HSBC Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2023

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings Plc's Q3 2023 results. For your information, this conference is being recorded. At this time, I'll hand the call over to Georges El Hedry, Group Chief Financial Officer.

Speaker 1

Thank you, operator, and hello, everyone. Thank you for joining us on our 3rd quarter results call today. I will lead today's presentation and Noel will join me for the Q and A session. Allow me first to begin by saying a few words on recent events in the Middle East. We have all been shocked by the devastating terrorist attack on Israel on 7th October and saddened by the growing humanitarian crisis in Gaza.

Speaker 1

The loss of innocent life and suffering is heartbreaking. We continue to offer assistance to our impacted colleagues and clients. Just to be clear, we are not changing our strategy in Israel for the Middle East. Turning to our results now. As always, Our purpose, ambition, values and strategy have been helping us drive the results that I am going to talk about today.

Speaker 1

Some highlights to begin with. First of all, the year to date performance clearly demonstrates that we have had 3 consecutive strong quarters, reflecting the successful execution of our strategy. Year to date reported profit before tax was $29,400,000,000 which is an increase of $17,400,000,000 on the same period last year, supported by higher interest rates and enabled by our strong balance sheet and the non recurrence of notable items. We have delivered an annualized return on tangible equity of 17.1%, excluding strategic transactions. For the avoidance of doubt, these transactions are the reversal earlier this year of the impairment relating to the planned sale of our retail banking operations in France and the gain on acquisition from SVB UK.

Speaker 1

We've announced another share buyback of up to $3,000,000,000 bringing total buybacks announced this year up to $7,000,000,000 And we've announced 3 quarterly dividends which total $0.30 per share. We have also exhibited good growth across our businesses. Wholesale Transaction Banking revenue was up 50% year to date, primarily due to higher rates and reflecting the strength of our deposit franchise. Wealth had another good quarter. Wealth balances were up by 12% compared to the same quarter of last year.

Speaker 1

And we are also very pleased that we attracted $34,000,000,000 of net new invested assets in the quarter, bringing the rolling 12 month total of $277,000,000,000 which is a strong performance and testament to our strategy. The planned acquisition of Citi's Wealth business in Mainland China will also help accelerate our growth plans for this business. In our 2 home markets of Hong Kong and the UK, we are also seeing good growth areas. In Hong Kong, insurance new business CSM was up 40% year on year. And our mortgage books in Asia and the UK grew by a total of $11,000,000,000 compared to the Q3 of last year.

Speaker 1

Let me now move on to the 3rd quarter numbers. Revenue was up was revenue was $16,200,000,000 which was up $4,600,000,000 or 40% on last year's Q3 on a constant currency basis. This was driven firstly by group net interest income of $9,200,000,000 which was up by $1,300,000,000 on the same period last year. And secondly, non NII was $6,900,000,000 up by $3,300,000,000 primarily due to first the non recurrence of a 2 point $5,000,000,000 impairment in last year's Q3 relating to the planned sale of our retail banking operations in France. 2nd, $1,600,000,000 higher revenue offset into non NII from the central cost of funding GBN M trading activity and 3 offset by $600,000,000 of treasury disposal losses taken for structural hedging and risk management purposes for our balance sheet.

Speaker 1

Banking NII of $11,500,000,000 was up $2,800,000,000 on last year's Q3 and broadly stable on the 2nd quarter. Expected credit losses of $1,100,000,000 were broadly stable on the same period last year and included a $500,000,000 charge in relation to our Mainland China commercial real estate portfolio booked in Hong Kong. Costs were up 1% in the quarter as lower restructuring costs were offset by higher technology spend, a higher performance related pay accrual and costs from HSBC Innovation Banking. Lending balances and deposits were both broadly stable and our CET1 ratio was 14.9%, an increase of 20 basis points on the 2nd quarter. Finally, we announced the 3rd quarter we announced the 3rd consecutive quarter of strong capital returns with a quarterly dividend of $0.10 per share and a further share buyback of up to $3,000,000,000 which we expect to complete before the full year results in February.

Speaker 1

The next slide shows that our global businesses all performed well. Wealth and Personal Banking had a strong quarter with revenues up by 71% or by 7% including the impairment taken in last year's Q3 relating to the sale of our retail banking operations in France. Within this, Wealth was up by 6% as our ongoing investment in that business continued to gain traction. And personal banking also had another good quarter, up by 21% due mainly to higher rates. Across commercial banking and global banking end markets, global payment services had revenues of more than $4,300,000,000 which was an increase of 56% on the Q3 of 2022.

Speaker 1

And in our trade business, Lending balances were up 3% in the quarter, mainly in Asia, reversing the declining trend from previous quarters. Global Banking and Markets also performed well, up by 2%. This included a resilient performance in foreign exchange compared to a strong Q3 last year and a good performance in securities financing and debt markets. On this next slide, reported net interest income was $9,200,000,000 which was broadly stable on the Q2. Banking NII was $11,500,000,000 up $2,800,000,000 on last year's Q3 and stable on the Q2 of this year.

Speaker 1

As a reminder, banking NII in the 2nd quarter was favorably impacted by a $400,000,000 year to date catch up due to methodology changes, approximately half of which was attributable to the Q1. Adjusting for this, banking NII was slightly up in the quarter in this Q3 on a like for like basis. The net interest margin remained broadly stable at 170 basis points. We are not updating our 2023 NII guidance and are also not expecting consensus to change. Next, constant currency non NII of $6,900,000,000 was up $3,300,000,000 on last year's Q3, primarily due to number 1, a $2,300,000,000 favorable movement in notable items and foreign exchange as last year's Q3 included a $2,500,000,000 impairment relating to the planned sale of our retail banking operations in France and this year's Q3 included a $600,000,000 of treasury disposal losses.

Speaker 1

Number 2, a $1,600,000,000 increase in the revenue offset into non MII from the central cost of funding GBNM trading activity. And number 3, a $300,000,000 decrease in other which includes lower market treasury income. We continue to reposition our treasury portfolio as part of our balance sheet structural hedging and risk management initiatives. In the 3rd quarter This resulted in $600,000,000 of treasury disposal losses. These losses do not have a material impact on CET1 capital or TNAV as they have already been taken through reserves last year, although they will have a modest benefit to our CET1 ratio this year.

Speaker 1

The disposal proceeds are reinvested into higher yielding or higher duration assets. Disposal losses are forecast to be more than recovered through NII with the majority over the next 5 years. Further restructuring of the treasury portfolio leading to a loss of around $400,000,000 is expected in the Q4, which will also be reported as a notable item and have modest CET1 upside. Turning now to credit, our 3rd quarter ECL charge was $1,100,000,000 which was stable on the same period last year. It includes a $500,000,000 charge related to our Mainland China commercial real estate exposure booked in Hong Kong following a $400,000,000 charge in the same quarter last year.

Speaker 1

The remaining wholesale charge was $300,000,000 The $200,000,000 personal lending charge included modest UK releases, although we retain overlays to address the current risks in the economic outlook. Stage 3 balances of $19,000,000,000 were down $1,000,000,000 on the 2nd quarter and account for 2% of total loans. We continue to expect a 2023 ECL charge of around 40 basis points of average gross customer lending, including held for sale balances. Focusing now on our Mainland China commercial real estate portfolio, Our principal area of focus remains the portfolio booked in Hong Kong. As you can see, our total exposure stands at $7,500,000,000 which is down by $500,000,000 from the half year primarily due to write offs.

Speaker 1

In February this year, we communicated a management assessed plausible downside scenario of around $1,000,000,000 The deterioration in the Q3 means that we crystallized around $500,000,000 of provisions into the P and L that were part of this plausible downside. We're encouraged by recent policy measures which will help the sector, but need time to take effect. So the plausible downside scenario does now look more realistic for full year 2023. Our exposures rated strong, good and satisfactory were broadly stable in the Q3 last year. Around half of these exposures is lending to state owned enterprises.

Speaker 1

The other half is primarily lending to privately owned enterprises that are not residential property developers. This is reflected in the minimal ECL allowance in this part of the portfolio. And if I now turn to the table at the bottom of against unsecured credit impaired exposures we already have now 73% coverage ratio. And against unsecured substandard exposures, we have a coverage ratio of just under 10%. This is clearly an area that we will continue to monitor closely.

Speaker 1

But to reiterate, We continue to expect the 2023 ECL charge of around 40 basis points of average gross customer lending, including held for sale balances. Next on costs, reported costs for the 1st 9 months of 2023 were down 2% on last year, primarily due to lower restructuring costs. Our cost efficiency ratio for the same period was 44%, improved from 66% last year. On a constant currency basis, costs were up by 1% on last year's Q3 as the lower restructuring costs were offset by increased technology and operations spend, a higher performance related pay accrual and the acquisition and investment costs from HSBC Innovation Banking, which were not included in our original plans. On our cost target basis, we now expect our 2023 costs to be around 4% higher than 2022.

Speaker 1

This is around 1% or $300,000,000 more than previously guided due to higher technology and operations spending, which we believe is appropriate given the importance of digitization to the Group and the strong financial performance of the business. In addition to this, we are contemplating an increase in performance related pay in the 4th quarter depending on the outturn of our performance and ongoing execution of our strategy in the Q4. This would represent a further increase of around 1%. We have provided a full reconciliation from reported costs to our target basis cost on slide 15 of the deck. And to reiterate, tight cost discipline remains my priority and a priority across the whole group.

Speaker 1

My next slide shows our strong capital position. Our CET1 ratio was 14.9%, which was up 20 basis points on the 2nd quarter. A few things to draw your attention to. Number 1, the dividend accrued year to date is $9,600,000,000 or €0.49 per share, while we have announced dividends of €5,900,000,000 or €0.30 per share. Number 2, we have announced a further share buyback of up to $3,000,000,000 which is expected to have a circa 40 basis point impact on our CET1 ratio in the Q4.

Speaker 1

We are aiming to complete it before the full year results in February. Number 3, we also expect to reclassify our retail banking operations in France as held for sale in the Q4 ahead of completion of the planned sale on the 1st January 2024, which would have a further impact on the CET1 ratio of around 30 basis points. Finally, the planned sale of our Canada Banking business also remains on track to complete in the Q1 of 2024. And as a reminder, profits from our Canada Banking business accrue to the buyer and are not included in our dividend calculations for the year. We estimate the gain on sale will be around 5,500,000,000 dollars which we will recognize through a combination of earnings from Canada and the remaining gain on sale at completion.

Speaker 1

Upon completion of the transaction, it remains our intention to consider a special dividend of $0.21 per share as a priority use of the proceeds and as previously announced. So in summary, this was another strong quarter. We delivered a good profit performance and an annualized return on tangible equity of 17.1 percent excluding strategic transactions, reflecting the successful execution of our strategy. Transaction banking and wealth both performed well and continued investment will help accelerate the growth of our Wealth business. We continue to expect a 2023 ECL charge of around 40 basis points of average gross customer lending.

Speaker 1

We remain committed to tight cost discipline and we have a strong capital position and have increased return to shareholders by way of dividends and share buybacks. And with that, operator, can we please open it up for questions? Thank you. Thank If

Operator

you would like to ask a question today, please use the raise hand function in Zoom. Please also turn your camera on now if you wish to be visible on screen. If you are invited to ask a question, please accept the prompt to unmute your line. If you find your question has been answered, You may remove yourself from the queue by lowering your hand. Our first question today comes from Aman Raka from Barclays.

Operator

Please accept the prompt to unmute your line.

Speaker 2

Good morning, George. Hope you can hear me okay. We can hear

Speaker 1

you very well.

Speaker 2

Thank you so much. Two questions, please. Firstly, on cost. Can I just probe you a little bit more on exactly what's changed around costs? Because I think as recently as mid September.

Speaker 2

HSBC were reiterating their expectations for costs very much in line with The existing guys and the commitment to the cost base. So particularly around the point around compensating staff potentially compensating staff for performance. I understand that it's been a strong year for profits, but it doesn't look like the view of profitability changed materially since you all spoke to us. So that component there would be interesting. And the related point then is to what extent should we expect that element of cost growth to roll over into next year.

Speaker 2

I guess, at its heart, I'm trying to get a sense of what the underlying cost growth is that you're currently seeing through the business. And then the second question was around margins. I was wondering if you Just help us with a bit on your experience on deposit beta and term deposit mix, particularly in Hong Kong, but also a comment on the U. K. Would be helpful.

Speaker 2

And as part of that, what your expectations are for NIM in both of those markets, please? Thank you.

Speaker 1

Sure. Thank you, Armand. So first on costs, I think with regards this 1% cost we contemplate for Q4, So look, we have to put this in the perspective of the financial performance. Obviously, at the start of the year, we weren't necessarily Realizing the performance of the group, we obviously need to wait for Q4 both to assess the financial But equally to assess how we continue to deliver on our strategy. It ultimately will be a matter for The board and the remuneration committee to decide, but we felt it appropriate and fair to recognize that our colleagues have contributed, participated for the last many years through the whole strategic reshaping of the firm through ensuring we have a great deposit franchise and a strong balance sheet and obviously delivering the growth we've In wealth and transaction banking that we can channel 1% or the equivalent $300,000,000 towards performance related pay.

Speaker 1

Again, All this is at the stage of contemplation, the matter we will reaffirm at the year end and again subject to our remuneration committee's opinion. In terms of next year, now we're not giving guidance for next year, but I think we are reflecting in this performance related pay a year on year Material change in our performance as you've seen from our returns and our PBT, which you know obviously with that quantum Probably not expect for next year, right? In terms of margins, Arman, So as we indicated at these levels of rates in mostly in the UK and certainly in a number of Western markets and for our wholesale businesses, At these levels of rates we were expecting to have a materially higher betas than 50%. We've That additional rate hikes from here would be mostly for the benefit of our customers. If you look at the overall betas In the UK, overall beta is around 50% just north of 50%.

Speaker 1

So While the marginal betas have exceeded 80%, the overall is in the range of 50%. Term deposit mix, Hong Kong kind of same trend as we've seen through the 9 months coming to this quarter, about 1% migration per month. So we have seen 4% over the quarter after 2% previous quarter and 3% in the quarter one that took the total term deposit mix to 31% in Hong Kong. We have not seen a deterioration of the trend, so we The trend to remain the same as we look into potential headwinds in the future, but equally we continue to see some of the tailwinds we were calling out before to continue. Just to put in perspective, the U.

Speaker 1

K. Term deposit Mix is just single digit percentage points. So it's a modest increase in Q3, but it's not a main contributor to the dynamic of our NII.

Speaker 3

George, if I could just add a couple of comments on the VP. There are 2 factors that are really coming to play in Q3. At the half year when we talked about our cost position, We had an eye to VP and we had a very strong 1st 6 months of the year. There was a lot of economic uncertainty around That time inflation, interest rates, ECLs, China commercial real estate. So we didn't want to anticipate Exactly what the financial performance would be in the final 6 months of the year, we were confident of mid teen returns, but we needed to make sure that the final 6 months traded well.

Speaker 3

I think as we've gone through Q3, we've continued to trade well. So I think Our expectations now on a full year out are probably higher than they would have been when we started this year and started to build a financial plan for this year. So in the context of things, we've given an indication that given the strong profit performance and if it continues into Q4, It would be right and proper to share some of that upside in profit compared to original expectations with our colleagues the way that we intend to share the upside in expectations with our shareholders on both dividends and buybacks and a 1% 300,000,000 top up to VP for the level of performance that could well out turn this year is a reasonable amount of additional VP to put in. And I will remind you that VP is not a Continuum and a baseline, it is assessed each year on the profit of the bank against targets and can go up and can go down. But that's

Speaker 4

the final determination we'll make at the end of the year.

Speaker 3

And we're just trying to We'll make at the end of the year. I'm just trying to be fair to our colleagues on what they've done, but it's a factor of uncertainty at the half year over trading performance has become less uncertain as we've gone into Q3 and you've seen the numbers. And we hope we'll continue in Q4 in a strong manner. And if that's the case, we feel we should reward our colleagues for a very strong performance this year. But it's that's the background to it.

Speaker 3

We remain both myself and George remain absolutely committed It's a strong cost discipline.

Speaker 1

Thank you, Farman. Next question, please.

Operator

Our next question today comes from Joseph Dickerson from Jefferies. Please accept the prompt to unmute your line and ask your question.

Speaker 5

Hi, can you hear me?

Speaker 1

Yes, Joseph. Carry it.

Speaker 5

Thank you very much for taking my question. Just on the Just following up on costs, I suppose how much of the tech and op cost spend was, if you will, necessary Versus discretionary in terms of needing to keep up with competitors and so forth. And then the other aspect would be on the trading book funding costs. You've guided to greater than $7,000,000,000 for the full year. On my numbers, you're already at 6.2 So that implies a material step down in that cost, unless we should be emphasizing on the in excess of 7 element there.

Speaker 5

Any color on that front would also be helpful. Many thanks.

Speaker 1

Thank you, Joseph. So maybe I'll answer your second questions fairly easy. You should definitely as you mentioned emphasize the in So of SEK 7,000,000,000 we actually haven't revised our guidance. We felt by and large that the consensus is in the right place and the need to influence it. We expect the trading balance So

Speaker 5

it's similar run rate, similar quarterly run rate we should be thinking about?

Speaker 1

So purely for the funding cost of the trading books, you should expect that the trading balances will remain broadly stable at around $130,000,000,000 for the quarter then kind of the math are simple, it's just that times the short rate levels Essentially in USD. As you look at the overall banking NII, I think The indication is that we've grown $100,000,000 Q2 to Q3. We haven't given indication for Q4, again feel comfortable with where the consensus is for Q4 and just Reiterate that Banking NII is probably a better measure because it kind of gets you immunized for some of these choices we make and how much we fund the trading book with. With regards to your first question about tech and ops, So look, it's a mix of necessary and discretionary. We made the decision on the basis that, Well, first when we put our cost base at the start of the year, we had a materially higher inflation than in some areas, in Some geographies and some pockets than we anticipated for the year.

Speaker 1

And we felt that it would be adverse for certain customer outcomes if we needed to take more restrictive action on it. And this is putting it in the context that our 9 month year to date Reported cost is down 2% year on year, is down 2% year on year. So this is why we were willing to tolerate The continued investment in tech and ops. I just want to reaffirm what Noel said. We're absolutely committed to our cost discipline and we will be you know giving you visibility about how we're spending our money now in the future.

Speaker 1

Thank you, Joseph. Next question, please.

Operator

Our next question today comes from Jason Napier from UBS. Please accept the prompt to unmute your line and ask your question.

Speaker 1

Hello, Jason.

Speaker 6

Good morning. Can you hear me okay now?

Speaker 1

We can hear you, Jason.

Speaker 6

Thank you. The first one, please, on the $600,000,000 of losses on the hedge reset and risk management this quarter and the extra sort of $400,000,000 that's penciled in for Q4. I wonder whether you wouldn't mind adding a bit of color in terms of exactly what it is you're doing there, the payback period, you said sort of longer than 5 years. It feels like a downside risk hedge That's being put in place. If you could just talk about how much you might get the sensitivity down once all is said and done and just confirm that it really pays you if rates fall rather than And I support your revenues in the near term.

Speaker 6

And then secondly, we've had a busy week of Mainland Chinese bank reporting all of the majors at Mistara and forecasts and One of your peers wrote down there Mainland Chinese State with their Q3 results. I wonder could you update us please on where value and uses versus book value on VOCOM and how that process runs towards year end?

Speaker 1

Sure. Thank you, Jason. So first on the treasury losses, so a few things to share here. 1st is we see this as one of the multiple tools we have to manage our structural hedge and obviously to manage the risk in our balance sheet. 2nd, importantly, the losses themselves have been taken already into CET1, mostly last year.

Speaker 1

So these are already affected in our CET1. And this is why effectively they have a mild CET1 ratio benefit where we sit today. And then 3rd, as you indicated, Jason, we are looking to retrieve these losses in the NII line essentially over the next 5 years. So this is a reinvestment into either longer dated or higher yielding instruments by disposing faster disposing of lower yielding instruments to allow us to kind of move faster on our structural hedging of the balance sheet. If you wanted some sense of Kind of math, you could argue if we've taken €600,000,000 losses, it's about €100,000,000 loss additional NII every year for the next 6 years or so, which kind of gives you a sense of how we're looking at it.

Speaker 1

And it's indeed as part of our structural hedging, which means Part of how we're mitigating or protecting the balance sheet, mitigating risks of a rate downfall in the future. On your second question, Jason, about the Mainland China. So first, I can comment on Bocom's Q2 performance because as you know in our numbers We have 1 quarter delay, so the exercise relates to Q2. Our value in use in as of Q3 has a room of about $400,000,000 compared to our carrying value. So as look impairment is not a management discretionary decision, right?

Speaker 1

There's a rigorous accounting process and we'll just follow the process and based on their Q3 results we will evaluate those as we go into Q4 and that will be part of our end of year assessment. I think the important thing I want to share about BoComm is because it sits in significant investments and because we hold capital deductions, regulatory capital deductions against it. And as you can see from the slide on capital, dollars 16,000,000,000 capital deduction. It effectively means that any impairment on our holding of BoComm should it happen will have virtually nil CET1 ratio impact. And that's because any impairment will be compensated like for like by release The deductions of a similar amount.

Speaker 1

So therefore no implication on CET1. We'll also it'll have an implication reported profits, accounting reported profits, but We'll treat it as a material notable item and it will have no implications either on the way we calculate our dividend or our dividend payout ratio. So this is why at this stage, this is not a concern. We'll just follow the accounting rules as we do the VIU assessment.

Speaker 3

Jason, just for clarity, based on the impairment test we did at Q3, we have headroom against are carrying value. There is no impairment due at Q3, and we'll reassess it at Q4. But based on the Q3 results that BoComm issued a couple of days ago, those results at a headline level first side did not cause us any concern on our impairment test of Q3, but we'll reassess that at Q4.

Speaker 1

Thanks, Noel. You'll have the details in the ARNA in how we do the impairment testing for the value and use of Qualcomm, Jason, in case you need

Operator

Our next question today comes from Gurpreet Singh Sahi from Goldman Sachs. Please accept the prompt to unmute your line and ask your question.

Speaker 7

Thank you very much for Let me ask the question. Good morning, Moel. Good morning, George. So first one on loan growth. How do we see The areas of loan growth going into next year, we've done a good growth around mortgages, but they have been offset by shrinkage in the commercial book.

Speaker 7

So that's the first one. So in terms of medium term, of course, we are highlighting mid single digit. But specifically, as interest rates remain high, How is the borrowing appetite into next year? And then the second one with respect to the special dividend timing, the $0.21 Will it be paid by June or will it be announced towards the Q2 and paid later on? Thank you.

Speaker 1

Thank you, Gurpreet. So in terms of loan growth, look what we've observed so far is strong growth in Continued growth in mortgages. We said 11,000,000,000 year to date essentially in Hong Kong and the UK. That continued even this This despite softness in the housing market, but we remain competitive and we continue to support this business for our customers. So that is Definitely there.

Speaker 1

We're also seeing some loan growth in the unsecured space in our retail business. It will be smaller proportions. In terms of commercial, the reality is the main softness in loan growth in commercial is in Hong Kong. And this is what's driving the commercial overall number. The softness in Hong Kong has 2 parameters.

Speaker 1

1, the rate differential with Mainland China and as long as We have such a rate differential. It is expected to have Mainland Chinese borrowers continue borrowing onshore Mainland China rather than borrowing offshore because of the rate differential and that probably will not reverse in the next couple of years. But also too is some of the softness we've seen in the economic conditions in Hong Kong, which we start to see reversing and we've been encouraged by the policy measures that's been taken by way of supporting the economy. And if those materialize, we will start Seeing some pickup in this segment. Now outside this softness areas, we do still have strong Loan growth potential in growing areas in our geographies such as Southeast Asia, such as India, such as the Middle East.

Speaker 1

We even had growth in some of the Western economies. So that's you know that is happening. And quite importantly also I want to call out growth in trade. I called it out in the earlier kind of speech if you want, but traders bucking the trend for the Q1 where we've seen 3% growth in our loan book after several quarters of decline And that's encouraging. We'll obviously need to see how it evolves, but that's definitely encouraging.

Speaker 1

And if you look at it, most of that growth is in Asia, which means it's bucking the trend in Asia. And that's probably on the back certainly on the backdrop of now the trade between China and ASEAN has exceeded trade between China and Europe or China and U. S. And that obviously will benefit given our footprint in China and ASEAN. On the special dividend, Gurpreet, at this stage we're aiming for completion of Canada sometime in Q1.

Speaker 1

We will then have to go through due governance and due approvals before we do it. I think H124 is reasonable to expect, but it is obviously at this stage just a a matter of a process we need to go through. I think that's what I can say at this stage. As soon as well, we'll pay it as soon as we can, Goparit. That's what we say at this stage.

Speaker 1

Thank you, Goparit. Next question, please.

Operator

Our next question today comes from Manis Castello from Autonomous.

Speaker 8

Good morning. Thanks for taking the question. Can I probe you a bit more on the hedging that you've got in place? You've talked about increased hedging for the last couple of quarters. And you have this quarter, as you discussed previously, taken some losses The Helpershell portfolio to improve NII next year, but we lack a kind of an overall understanding of what you've got in terms of the hedge.

Speaker 8

And so my question specifically is how big is your hedge and what's the duration of your hedge so that we can do some modeling to understand how much protection you've got into 'twenty four and beyond? Thank you.

Speaker 1

Thank you, Manus. Very insightful question. We are intending to have much more disclosure around our structural hedge at the full year. We're planning to give you additional disclosures from the one we already give Today, which is the usual NII table with multiple rate shifts and over the 5 years that includes duration that includes yields on the structural hedge etcetera, which hopefully can allow you to model all of this. We're not ready to do it at Q3 it will be more appropriate to do it at the full year.

Speaker 1

I think what you should take into account is some of the information we shared at the half year, which is The hedge itself has allowed us to reduce our NII sensitivity at the back end of last year from $6,000,000,000 for 100 basis point down to now $2,600,000,000 over which you should add the Funding with the trading book sensitivity of 1.3. So that's giving you an idea of how much the overall hedge among other Contributors have supported the reduction of our NII volatility and our NII sensitivity to the downward pressure on rates. And I think you should definitely assume that it remains our intention at this phase of the cycle in rates to continue doing hedges as appropriate across all our balance sheets where we can find them. So more on that at the full year, Manus. Thank

Operator

Our next question today comes from Rahul Sinha from JPMorgan. Please accept the prompt to unmute your line and ask your question.

Speaker 4

Hi. Good morning, Norman. Couple of follow ups for me, please, if I can. I guess the first one is just around Slide 17, looking at the split of our NIM across your main subsidiaries. I'm just trying to understand the underlying NIM trajectory For the bank in the absence of any rate changes from here on.

Speaker 4

If you look at the UK bank, the ring fenced bank, obviously that's That margin has been under pressure this quarter, and a number of peers are obviously flagging the lag effect on deposit costs As well as the migration is going to have an impact in Q4. I was just wondering if you could give us a little bit color on what you think is the outlook for your business in terms of margin in the UK. And then I guess just linking it back to the group margin, which is, as you said, probably stable, But starting to come under a little bit pressure. The hyper LIBOR gap is obviously very narrow. Seasonally, I guess, hyper tends to go up in Q4.

Speaker 4

Let me take a step back and think about the overall margin trajectory. Would you say that In the absence of rate changes, the margin is stable or do you think there's a little bit more pressure sort of creeping in because of what is going on in the UK? Thank you.

Speaker 1

Sure. Okay. Thank you, Rahul. Okay. So let me unpack.

Speaker 1

There are quite a number of considerations here. So the first one is, I would kind of as always will encourage you to look at banking NII, because that will first, it's reflection of our rate sensitive earnings. And second, it will immunize you from some of the kind of business choices we make by putting more money into the trading to support more funding to support the trading activities or not. And that can create noise in NII versus funding of the trading book, which is NII related when you look at it from a banking NII perspective. Now talking a little bit on Q3 before I talk about the outlook.

Speaker 1

On the Q3 numbers, If you look at banking NII in Hong Kong, it was up 10%. Now this is not reflected in NIM. NIM is up 2 basis points, But essentially because a lot of that upside went into the funding of the trading book. But the Rate sensitive earnings in Asia and or you know Asian entity has grown 10% by about $300,000,000 So that's the first thing to observe. If you look at high board rates, Q2 to Q3 obviously they were up 75 basis points.

Speaker 1

You know when we look at Q4 to date, there's another something like 50 basis points baked in the average. So there is additional tailwind into Q4 from HIBOR which we'll obviously need to see how the next 2 months fair before we evaluate. If you look at the UK, so the UK NIM was up 16 basis points Q1 to Q2, down 8 basis points Q2 to Q3. The first thing I want to say is this is definitely not the trend here to be read. I think NIM is broadly stable from here for the next few quarters.

Speaker 1

Some of these moves are kind of idiosyncrasies in our market treasury management, not necessarily drivers of trends. So we were looking at it in the all as broadly stable. Obviously, continued facing Pressure on deposit costs. But as I just said earlier, at these rates, any additional rate hikes are expected to be passed through to customers. And this is what's been happening.

Speaker 1

So we've benefited from 75 basis point rate hike in pounds between Q2 and Q3, most of which has gone either to customers in the form of pass throughs, some term deposits, migration in the UK minimal, but some and then obviously asset margin compression in the U. K. So as you look forward, How can I kind of invite you to evaluate forward? First, I'm not giving guidance for 2020 For where the only guidance within 2024 is now is the mid teens ROTI. We will be giving more details at the year end.

Speaker 1

But if you want some indicators of how to think about it. 1st, think about it as we will continue facing the usual headwinds of Margin compression, but that probably is easing now having seen most of that compression in Q2 and Q3. We will continue to see pressure on deposits. Migration may continue. We've seen a pace of 1% per month in Hong Kong, kind of steady for the last 9 months that is likely to continue.

Speaker 1

And then So these would be the main headwinds. The tailwinds, so the tailwinds would be 1, the additional rate upside in Hong Kong from HIBOR, probably no further rate upside in the major other currencies. The tailwinds will be reinvestments of maturing structural hedges that have been put at lower rates and as they mature we reinvest them in higher rates and that will give us Additional tailwinds. And then look, the main tailwind, which we anticipate at some stage in 2024, but not yet, at least not for the next couple of quarters, but at some stage in 2024, is volume growth. When we start seeing volume growth, we will see the support for the NII in the medium term.

Speaker 1

As we've always indicated, mid single digit percentage point growth for our balance sheet is our mid term aspiration. And as and when this starts after the next couple of quarters of transition, this will give us the additional tailwinds. I suppose that's probably as much as we can say at this stage, Rahul.

Speaker 4

PLCs.

Operator

Our next question today comes from Perli Moll from KBW. Please accept the prompt to unmute your line and ask your question.

Speaker 9

Hello. Thank you for taking my questions. I guess just a couple of follow ups. The first one is on your hedge strategy because I guess you've basically in the disposal losses you've Essentially I guess brought forward some of the rolling of the hedge which I guess we haven't really seen so much in especially in UK banks. They tend to sort of use it as a Sort of pure smoothing mechanism as it were to just let the lower rates run off and then reinvesting but you seem to have brought forward that.

Speaker 9

So I guess the question is You know, does that suggest that you're not just using the hedge as a smoothing mechanism but is to sort of more Simply sort of traded as it were. Is that fair? I guess is the first question. And the second question, I guess it's really for Noel. I just saw on Bloomberg that you made a comment that we feel like the China CRE situation has bottomed out.

Speaker 9

I mean acknowledging that the Chinese government has taken steps to support the sector but the news flow still seems to be pretty negative and To the extent that there have been actions taken, they're probably not as large as maybe some of the market would have expected or hoped for a few months ago. So it's probably around tailoring the policy requirements in some of the Tier 1 cities. So I guess just what gives you the confidence that we have bottomed out.

Speaker 1

Perfect. Thank you, Perley. I'll take the first question and I'll invite Noel obviously to comment on your second one. So look, the hedge strategy, first, we have a number of tools at our disposal. We will use them as effectively and as you know, to domestically as we can to achieve what we want to achieve, which is number 1, reducing the downside sensitivity of our balance sheet to a reduction in rates and number 2, extending that reduction of downside as far out in time as possible.

Speaker 1

This strategy that we've used, which is disposing of existing low earning positions is one of these measures. So number 1 to remind you it does not have a CET1 impact, At least the loss does not have a CET1 impact because the loss has been taken capital mostly in 2022 already. So that gives us this flexibility on our capital. The second one is yes part of the hedge considerations is indeed allowing us to extend higher yields for longer rather than be, you know rather than kind of retain some of the lower yielding assets for longer than we wish for and give us additional protection. And the third is it's also risk management considerations.

Speaker 1

We will also look at How we use our RWAs and treasury portfolio and how we can optimize the utilization thereof and how we use combination of bonds and swap hedges and in fair value accounting relationships, etcetera. So there are all sorts of number of other considerations which we look at, but the outcome of which for the purposes of our bottom line is indeed giving us this runway. Now I need to point out we've done An exercise in Q3, we indicate that we intend to do another exercise to the tune of about $400,000,000 in Q4, But we do not look at this as a recurring activity, right. This is a kind of by exception occasional When risk management and performance justify it, we will do it. This is not meant to be a recurring quarter on quarter activity.

Speaker 1

I just want to be clear about that. We've done it last quarter. We'll do it next quarter. Anything beyond that we will give you indication, but it will be on a case by case and occasional basis. No one for the second question.

Speaker 3

Yes. On China CRE, my comments this morning were really about the massive policy correction that has taken place over the last 18 months in commercial real estate in China. It has really impacted very heavily the real estate market. Do I think that big negative correction in the market has been delivered. And do I expect further negative correction?

Speaker 3

No. I think what we're now into is the workout phase of that policy correction. Equally, I think I said this morning, I don't see a big swing back into positive policy territory for commercial real estate. I see it as fine tuning from this low base. So what I'm talking about is the market as a whole, the commercial real estate market in China, A massive correction down.

Speaker 3

I think we're at the bottom of that correction phase. And we're now in a gradual recline back out with possible policy tweaks taking place. But as you quite rightly say, Parekh, they're not going to be big swings back up In policy correction, there are going to be smaller policy correction taking place as we've seen in recent weeks. Now What does that mean for ECLs, for banks, both domestically and internationally? Well, those ECLs have and could still emerge over time.

Speaker 3

But I think the market itself has bottomed, and now we're in a period of sort of readjustment for the new norm. And I don't see a big readjustment back up. From our point of view on ECLs, I think we feel, as George has said, we've got good coverage ratios on the unsecured book. The 50% of our offshore book that is SOE related or POE related, We do not see that same policy correction affecting the SOEs the way it's affected the POEs. So we don't see Necessarily a downside on that at this stage.

Speaker 3

And on those POEs in that 50% I talked about, Those POEs are largely either secured or they're not in the residential sector. They're in CRE and other forms of the sector. So I think from our point of view, We feel well provisioned at this stage. It's not to say that there aren't potential problems on the horizon from an ECL point of view for the industry, We feel as though we're well positioned. But I suppose my bottom in comment was on the market as a whole, in that There's been such a massive correction.

Speaker 3

I think we're now in a gradual rebuild, but that gradual rebuild will take time. And there will be the potential for the industry to bear some further losses. And we are keeping a close eye on that and what it means for us. But we think we're well provisioned at Q3 level. We're probably going to take some more of our downside plausible downside scenario in Q4.

Speaker 3

But as George said earlier, we think that we've got the capacity within our overall guidance on ECL of 40 basis points to absorb any further charges we may or may not take in Q4.

Speaker 1

Thank you, Noel. Thank you, Berly. Let's move to the next question, please.

Operator

Our next question today comes from Rob Noble from Deutsche. Please accept the prompt to unmute your line and ask your question.

Speaker 10

Morning. Thank you for taking my questions. Just on the treasury sales, you've announced another potential SEK400 1,000,000,000 in Q4. Why not do them all in Q3? What's the advantage of waiting.

Speaker 10

If you're just going to realize a loss and do it now, why not just do them all now? Secondly, Just a little bit more on China. What's the sensitivity of the balance sheet to rates in China? And how concerned are you about the rate Central between China and Hong Kong, what are the moving parts of that differential on all of the businesses, not just the commercial side? Thanks.

Speaker 1

Thank you, Rob. So on your first point, I mean look this is a matter of phasing it in time so that we're doing it Thoughtfully, carefully we're evaluating the impact every time we do an activity. So, I don't think there's a we didn't put a cut off per se for Q3 and Q4. As you can see the numbers aren't mathematically or aren't kind of they don't follow a given symmetry. It's just a matter of where we are on the journey when we kind of cut off the books on the 30th September, but we carry this activity throughout and we look for The right market opportunities to do it.

Speaker 1

I think this is the way we look at it. In with regards to your second point, A couple of things I can share here, Rob. The first one is the rate sensitivity of China. So just to give you an indication, the impact of the China NIM on our HBAP or our Asia NIM is about 3 basis points. So the fact that we have some rate compression in China simply because of the policy rates compression, This has affected our overall Asia NIM by a couple of basis points.

Speaker 1

So that's the quantum or the magnitude given Obviously, the size and scale we have in Hong Kong versus the size and scale we have in Mainland China and other geographies. The second one to call out is that the rate differential we expect it to remain for a matter of many quarters, probably a couple of years, Which does mean that that offshore Hong well that mainland Chinese customers borrowing offshore in Hong Kong will probably remain subdued for the next couple of years because it's much cheaper for them to borrow at lower rates in RMB. And this headwind is likely to continue for the next couple of years. Now on the flip side, Again because of the rate differential, the growth in wealth that we observe in Hong Kong is obviously a positive and a beneficiary of Differential. So the fact that we're seeing more wealth buildup in Hong Kong, the fact that we're seeing more demand for our insurance products and capabilities in Hong Kong also reflects the fact that you know for mainland Chinese, for some you know some of them and subject to the quotas they're allowed to do etcetera, it is interesting.

Speaker 1

It's an attractive proposition to invest offshore because they're getting the rate pickup. So we're seeing the benefits of that when we talk about our insurance business in Hong Kong and our new business CSM, while we're seeing The Chairman's on the other side. Look all this at the end to say is we remain very PLCs. In the medium to long term on both Hong Kong and Mainland China, and we just need to see some of the short term difficulties play out specifically in Mainland China, specifically in the real sector until we recover and are able to see some of the momentum back on positive growth there. Thank you, Rob.

Speaker 1

Suggest we move to the next question.

Operator

We have time for one last question today from Andrew Coombs from Citigroup. Please accept the prompt to unmute your line and ask your question.

Speaker 11

Good morning. I'll ask a Couple if that's okay. Just a quick one. Firstly, you've reiterated the greater than €35,000,000,000 NII guidance. In the past, You talked about being comfortable with consensus, which is obviously above that 36.5%.

Speaker 11

So if I could just push you as to Whether you are still comfortable with consensus? And then second question, buybacks and how you're thinking about those. Obviously, a step change today going from 2 to 3 for the next quarter. Pro form a for the buybacks And for Advanced Retail, you're looking at a 14.2% core Tier 1 ratio, still within your target range. You've said 2024 ROTE similar to 2023, payout ratio for the dividend similar to 2023.

Speaker 11

So the only delta Seems to be loan growth where you're still talking cautious short term, but aiming for mid single digits and medium term. So When we're thinking about the buyback going forward, is it a trade off with that loan growth? So is it a case that if the loan growth goes to mid single digits, you're back CHF 2,000,000,000 whereas if it stays low single digit, you stay at CHF 3,000,000,000. Inception, how are you thinking about the buyback? Thank you.

Speaker 1

Thank you, Andrew. Okay, on your first question NII guidance, I can, yeah, I can reaffirm. We're still comfortable with the 2023 consensus. As you look into 2024, we haven't Given guidance yet apart from the mid teens ROTE, but I'd like to kind of just point out 2 things just to keep in mind. The first one is Again, banking NII would be a better guide of how our earnings will behave with rates.

Speaker 1

So look at NII in combination with the Funding cost of the trading book and immunize therefore your analysis from how much we end up channeling or not in terms of funding to the trading book activities. And then the second one just to keep in mind is the disposal of Canada and France, which will both contribute to an annualized $1,500,000,000 of NII, which obviously not be there as and when they go away, as and when the sale is complete. And then finally, balance sheet growth At some stage in 2024 where we kind of start resuming the expectation of our balance sheet to grow. That's I think in the broad sense how we should look at for 2024. Again, we're not guiding, but we're giving you some tools that you can do your analysis.

Speaker 1

In terms of buyback, So a couple of things. First, the reason we announced a SEK 3,000,000,000 buyback, certainly because we have the capital to support it, but equally because we have an extended period to do it. We mentioned that this is an intent to do it up to February results, that gives us 4 months. So I'll definitely encourage you not to look at SEK 3,000,000,000 as the new SEK 2,000,000,000. It is not.

Speaker 1

It is a reflection of the fact that we're aiming for a lot well, we have a longer period ahead of 4 months instead of 3, and we're aiming to see if we can get up to 3,000,000,000 during that period. You know, it's therefore kind of a Specific consequence of this length of the period that is ahead of us for that buyback. We you know Look, I continue saying it remains our intention to perform a rolling series of share buybacks As long as the capital support it, we look at our forecast and our capital Does our capital buildup does seem to be reasonably realistic in our forecast and therefore it remains our intention to do the series of buybacks. About the question of trade off between buybacks and loan growth, a couple of things. First, as you know the Proceeds of the sale of Canada will give us a buyback runway regardless of loan growth because that the gain, you know the Well, the proceeds less the priority use for special dividend will still allow for you know, a few $1,000,000,000 of additional buyback and irrespective of our loans.

Speaker 1

So that will give us runway for loan growth. 2nd, I just need to also highlight when we talk about mid single digit loan growth, we're not saying mid single digit RWA growth. Some of our loans specifically in the mortgage space, which is a big component for our loan growth, have lower RWA density and therefore benefit from lower RWAs and therefore our RWA growth is expected to trail loan growth you know kind of absent credit reviews. And therefore, we don't see that there is a competition between loan growth and buybacks. I think this is a fine balance between the 2 and the appropriate trade off between the 2.

Speaker 1

This is, Andrew, probably how much I can say at this stage to your question. Thank you very much. I'll move straight to the closing remarks. Thank you everyone for joining us today and for your questions. I want to end by reiterating that we've had a good 9 months.

Speaker 1

All of our businesses have been performing well. We have delivered an Annualized return on tangible equity of 17.1 percent when you exclude strategic transactions and we remain committed to tight cost discipline. We're investing in growth, while we're also supporting dividends and buybacks. And I will be looking forward to speaking with you all again soon. So have a good morning or afternoon, everyone.

Speaker 1

Thank you very much.

Speaker 3

Thank you.

Operator

Thank you, ladies and gentlemen. You may now disconnect.

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Key Takeaways

  • Year-to-date profit before tax was $29.4 billion, up $17.4 billion year-on-year, delivering an annualized return on tangible equity of 17.1% (ex-strategic items) and backed by announced $7 billion of share buybacks and $0.30 per share in dividends.
  • In Q3, revenue rose 40% on a constant currency basis to $16.2 billion, driven by banking net interest income of $11.5 billion (+$2.8 billion) and non-NII of $6.9 billion (+$3.3 billion); expected credit losses remained stable at $1.1 billion, costs were up 1%, and the CET1 ratio improved to 14.9%.
  • All global businesses grew: Wholesale Transaction Banking revenue was up 50% year-to-date, Wealth balances rose 12% quarter-on-quarter with $34 billion of net new invested assets, mortgages increased by $11 billion, and insurance new business CSM jumped 40% year-on-year in Hong Kong.
  • The treasury portfolio was reshaped by recognizing $600 million of disposal losses in Q3 (and an expected $400 million in Q4) to reinvest in higher-yielding, longer-duration assets as part of structural hedging, with minimal CET1 impact and payback primarily over the next five years.
  • Offshore Mainland China commercial real estate exposure stood at $7.5 billion (down $0.5 billion in the half), with $500 million of provisions crystallized in Q3 and a coverage ratio of 73% on impaired exposures; management views the market as having largely corrected but still requiring time for recovery.
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HSBC Q3 2023
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