVENSON: On capital planning, I guess, various parts to that. Firstly, I touched on, when I spoke about the technical nature of how we accrue dividends during the year. We've accrued 28 cents so far this year, so there will be very limited drag in Q4 from dividend accrual. Secondly, we've largely completed the $120 billion RWA saves programme that we committed to. I think there'll be a bit of a carry-through into Q4 of a few billion dollars. And on top of that, going back to Q1, we did implement a series of other tactical measures to support the common equity tier 1, given the movements we were seeing driven by the OCI losses and the impact that was having on capital.

We're already seeing some of that benefit come through the Q3 results, and they'll be incremental benefits in Q4, but I would say that you should see material improvement in the common equity tier 1 ratio in the fourth quarter, and then we'll be back at the bottom end of the common equity tier 1 range by the middle of next year, which also then supports the buyback comments for the second half of 2023 because, at that point, with a 12%-plus return on tangible equity and a 50% pay-out ratio, we've signalled that we expect low-single-digit loan growth next year. That means the business at that point is very capital accumulative.

On the second question, on the real estate crisis, I don't have to hand what a 15% impact would be on a ratings migration across the book, but perhaps I can get you a follow-up with the IR team afterwards. There is quite a bit of detail in the Pillar 3 documents that I think they can help you step through to try and estimate what that impact may be.

Then on asset quality for 2023, firstly, I think we do expect, on the China commercial real estate book, to continue to see some losses coming through that portfolio through 2023. It still feels like we've got some ways to go before we're going to get stability and improvement in the China property markets. For the UK, probably the market with the biggest delta around it for us at the moment is the UK. We have already, in some way, front-end-loaded potential stage 3 losses for 2023, with forward economic guidance adjustments that we've made during the third quarter. And above and beyond that, I think we're just being reasonably prudent with the guidance at the moment. We didn't say 40 basis points. We said to the higher end of 30 to 40 basis points. I think when we look at consensus, it's sitting at slightly higher than 40 basis points at the moment, but we're not really trying to change that guidance.

But when you think about the world next year, I think it's also important to recognise that places like Hong Kong and China are likely to have better economic performances in 2023 than in 2022. For us, when you think about our business mix, we have got a blend of some parts of the world seeing improved economic performance next year.

NOEL QUINN: I would just reiterate the fact that, despite the guidance to stay at the top end of the 30 to 40 basis points, we still committed to the delivering 12%-plus RoTE. It's affordable within the RoTE guidance we've given you, and we are building stage 1 and stage 2 provisions now in anticipation of potential losses turning into stage 3 losses in 2023. We've taken a prudent position on balance sheet positioning as well.

ROBERT NOBLE, DEUTSCHE BANK: I was wondering if we could just walk through the NII guidance? You're saying the $37 billion had gone down $1.2 billion for FX. My understanding of the trading book funding cost is that was already within your previous NII sensitivity. So rates have gone up, and I would have assumed that your NII should have gone up by more

than what you're guiding to. So the $36 billion looks quite low to me. I was wondering if you could walk us through your thoughts on that one, please?

EWEN STEVENSON: On the NII guidance, the technical side to the guidance is on the walk from the second quarter. Firstly, as you've noted, we've had adverse FX movements of $1.2 billion, and our planning assumption is that rate moves will increase the cost of funding in the trading book by at least $1.3 billion. The cost of funding will be a drag on net interest income but will have a dollar-for-dollar improvement in trading income in non-interest income. Relative to the second quarter, we think we're guiding like-for-like revenue guidance up by at least $1.5 billion, even though the net interest income guidance is down by $1 billion.

On the non-technical side, we think our net interest income assumptions at the moment are cautious. I think, increasingly, the interest rate sensitivity tables that we show you are less helpful because they are based on a 50% deposit beta. Given the relatively unprecedented speed in rate rises that we've seen relative to recent history, I think we are being deliberately cautious in key assumptions. We're assuming in that guidance very high deposit betas, elevated levels of migration out of non-interest-bearing current accounts and contraction of asset margins in some areas. We'll obviously see how this plays out in the coming quarters, but I would say, at the moment, we are trying to be deliberately cautious in that guidance, and I would note that, like for like, we have increased the guidance by $1.5 billion.

NOEL QUINN: And, just for clarity, the cost of funding the trading book was inherent in the Q2 numbers, but that cost has increased by $1.3 billion. So we said, 'increase on the Q2', and it's an offset between NII and non-NII. So, although the cost on NII is higher by $1.3 billion, the benefit re-emerges in the non-NII. That $1.3billion re-emerges.

EWEN STEVENSON: And the other thing is just also to note - which was in my comments, but, if people missed it - was that FX impact will also have a corresponding impact on operating expenses. The 2021 costs were $32 billion. That translates to $30 billion on average FX rates year to date and $29 billion if we were to use September averages. So I do think where consensus is sitting at the moment looks too high relative to those numbers.

ROBERT NOBLE: Thank you. Just to follow up on the NII bit, so the trading book funding costs gone up, but you've effectively assumed that the banking book doesn't benefit at all from the incremental rate rises that you've assumed in Q4. Is that right?

EWEN STEVENSON: Yes. And implicitly in those assumptions, I think that's broadly correct. But, as I say, I think within our planning assumptions at the moment are very cautious assumptions across deposit betas, deposit migration and asset margins. And I think, again, that answer is more nuanced if you go to the individual legal entity level. I think probably in Hong Kong we are getting towards peak NIM during the fourth quarter, I think. In some of the other markets, I still think there's further expansion of NIM.

ROBERT NOBLE: Alright, thank you very much.

JOSEPH DICKERSON, JEFFERIES: Good morning. Thank you for taking my question. Ewen, you cited a weakening credit outlook. Could you just discuss for us - help us dimension a little bit a couple of things in terms of, for instance, how a strengthening dollar plays on credit cost in your Asia footprint?

And then, relatedly, if I look, the Hong Kong interbank liquidity is down to about HKD100 billion, and the HKMA has been active in defending the peg. It's not a zero chance that the peg could break. What would be the consequences for the bank in that event, particularly from a credit standpoint? If you could help us think through those two dimensions, it would be helpful. Many thanks.

NOEL QUINN: I think let me take the second question first, if I can, and then, Ewen, you take the first. We do not believe there is any risk to the peg at all. We believe the peg - the HKMA have sufficient capabilities to defend the peg and that's not a scenario that we envisage.

EWEN STEVENSON: No, on the first part of the question, Joe, we don't think, when we look across the portfolio in Asia, there's any meaningful impact from stronger US dollar, apart from potentially in smaller markets - for example, in Sri Lanka - but that's not all dollar-related. But at a big, macro level, we don't think the strength in the dollar has a material impact on us as we look out on credit quality across the region.