HSBC : 1Q 2021 Presentation to Investor and Analysts - Transcript

Transcript

Investor and Analyst Call

Q1 Results 2021

27 April 2021, 07.30 BST

NOEL QUINN, GROUP CHIEF EXECUTIVE: Good morning in London and good afternoon in Hong Kong. I've got Ewen with me today and I wanted to start by sharing on screen our purpose, ambition and our four strategic pillars: the focus on our strengths, to digitise at scale, to energise for growth and to lead the transition to net zero. I will return to these in a moment, but first I'll run through some highlights before Ewen takes you through our financial performance.

We've had a good start to the year. I've seen excellent energy within the business, strong collaboration and a determination to get things done for our customers. I'm very grateful to all of my colleagues for the way they've managed growing demand since the turn of the year and for the single-minded way they've helped our customers to capture both present and future opportunities. There are many parts of the world where the pandemic remains a very real part of people's lives. Our thoughts are with the people of India in particular and we're working hard to support our colleagues and customers in India through this very tough time.

In terms of our financial performance, our good performance, supported by a net release of expected credit losses, delivered reported pre-tax profits of $5.8 billion, which were up 79% on last year's first quarter. We strengthened our lending pipelines across our Personal and Commercial Banking businesses, which bodes well for our future revenue. Our cost and RWA programmes remain on track, with $443 million of quarterly cost-programme savings, and $9 billion of gross RWA savings in the quarter. We retained a strong capital ratio of 15.9%, with further growth in both deposits and lending.

Pointing out a few highlights on slide 3, a combination of our digital campaigns and growing customer confidence saw strong credit card sales growth in Hong Kong. We saw good mortgage growth, with drawdowns up 60% in the UK and 37% in Hong Kong. Our wealth strategy got off to a strong start, with 23% growth in overall wealth balances. We attracted $13 billion of net new money into Private Banking in the quarter and $11 billion of net new money into Asset Management. We saw good loan-volume growth in Commercial Banking and month-by-month increases in lending approvals, with nearly double the approvals in March of any one month in 2020. Global Banking and Markets had a good quarter, supported by strong customer activity in capital markets. We led more than $567 billion of capital markets financing across global debt and equity markets and syndicated loans, including around $40 billion of social and Covid-19 response bonds, which is around 29% of the total market. This was a global performance, with good profitability in all regions, and growth of $3.2 billion in profits booked outside of Asia compared with last year's first quarter.

Moving to slide 4, I said in February that our growth and transformation plans were already in motion, and you can see the evidence of that here. Under Focusing on our Strengths, we've already grown Wealth balances in Asia by 18% year on year. We've grown our Asia Wealth FTEs by more than 600, including around 100 new client-facing wealth planners in mainland China, and we've grown trade-finance lending in Asia by around $3 billion, mainly in China and Hong Kong.

Under Digitise at Scale, we started to integrate our market-leading PayMe app in Hong Kong into merchant checkouts, and officially launched HSBC Kinetic for SMEs in the UK, with around 6,000 customers already signed up.

Under Energise for Growth, we're applying all that we've learned through lockdown, combined with our digital investment, to improve the way we work. We're moving to a hybrid

model wherever possible, giving our people the flexibility to work in a way that suits both them and their customers. We will need less office space as a result and we have a plan to reduce our global office footprint by more than 3.6 million square feet, or around 20%, by the end of 2021. We're also relocating three of our global business CEOs to Asia on a permanent basis, taking them closer to our customers and to the core of our business.

On the transition to net zero, we've published details of the climate resolution that we'll put to shareholders at our AGM in May. We are one of the founder members of the Global Net Zero Banking Alliance that launched last week. We maintained our leadership position in sustainable finance, following a record quarter for global ESG bond issuance, and we're piloting a new tool in the UK to help SMEs better understand their ESG performance and to prepare to take action.

It's early days, but we're carrying good momentum into the second quarter. Ewen will now take you through our results.

EWEN STEVENSON, GROUP CHIEF FINANCIAL OFFICER: Thanks, Noel, and good morning or afternoon, all. We had a good quarter against a backdrop of ultra-low rates; reported post-tax profits of $4.6 billion - that's up 82% on last year's first quarter; and an annualised return on tangible equity of 10.2%. Adjusted revenues were down 3% on last year's first quarter, largely due to the impact of ultra-low interest rates, but there were notably good performances in some segments, including Asia Wealth in Wealth and Personal Banking, Asia Trade Finance in Commercial Banking, and Capital Markets and Advisory, Global Debt Markets, and Equities in Global Banking and Markets. Relative to the first quarter of 2020, adjusted revenues also benefited from the reversal of negative insurance market impacts and Global Banking and Markets valuation adjustments.

Expected credit losses had a $435 million net release. This reflects both an improved economic outlook for our central scenarios and, in the UK and the US, lower probabilities attached to downside scenarios. Operating expenses were up 3%. This was due to a shift in variable pay accruals to reflect quarterly profitability. We remain on track to deliver our target of broadly stable costs for the year ex the bank levy, subject to final decisions on the variable pay pool later in the year. Lending and deposit balances were both up 1%, with confidence in higher loan growth in the remainder of the year. Our common equity tier 1 ratio remains stable at 15.9%, and our tangible net asset value per share of $7.78 was up three cents on the fourth quarter, with retained profits more than offsetting negative reserve movements.

Turning to slide 6 and looking at first-quarter adjusted revenues across the three global businesses, in Wealth and Personal Banking revenues were down 1% on a year ago, Wealth Management revenues grew by just under $1 billion due to the turnaround in insurance market impacts from a big loss last year, and a good performance in equity and mutual fund sales in Hong Kong. Personal Banking revenues fell by $890 million, due to the impact of low interest rates on deposit margins. Commercial Banking revenues were 14% lower, due mainly to the impact of low interest rates on Global Liquidity and Cash Management, but with a good bounce-back in trade balances in the quarter and growing confidence in the lending pipeline for the coming quarters. In Global Banking and Markets, revenues were up 10%, with strong performances in Global Debt Markets and Equities, up 52% and 55% respectively, and Capital Markets and Advisory, up more than 100%. Just to remind you, we've no significant exposure to SPACs, where some peer banks benefited from exceptionally high activity levels in the first quarter.

On slide 7, net interest income was $6.5 billion, down 14% against the first quarter of 2020 on a reported basis. On rates, the net interest margin was 121 basis points, down one basis point on the fourth quarter, primarily reflecting the fall in HIBOR during the first quarter. On volumes, we saw continued good volume growth in mortgages in both Hong Kong and the UK, and strong commercial applications that we expect to translate into volumes in the coming quarters. Looking forward to the remainder of the year, despite some continuing rolling impact of last year's shift in interest rates, we expect volume growth to support net interest income at levels broadly in line with the first quarter.

On the next slide, non interest income was $6.8 billion, up 15% against last year's first quarter, but noting last year was negatively impacted by volatile items due to Covid-19. Overall, non-interest income stabilised in the quarter compared with falls over the previous

three quarters. Wealth and Personal Banking, and Global Banking and Markets benefited from higher volumes, better equity and mutual fund sales and stronger capital market activity. FX revenues were down year on year, but this was still a good performance against an exceptional first quarter of 2020. Commercial Banking was down slightly, reflecting lower trade and payment volumes, due to the continuing impact of Covid-19 on activity levels. Looking forward, we expect customer activity and fee income to continue to recover as economic activity recovers, although this remains subject to the impact of new Covid-19 variants and the continuing success we've seen to date in the rollout of a global vaccination programme.

On the next slide, we had a net release of $435 million of expected credit losses in the quarter. This compares with a £3.1 billion charge in the first quarter of 2020. The net release was across all global businesses and reflected an improvement in the economic outlook, notably in the UK, including the reduction in downside probabilities. Last year's first quarter included a large charge related to one single-name corporate exposure in Singapore, but this year's first quarter was still very benign for stage 3 charges, particularly on the wholesale side. We're retained ECL uncertainty overlays of $1.5 billion, broadly the same as the fourth quarter, recognising the risks that still exist from the pandemic. But based on the current economic outlook, we now expect the ECL charge for the full year to be below our medium- term through-the-cycle planning range of 30-40 basis points.

Turning to slide 10, first-quarter adjusted operating costs were $220 million higher than the same period last year. This was driven by higher performance-related pay accrual of $474 million, primarily due to a shift in accruing a higher percentage of variable pay this quarter relative to the first quarter of 2020. We made a further $443 million of cost programme savings in the quarter, with an associated cost-to-achieve of $319 million. To date, our cost programmes have achieved annualised saves of some $2.2 billion against our target of $5-

5.5 billion, with cumulative cost-to-achieve spend of $2.2 billion. We're not softening our vigorous approach on costs. We continue to expect our 2021 costs to be broadly in line with 2020, excluding the benefit from a reduced bank levy. This is subject to final decisions on our variable pay pool later in the year, which will be primarily driven by the pre-tax profitability of the Group.

Turning to capital on slide 11, the impact of profit generation in the quarter was offset by fair value movements and other deductions, including around 10 basis points for foreseeable dividends. As a result, our common equity tier 1 ratio was unchanged at 15.9%. In line with our shift to a payout-ratio approach going forward, the deduction for foreseeable dividends was based on one quarter of the 2020 15-cent dividend. We expect to make the same capital deduction in the next two quarters, based on the same trailing-dividend assumption. But to be clear, we're not signalling with this our 2021 dividend intentions. Excluding FX movements, risk-weighted assets fell by $6 billion in the first quarter, due to changes to our portfolio mix, and methodology and model updates. To remind you, we do expect some common equity tier 1 headwinds going forward from regulatory changes. These haven't changed from the full year.

So in summary, against the backdrop of ultra-low interest rates, this was a strong quarter for us, our best in reported profits since the onset of Covid-19, and an annualised return on tangible equity of 10.2%. While the results were flattered by a net release of ECLs, we saw strong performances across various parts of the bank, with continued strength in Asia, despite the impact of a very low HIBOR, and a material recovery in profitability outside of Asia. As we look out, there remain heightened levels of uncertainty, particularly driven by the continuing emergence of Covid-19 variants, so expect us to retain a conservative position on capital funding and liquidity for the time being. However, based on the first-quarter performance and the strengthened economic outlook, Noel and I are more optimistic about this year, albeit cautiously, than we were at our full-year results in mid-February. With that, we will open up for questions.

ED FIRTH, KBW: Good morning, everybody. I just had two questions. The first was on capital. I was surprised that the capital ratio wasn't stronger, given the earnings beat and risk- weighted assets falling. I just wondered if you could give us some more colour around 'Other' movements - I think it was a minus-40-basis-point hit in the chart - exactly what's driving that and how we might expect that to progress going forward.

And then the second question was restructuring charges seem to be running some way lower than you were perhaps informally guiding to at the full year. Should we expect those to pick up during the rest of the year, and can you give us any colour on how that might end up?

EWEN STEVENSON: On restructuring charges, we're not changing our full-year guidance

we gave at full-year results. You're right: Q1 was unusually low, so yes, you should expect

those to pick up as the year progresses. On capital, a few things: there were deductions for fair value reserve movements on cash flow and negative FX movements. There was a higher deduction for BoCom as its profits increased and, again, note that we talk about a 10-basis- point deduction for the foreseeable dividend, which is new for us, but represents a change in policy because we've shifted to a payout-ratio policy.

ED FIRTH: Based on what we can see, the bulk of those sound to me like they're peculiar to this quarter?

EWEN STEVENSON: Yes, they are peculiar to this quarter.

FAHED KUNWAR, REDBURN: Morning. Just a couple of questions. The first one is on margins. You gave colour on this, Ewen, during the call, but they're down in all your major regions. Just to understand, how much of that is lower rates feeding through - previously lower rates and slightly lower HIBOR? And is there anything on competitive pressure that's pushing those margins down or is it all about the background yield curve and rates?

The second question is just on the writeback. It does look like a lot of the writebacks were in the UK, particularly UK commercial - a) Is that right? Were they mainly UK commercial? And

1. what did you see that was driving that? Was it an outlook on the vaccine rollout or was it specific data points that you were seeing on the UK corporates or UK personal, if that was the case? Thank you.

EWEN STEVENSON: On NIM, it was, I think, almost exclusively driven by the shift in yield curves. We've broadly repriced all of our liabilities now. And on the asset side, we're seeing some opportunity for margin expansion. So for example, in the UK, we increased margins to try and slow down some of the inflow that we were seeing, and we have, for several quarters, seen some opportunity to reprice in Asia on the commercial side, so we do think that we are now close to troughing on NIM. HIBOR clipped it a little bit further in Q1, but as you know that translates very rapidly into the books, given the short-dated nature of assets of liabilities in Hong Kong. And for net interest income, loan growth in Q1 was mid-twos percent, and we're signalling that we expect mid-single-digit growth over the full year, so that does imply much higher growth rates and lending volumes in the remaining three quarters, which we've got confidence in, given the pipelines that we can see, which should help support net interest income over the remainder of the year, even if there is still some residual NIM pressure coming from the roll-off of books as a result of last year's interest-rate shift.

On writebacks, you're right. There was a larger writeback in commercial, particularly in UK commercial. I think. In part, that reflected the very large reserve build-up that we had last year. Overall, there were various things going on which made this an unusual quarter for us . Firstly, we had very low stage 3 losses of around about $300 million or so in the quarter, which was unusually low, we think, And secondly, on stage 1 and stage 2, two things, really: an improvement in our economic forecast for central scenarios in most places that we do business, coupled with, as you know, we went into the full year with very large probabilities, particularly in the UK, against downside scenarios, which we have reduced on the back of a very successful vaccination programme here. We're also seeing that in the US and we would expect to see that in other markets as the vaccine programmes ramp up elsewhere.

OMAR KEENAN, CREDIT SUISSE: Good morning. Thank you for the questions. My question is that, with the Wealth and Personal Banking rationalisation in France and the US, I was just wondering what the appetite might be to use released risk-weighted assets to potentially exit capital to add portfolios in your other markets where it might make sense. I'm noting here that a large global bank has put up consumer balances for sale in about 13 markets. So I was just wondering what your view is of where markets might overlap in those geographies and where HSBC might think it makes sense to be bigger rather than smaller. Thank you.

NOEL QUINN: Omar, thank you. As you know, our primary focus in the WPB business is to grow our Wealth part of that business and, therefore, we are looking at opportunities for both organic and bolt-on, inorganic opportunities, but it's primarily focused on wealth businesses, either acquiring product or distribution capability in wealth management, in insurance, in private banking. That's the primary focus, rather than just a geographic expansion of retail banking capability. So we're more focused on that for opportunity. And it will be Asia-based, largely.

OMAR KEENAN: So essentially, the way that we should read that is that there's going to be no balance-sheetbolt-on M&A that would consume any excess capital. It's really just you're focused on an organic strategy -

NOEL QUINN: Well, we would use capital to do an M&A deal, but what we're buying is less retail banking assets and more wealth management capabilities. So we will use freed-up capital if we see bolt-on-acquisition opportunities. But as I say, it's more around wealth management capabilities than it is retail banking capabilities. We will look at opportunities as they emerge.

EWEN STEVENSON: Make sure you listen to the word 'bolt-on.' We're not planning anything substantive. So will it eat into some of the excess capital? Yes, but it will be relatively modest, if we choose to do anything.

OMAR KEENAN: Could I maybe just ask a follow-up on that? So having said that, and just bearing in mind your comments from last quarter around not to expect buybacks this year, could you perhaps paint the path for us towards returning excess capital which HSBC is clearly building?

EWEN STEVENSON: So I think we've been clear on our distribution policy and certainly our dividend policy. We said we're going to shift to a 40-55% payout ratio from next year. That's going to be all cash. This year, we're going to transition towards that. We were close to an 80% payout ratio last year. We do expect, subject to seeing how the second quarter goes, to be in a position to pay an interim dividend in the middle of the year and then re-evaluate whether or not we'll shift the quarterly dividends at the end of this year.

On buybacks, we continue to have no current intention to do buybacks this year. You know that we've used buybacks in the past, so they're certainly something that we do actively consider as a tool of capital management, and we are committed to active capital management. We do think at the moment that, when we look at consensus versus where we are, we do see RWA growth probably being a tad higher than is in most people's models. We see loan growth being fuller than I think all of you currently are modelling. That's on the back, I think, of very strong growth what we continue see in mortgages across the UK and Hong Kong, a commercial pipeline that is building nicely. And just in context, in one of the slides, you'll see that our commercial pipeline is running close to 50% higher than it was in Q4 in Q1. And we do think other segments like consumer credit will bounce back as we recover out of Covid.

There are about $20 billion of regulatory headwinds that we see this year. Offsetting that is the $30 billion or so of RWA rundown that we expect. We're making good progress on that . We did about $9 billion in the first quarter. And the last thing is we're still cautious on credit- rating migration, particularly as some of the government support packages roll off here in the UK, for example, as furlough rolls off and what impact that has on credit later in the year. So yes, we are probably slightly more cautious on capital and excess capital than would be in your numbers at the moment.

TOM RAYNER, NUMIS: Good morning, both. Just two questions, please. First, on credit quality, you released $0.7 billion from stage 1 and 2 reserves in Q1. I think you flagged $6.8 billion still left on balance sheet. Your guidance, if I take the bottom of your range of 30 basis points, below would suggest a full-year charge of somewhere around $3 billion or lower. I just wondered: that guidance in itself, what does that imply in terms of further stage 1 and 2 releases for the rest of 2021? Then I know you've already touched on this - I was going to ask you to then expand on your thoughts about when the government programmes actually do end. What are your thoughts on releases over a two-to-three-year period? That was the first question and I have a second one on costs, please.