HSBC : Interim Results 2023 Fixed Income Investors Conference Call - Transcript

Transcript

Interim Results 2023

Fixed Income Call

5 September 2023

HSBC participants:

Georges Elhedery, Group Chief Financial Officer

Faisal Yousaf, Group Treasurer

Richard O'Connor, Global Head of Investor Relations

Greg Case, Head of Fixed Income Investor Relations

Non-HSBC participants:

Lee Street, Citigroup

Robert Smalley, UBS

Daniel David, Autonomous Research

Paul Fenner-Leitão, Société Générale

Ivan Zubo, UBS

GEORGES ELHEDERY, GROUP CHIEF FINANCIAL OFFICER: Thank you, operator. Hello, everyone. Thank you for joining us. I'm Georges Elhedery, I'm Group CFO. And I'm joined on this call by Fas Yousaf, our new Group Treasurer; Richard O'Connor, our Global Head of Investor Relations; and Greg Case, Head of Debt Investor Relations.

I'll speak about a couple of items relevant to this audience, and then Fas will give you an update on the balance sheet, and after which we'll go straight into Q&A.

I'll keep the opening remarks relatively brief, as I'm sure you've had a chance to digest the results since we published them in early August, and I won't be referencing any slides as we go through this, but there is a fixed income investor deck on the IR website.

So, we've announced a good set of second quarter results, the annualised return on tangible equity for the first half stood at 22.4%, or 18.5% if we exclude the provisional gain on SVB U.K., and the reversal of the impairment of the sale of the French retail business.

Revenue was up 38% and we've seen growth in all three lines of business. Despite the inflationary environment, cost growth in the quarter was restricted to 1% compared to last year's second quarter, and based on our cost target basis, we remain on track to meet our 2023 cost target. The ECL charge was $0.9 billion, 35 basis points of gross loans. This includes circa $0.3 billion for our Mainland China commercial real estate exposure that is booked in Hong Kong. And finally, our CET1 ratio remains strong at 14.7%, which allowed us also to announce an interim dividend of $0.10 per share, and a second share buyback of up to $2 billion to be executed in around three months.

So with that, I'll hand over to Fas. Fas, over to you.

FAISAL YOUSAF, GROUP TREASURER: Thank you, Georges.

Hi, everyone. I'm Fas Yousaf, Group Treasurer. I'm excited to be here today and looking forward to engaging with you all over the coming weeks and months.

Firstly, before I move on to the Q2 update, I wanted to give you a bit about my background. I've been at HSBC for over 22 years, in that time spanning many roles across Finance and

Risk, most recently as Global Head of Traded and Treasury Risk. I'm excited by the new challenge and I'm looking forward to further shaping and delivering the ambitious treasury agenda that we have here at HSBC.

Coming back to the second quarter, our financial resources remain in solid shape. As Georges mentioned, our CET1 ratio was 14.7%, flat on the quarter, 3.8 percentage points above our MDA level. Attributable profits added 1.8 percentage points to the ratio, but were fully off set by the dividend accrual for the second quarter and the first quarter buyback. Our CET1 ratio remains above our planned operating range, which to remind you is 14.0% to 14.5%. Albeit the current buyback is expected to lower the ratio by about 25 basis points. And additionally, we expect the re-recognition of impairment of our French retail business will further reduce the ratio by approximately 25 basis points. We expect to recognize this loss in the second half.

With respect to liquidity, remember that we primarily manage liquidity at individual legal entity level, so our liquidity story is more complicated than the Group LCR. We show the LCRs of our major entities on slide 14 of our fixed income investor deck, and I would urge you to note the strong ratios, all of which are above the group ratio of 132%, demonstrating the conservatism that's baked into our group LCR calculation.

In high level terms, we have $796 billion of high-quality liquid assets on the balance sheet, of which over $300 billion is in cash. Our funding position remains enviable with a loan-to-deposit ratio of 60%, giving us a very significant deposit surplus. Our MREL ratio was 31.2% of RWAs, which is 4.8 percentage points above our 26.4% requirement, and we expect to continue to maintain a prudent buffer over that requirement.

On issuance, starting with HoldCo Senior, well we've issued just under $16 billion so far this year, after the $3 billion issuance in August. We have a plan of $17 billion to $20 billion for the year and currently expect to be at the lower end of that range. As such, we have limited further needs and expect negative net issuance in the second half.

Of course, I would not rule out pre-financing for next year in Q4, but this would be a decision taken closer to the time.

In terms of Tier 2, we have issued $3 billion so far in '23, and that's against the plan of $4 billion to $5 billion, and again, we currently expect to come in at the lower end of that range.

Finally, we came into the year with relatively modest AT1 needs, only around $2 billion and covered the need in February. We've announced the call of our AT1 callable this year, totalling $4 billion, and so we will see another year of net negative issuance in this asset class.

Overall in summary, our profitability, capital, funding and liquidity position leave us well-placed and our business model offers bondholders one of the most diversified banks in the world.

On that note, let's open the call up for Q&A. Operator?

OPERATOR: Thank you. Our first question comes from Lee Street. Your line is open.

LEE STREET, CITIGROUP: Hello all. Thank you for doing the call and thanks for taking my questions. I have three for you.

…

OPERATOR: His line has dropped, one moment please.

FAISAL YOUSAF, GROUP TREASURER: Okay. Maybe we can get Lee back. Can we take the next call?

OPERATOR: Yes. Our next question comes from Robert Smalley. Your line is open.

ROBERT SMALLEY, UBS: Hi. Thank you very much for doing the call. I just wanted to ask about capital generation, and I know in your fixed income presentation you put that first and foremost, thank you for that, I think it's an underappreciated credit metric. Could you talk about

what you think the realistic running rate for capital generation would be over the next several quarters? That's number one.

Number two, do you think that we're kind of at peak levels there? Or do you see any kind of expansion in the capital generation rate?

And then three, if you talk a bit about the experience in the U.K., you saw a bit of margin expansion, doing a little bit better than peers. Just what's going on in the general environment, margin-wise? And then if you could address credit quality, I'd appreciate it. Thank you.

FAISAL YOUSAF, GROUP TREASURER: Okay. Thank you very much, Rob. Let me start with the capital question. So we are in a position, as you will have seen where we are very capital generative.

We guided to an NII for the full year of greater than $35 billion and that's updated this half. We are not guiding for 2024 at this stage, but all of the metrics, from our perspective, look very positive for the forthcoming years. And we are working to ensure that we have stable NII for the future. So there are various things that we're doing in that regard and perhaps I'll call out just a few of those.

So first of all, we have, as you will know, been working on a program of structural interest rate hedging. That is progressing well and you will have seen that our sensitivity over the half has come down from where it was at the end of '22 at around $4 billion for 100 basis points move down in rates. That has come down to $2.6 billion. There are various factors that drive that, but about a third of that number is down to our structural interest rate hedging program, and we'll continue that program over the course of H2.

We're also working on diversifying our revenue base, so we're moving through a number of initiatives to generate greater fee income, and you will have seen that in the equity call at half year. So overall, I would say from a capital generation perspective a very positive outlook.

Perhaps I will pass to Georges to talk about the U.K. and the U.K. market, if that's okay.

GEORGES ELHEDERY, GROUP CHIEF FINANCIAL OFFICER: Sure. Thanks, Fas. Thank you, Robert.

I would also highlight in the capital generation, as an addendum to Fas's point, the intended sale of our Canadian business, and you may have seen very recently the Competition Bureau in Canada giving the go-ahead. Obviously, additional regulatory approval and ministerial approval are required, but that sale should provide us with increased capital, which we've already indicated that of an amount of $9-10 billion, we will use $4 billion of which as priority use for the special dividend of 21 cents per share, and then the rest would just become excess capital available for share buybacks or other capital actions.

Specifically on the UK margin expansion, the first thing I want to highlight, Robert, is very important - that we are passing through to customers the majority of the rate increases that we have seen of late.

In particular, we've passed to our instant access retail saving accounts more than 70% of the most recent increases we've seen in the UK in GBP. So, therefore, it's very important to position this. The overall pass-through on some of these instant savings accounts now is close to 50% on a cumulative basis.

So, the reason why our NIM has performed compared to other peers - and I'm only going to give you some elements. Obviously, I cannot comment on other peers.

The first element is we have a materially smaller fixed-rate consumer lending book, which, in the market, had suffered some reduction due to customers repaying some of these consumer loans. We did not have this dynamic manifest in our books.

The second one is that we continue to have a very strong franchise in deposits - and has therefore helped us not have to pay up for some of the flighty deposits. And, as a reference, our term deposits remain a small, single-digit percentage of our overall portfolio.

And the third thing to call out is also the fact that our large mortgage book with a growing market share in mortgages - our new business market share is just shy of 10% against the back book market share of the mid-7%s - is giving us additional impetus, if you want, on the NII, given the way mortgages have been struck.

So these are some of the metrics that have allowed our NIM to perform as you've seen in Q2. A word of caution, though - we do believe that, at these levels, we're probably going to see a more stable NIM than any additional expected increases in this space. Thank you, Robert.

ROBERT SMALLEY, UBS: Thanks for all the detail. It's greatly appreciated.

RICHARD O'CONNOR, GLOBAL HEAD OF INVESTOR RELATIONS: Robert, apologies. You had two other questions there - credit quality UK, which I'll take.

Look, you saw in Q2. UK credit quality went back to normal if you look at the basis point charge, and so it's actually been better than some, or at least some commentators would say. Two areas where we are watchful: the mid-market segment and our early warning indicators on areas like mortgages or cars, but generally, UK credit quality is bearing up pretty well in a tough economic environment, but I'd say the charge very much for Q2 was at a pretty normalised level.

There's two other quick points on capital generation, Robert. Look, you'll clearly be aware of the building blocks with guidance for mid-teens RoTE. We were above that in the first half. That excludes, for example, Canada gain, and also our guidance for, short term, pretty cautious on loan growth versus our medium-termmid-single digit growth, for obvious reasons - pretty muted loan demand in, for example, Hong Kong and the UK at the moment. We're not bearish longer-term, but certainly near-term, that will be the case.

You've got the consensus on the website, and that's up to date, so you've got all the building blocks there. The one thing I would say is, clearly, the associate income doesn't flow through automatically to capital. Obviously, the dividends from the associates, which are public - and you can get them off Bloomberg in five seconds - do flow into capital, so you just need to make that adjustment along with other adjustments as you do your capital model, okay?

ROBERT SMALLEY, UBS: Great. Great. Thank you.

GREG CASE, HEAD OF FIXED INCOME INVESTOR RELATIONS: Thanks, Rob. Next question please, Julie.

OPERATOR: Thank you. Our next question comes from Lee Street. Your line is open.

LEE STREET, CITIGROUP: Hello, all. I'll try again. Three from me, please.

There have been a lot of changes in the group structure and things you've sold and the like over the last few years. Just any areas, at a broad level, where you think the group's structure can be improved, as you look out from here?

Secondly, welcome to the incoming new treasurer. Any areas where you think there's scope for optimisation within the HSBC liability structure?

And then a more detailed one to finish - just why run such a large MREL headroom at 480 basis points? Is that a mix of how it works across each individual resolution entities, or just why is that so large? They would be my three questions. Thank you.

FAISAL YOUSAF, GROUP TREASURER: Okay. Thank you very much, Lee. I think I'll probably start with the treasurer question, and then go into group structure, and then the MREL.

So, I officially moved into role on 1 July. I'd start by saying, look, I'm very familiar with HSBC, having been here some 22 years, as I said earlier. The strategy that I will adopt as Group Treasurer will be consistent with that of my predecessors, so there's no radical change that we'd expect to see, certainly in the short term, and our strategy is entirely aligned to the overall Group strategy.

From my perspective, probably, I've got four high-level priorities that I would call out. The first is really protecting and safeguarding what is a very strong capital, liquidity, deposit base and an overall balance sheet, and that's working with our global businesses and global functions in order to do that.

The second is really around 'optimise' and 'enhance'. So, what I want to do is apply a commercial lens to optimise where we use our financial resources across the organisation to benefit shareholders, investors and the like.

The third area, which is ever-present, I think, is regulation, and we've got a substantial programme of regulatory change that we need to deliver on, and that's a priority. And I suspect we'll touch on a little bit through the course of the call, but we've obviously got our commitments in terms of resolvability and recovery, and the legacy stack is one area that I'll be very focused on as I move through the role. We've got LIBOR cessation as well, which is another area of regulatory change, and the overall Basel 3.1 framework as well.

The fourth and final bit that I would call out is technology and analytics, so that's going to be an area of focus for me. I will be looking at optimisation, digitisation and making the best use of technology and advanced analytics within our treasury capabilities at HSBC.

So, to go on to your specific question about the liability structure and whether there's scope for optimisation of the liability structure, it's something we'd always look at and I have looked at over a period of time. There's nothing that I would call out, obviously, at this point in time, but we'll continue to look at that as we go ahead.

Equally, in terms of the group structure, as you allude to in your question, we've made a lot of changes over the past two years with the disposal of the French retail business and of our business within Canada. Add to that the restructuring in Oman and the completing of the disposal of the Greek business as well and the announcement that we will be winding down our operations in Russia. So there's a lot of things that we've been doing in a very short space of time. We'll continue to look for opportunities, but we'll obviously announce those as and when we go along.

Finally, in terms of our MREL and the MREL structure, there are various drivers for that. At the moment, the overall buffer that we run is around 4.8 or which 3.8 is CET1.

GREG CASE, HEAD OF FIXED INCOME INVESTOR RELATIONS: So, Lee, yeah, so I think it's fair to highlight we have a 4.8 percentage point buffer right now, but important to note that

3.8 of that is CET1. That's effectively the buffer that we're running in CET1, and right now as well, you'll note we're operating at 14.7, so we are operating about 50 basis points above the mid-point of our range, though, naturally, that buffer will likely come down modestly over time, and we'll be primarily still CET1, and we'll run a small buffer in other MREL instruments.

LEE STREET, CITIGROUP: Alright, that is very clear, and thank you very much.

DANIEL DAVID, AUTONOMOUS RESEARCH: Hi. Good afternoon. Thanks for doing the call. I have three as well. The first one was just following on from what you were saying about optimal levels of capital. So I guess you've been shrinking that Tier 1 stack with calls larger than you've re-financed, and I guess I'm just interested - is this level of Tier 1 where you see yourselves longer term or could we maybe expect you to increase it back to more historical levels when double leverage was a bigger factor?

Secondly, I guess, on the legacy - it would be remiss of me not to bring it up. You've done an awful lot, and that's been acknowledged. I guess the one part of the stack that I think you haven't touched yet is the make-whole bonds, so the 10.176 and the 5.844. I guess my assumption is these bonds have to go eventually. Is there something you're waiting for? Is there something we should be watching out for? I guess is it rates peaking? Is there anything else that we should be looking at? I'm just interested to hear your thoughts with regard to that.

And then, finally, just on LIBOR, I guess you've got a number of AT1s with fallbacks which are defined, but I'm just interested to hear how you're thinking about those, particularly the New York law AT1s, which have got problems with the reference to mid swaps. Any thoughts there would be appreciated. Thanks.