HSBC Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 15 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings Plc's Q1 2023 results. For your information, this conference is being recorded. At this time, I will hand the call over to Mr. Richard O'Connor, Group Head of Investor Relations.

Speaker 1

Good morning, good afternoon, everyone. Before I hand over to Noel, I want to give a quick reminder of the reporting changes that have taken effect this quarter. Numbers in the presentation quarter. Today on an IFRS 17 basis and thank you to all those who attended. Our focus is now on reported numbers, that we will call out and specify no other items.

Speaker 1

Our global businesses are still the primary basis of our reported, Consensus hasn't yet fully caught up with all these changes,

Speaker 2

call. Thanks, Richard, and good morning and good afternoon everyone. And thank you for joining our Q1 results call. George is going to lead the presentation, but I'd like to make some opening comments. We've announced a strong set of Q1 results.

Speaker 2

We delivered a strong profit performance, which was spread across all our major geographies. All three global businesses performed well and cost discipline remained tight. In the Q1, excluding the gain on SVB U. K. And the part reversal of the impairment on the potential sale of our French retail bank, we delivered an annualized return on tangible equity of 19.3 percent.

Speaker 2

So our strategy is working. I'm also confident about the future for two main reasons. First, We have built a good platform for growth. We have a strong balance sheet, broad based geographic profit generation, a good combination of net interest income and non net interest income and a tight grip on costs. This growth potential was evident in the inflow of new invested assets of $22,000,000,000 in the quarter with a

Speaker 3

cumulative €93,000,000,000 over the last 12 months, which shows that our wealth strategy is continuing to gain traction. And you have my commitment that we will continue to drive strong performance for the rest of the year while maintaining cost discipline and investing in growth. The second reason I'm confident is the diversity and connectivity of our geographical footprint, where we have access to markets that are exhibiting good growth and return potential. I've seen firsthand the strong economic recoveries underway in Hong Kong and Mainland China. I've also visited the Middle East recently where I saw a strong economy that is well placed to continue to grow.

Speaker 3

And the U. K. Economy is also showing good resilience. And our HSBC U. K.

Speaker 3

Business is performing well. Investing in growth is critical, and we saw an opportunity to do that by acquiring SVB UK. For 158 years, HSBC has banked the entrepreneurs who have created today's industrial base. With the SVB U. K.

Speaker 3

Acquisition, We have access to more of the entrepreneurs in the technology and life sciences sectors who will create the businesses of tomorrow. We believe they're a natural fit for HSBC and that we're well and uniquely placed to take them global. You will have seen the recent hires that we've taken on in the U. S. In that regard, and we continue and we're going to continue to invest to grow this part of the business on a global basis.

Speaker 3

We announced that the sale of our French Retail Bank has become less certain due to significant interest rate rises in France and the related fair value accounting treatment impacting the capital position of the purchaser. We still believe it's right to sell the business, We are working with the buyer to try and find a solution, but the uncertainty on deal terms and timing has led us to reverse the impairment. Finally, we made 2 important announcements today. The first was the resumption of quarterly dividends with an interim dividend of $0.10 per share, which is the same level as the last time we paid a 1st quarterly dividend before COVID. The second was that good, Continued capital generation enabled us to announce a share buyback of up to $2,000,000,000 Our AGM on Friday will be an important milestone.

Speaker 3

As you know, resolutions have been tabled by shareholders on the strategy and structure of the bank as well as to fix the dividends. The Board has recommended that shareholders vote against Resolution 1718. I believe our Q1 results reinforce our recommendations and demonstrate that our current strategy is the fastest and safest way to improve returns. I'll now hand over to George to take you through the numbers.

Speaker 4

Thank you, Noel, and a warm welcome to all of you. Thank you for being with us on this call today. Let me begin with the Q1 highlights. Profit before tax was $12,900,000,000 up $9,000,000,000 on the Q1 of 2022 on a constant currency basis. This was driven by an 8.6 $1,000,000,000 increase in revenue, which includes $2,100,000,000 from the part reversal of the impairment relating to the potential sale of our retail banking operations in France and a $1,500,000,000 provisional gain on the acquisition of SVB U.

Speaker 4

K. Credit performance was benign with expected credit losses of $400,000,000 Costs were up 2% in the first quarter against Our 2023 target of limiting cost growth to circa 3% on a constant currency basis and excluding notable items and hyperinflation. Our annualized return on tangible equity was 27.4% or 19.3 percent excluding the gain on SVB UK and the part reversal of the impairment on the potential sale of our French retail bank. And as Noel said, we're providing strong capital returns in the form of the first quarterly dividend since 2019 of $0.10 per share and a share buyback of up to $2,000,000,000 which we expect to start after the AGM and complete in around 3 months. Going into more detail, net interest income of $9,000,000,000 was up $2,900,000,000 or 47% on the Q1 of 2022 and was stable on the Q4 on an IFRS 17 basis.

Speaker 4

Non net interest income of $11,200,000,000 was up $5,700,000,000 which includes $3,600,000,000 of notable items in the Q1 and was driven by strong performances in Markets and Security Services and in Wealth. Lending balances increased by $32,000,000,000 in the quarter on a constant currency basis. This was made up of $25,000,000,000 from the reclassification of balances associated with our retail banking operations in France and $7,300,000,000 from SVB U. K. Deposits also increased in the quarter due to the same factors.

Speaker 4

If we excluded these items, lending and deposits were both stable. The tax charge of $1,900,000,000 included a credit of $400,000,000 and the CET1 ratio was 14.7%, which was an increase of 50 basis points on the 4th quarter and included a 30 basis point gain relating to the part reversal of the France impairment and the SVB U. K. Acquisition. As Noel said, all of our global businesses performed well.

Speaker 4

This slide gives you the evidence for that. Wealth and Personal Banking had a strong quarter with revenues up 82%. Within this, Wealth was up 13% driven by the economic resurgence in Asia and increasing traction from the investment we've made in digitization and in people. Personal Banking also had another good quarter, up 64%, benefiting from our strong deposit franchise. Across both commercial banking and global banking end markets, The global payment services had revenues of $4,000,000,000 which was an increase of 176% on the Q1 of 2022.

Speaker 4

Global Banking and Markets also performed well overall. Markets and Securities Services revenue, in particular, were up 12% with a strong performance in foreign exchange. Reported net interest income was $9,000,000,000 which included $1,400,000,000 of interest expense due to the funding costs booked in Corporate Center to fund the trading books. This was offset by $1,400,000,000 of non net interest income reported in Corporate Center. On a reported basis, the net interest margin was up by 50 basis points on the Q1 of last year and up by 1 basis point on the 4th quarter.

Speaker 4

For the avoidance of doubt, our net interest income guidance is unchanged from our 2022 full year results. On an IFRS 17 basis, we expect to achieve net interest income of at least $34,000,000,000 in 2023. This is equivalent to at least $36,000,000,000 of net interest income on an IFRS 4 basis, which was what we told you in February. Our current view is that the things we told you about net Interest income at our 2022 full year results remain unchanged. Non net interest income of $11,200,000,000 was up substantially by $5,700,000,000 which was a combination of $1, $3,600,000,000 of notable items in the 1st quarter 2, Global Banking and Markets Trading Income Increase of $400,000,000 3, a $1,300,000,000 increase in corporate center income for funding Global Banking and Markets Trading activity and 4, other income which grew by $200,000,000 and included higher wealth revenues.

Speaker 4

Fees were broadly stable compared to the Q1 of 2022 with a good payments fee performance partially offset by lower wealth fees. However, net new invested assets in the quarter were $22,000,000,000 $93,000,000,000 for the last 12 months, which bodes well for future growth. I called out the global business revenue highlights earlier, and there is a detailed non net interest income breakdown on Slide 17. Our credit performance in the quarter was benign with a €400,000,000 charge for expected credit losses, which was $200,000,000 lower than the Q1 last year. This reflected a favorable shift in the probability weightings of our economic downside scenarios as well as low Stage III losses.

Speaker 4

China CRE was also benign with the small charge relating to technical adjustments to 2 customers. We saw no China CRE defaults in the quarter for the first time since the Q4 of 2021, though there were also limited repayments. We are encouraged by the Q1, but there are still downside risks, So our 2023 guidance remains unchanged at a charge of around 40 basis points of average gross customer lending, including held for sale balances. We will review this at our interim results. On a constant currency basis and excluding notable items, costs were up by 2% in the first quarter, once we also exclude the impact of retranslating prior year costs percent.

Speaker 4

As you can see, most of the spend was on technology. We remain committed to limiting cost growth to approximately 3% in 2023 on that basis. As I shared at the year end, one of my top priorities is cost discipline. Equally, I also shared that another of my top priorities is to support our businesses to deliver growth and returns. The acquisition of SVB U.

Speaker 4

K. Was an opportunity to do that. This is expected to result in incremental cost growth of circa 1% to group operating expenses, the majority of which is the acquired cost base of SVB U. K. Together with some additional investment in the U.

Speaker 4

K. And other geographies. And this will be in addition to our 2023 target of limiting cost growth to circa 3%. Finally, at year end, we also flagged $300,000,000 of expected severance costs this year. A large portion of these severance costs are now expected to be incurred in the second quarter with the cost benefit starting to come through in the second half of this year.

Speaker 4

Moving on, we usually include information on customer deposits in the appendix, But we have moved it up to the presentation this time because we appreciate the current interest. Overall, customer deposits are stable year on year and quarter on quarter. Of the $1,600,000,000,000 of deposits we hold, half are invested in high quality liquid assets, which gives you a sense of our strong liquidity position. This is a historic feature of the way that HSBC manages its balance sheet and it has not changed. Around 40% of our high quality liquid assets are held in cash or cash equivalents.

Speaker 4

And there are only around $1,400,000,000 of unrealized losses in our held to collect portfolio, which is down from around $1,900,000,000 at the end of 2022. Three main points on capital. 1, our CET1 ratio was 14.7%, up 50 basis points on the previous quarter, 25 basis points of which was from the reclassification of our French retail business from HealthForce Inc. Pending the outcome of negotiations for our French retail bank, there would be a commensurate reduction to CET1 in the event that the deal closes. Number 2, as you know, our business in Canada remains classified as held for sale, And we now expect the transaction to complete in the Q1 of 2024 as we work with the purchaser to ensure a smooth transition.

Speaker 4

We continue to expect to pay the potential special dividend of €0.21 per share in the first half of 2024. And as previously indicated, we expect almost all excess capital from the Canada transaction accruing into CET1 to be returned to shareholders primarily through a rolling series of share buybacks in 'twenty four and 'twenty five that would be incremental to any existing buyback program at that time. And number 3, share buybacks remain an active part of our capital management plans, We will update you on our assumptions for share buybacks in 2023 and beyond at our interim results. So in summary, This was a strong quarter, there was a strong profit performance, net interest income was stable, Strict cost discipline was maintained, which I told you would remain a key focus area for myself and the management team. Our credit performance was benign amid a more positive economic outlook.

Speaker 4

We are starting to see the impact of strong economic rebounds in Hong Kong and Mainland China, and our wealth strategy is gaining traction. And I am pleased there were strong capital returns, a quarterly dividend of $0.10 per share and a share buyback of up to $2,000,000,000 which we expect to start after the AGM and complete in around 3 months. As Noel said, we are clearly on track to meet our returns target for 2023 onwards. And this upward trajectory would give us substantial distribution capacity including of course the potential proceeds from the Canada transaction. With that, operator, can we please open it up for questions?

Speaker 4

Thank you.

Operator

Thank you, Mr. Elhederi. Switched off. Our first question today comes from Joseph Dickerson with Jefferies. Your line is open.

Speaker 5

Hi, good morning gentlemen. Congrats on a good set of numbers and what was the easiest environment in Just a quick question on the buyback. You've been very precise in discussing that you would expect the buyback over 3 months. Is this something now we can expect to be a regular quarterly event given the strong capital generation, not to mention Canada leading early next year or is it going to be slightly more erratic?

Speaker 3

Joe, thank you for your question. I'll ask George to answer that. Thank you.

Speaker 4

Thank you, Joe. Yes, indeed. So first, we are hoping to achieve $2,000,000,000 in the next 3 months. In the past, we've managed to achieve between $1,000,000,000 $1,500,000,000 in a quarter. Obviously, we have 5 months to complete this program.

Speaker 4

We are hoping to complete it in 3 months. Going forward, we're certainly considering as well as the Canada sale proceeds in 'twenty four. And Joe, it remains our intention to return excess capital, including the Canada proceeds if the conditions justify it. Thank you, Joe.

Speaker 3

Great. Thanks, Patrick. Next question, please.

Operator

Thank you, Mr. Elhedari. Our next question today comes from Raul Sinha with JPMorgan. Your line is open.

Speaker 6

Good morning, gents. Thanks very much for taking my questions. Maybe just to follow-up on that capital return question firstly and then another one on When we look at your headline capital ratio, obviously, it's very strong and quite a significant pickup over the last couple of quarters in particular. I guess there are few adjusting items in there. Should we kind of exclude the French disposal, That's a reversal from the headline ratio.

Speaker 6

And then I guess if we exclude the share buyback, we kind of get back in your range So I guess the question is, how much RWA growth do you anticipate the business to acquire over the next sort of 12 months and linking to your loan growth outlook as well. I'm just wondering if you could give us some color on RWA Apple, you might be able to get it in the remaining part of the year. Your guidance on asset quality still implies quite a significant tick up in provisions given the very strong performance in Q1. So I guess the question really is, are you guiding us to something specific In terms of the 40 basis point provision charge? Or is that just an element of conservatism built in to your guidance there?

Speaker 6

Thank you.

Speaker 3

George, do you want to take both of those? I can always add something to the asset quality later, but you take both first.

Speaker 4

Sure, Nolan. Thank you, Raul. So on your first question, Raul, I think it is prudent to adjust for the French part reversal of the impairment and so far that capital is concerned. As indicated, if we do reach Transaction, there is a likelihood of a commensurate kind of capital reduction taking place. Now just to remind you, our capital target operating range is 14% to 14.5%.

Speaker 4

And we expect this to be reviewed slightly lower in the medium to long term. And as we do our capital return projections or our share buyback projections, We look at our medium term capital outlook and compare it to that range. And this is and obviously, cautiously compared to that range. And this is what's giving us Now the flexibility to announce the share buyback and to consider additional buybacks going forward. As regards RWA growth in line with loan growth, it has been subdued in the Q1.

Speaker 4

It may remain subdued for another quarter. We may see some pickup, particularly with the Hong Kong and China bounce back. But again, for this year, we have not given guidance on loan growth, recognizing some of the economic conditions. We do remain committed for medium term or mid single digit growth in loans for the medium term, Question with regards asset quality, I would lean towards your latter comment, Joe sorry, Rahul, We are baking in some conservatism or we think at this stage the full year guidance, which we have retained unchanged from February is now leaning towards conservative. Just want to highlight some tailwinds.

Speaker 4

Certainly the situation in the U. K, the possibility that we may dodge a recession is a tailwind. Equally, the recovery in Hong Kong and Mainland China following the opening up of the borders and resumption of Activities and trade is a tailwind, but at the same time and obviously the China real estate has shown some positive signs both from the economic standpoint as well from the policy measures. But the same at the same time, we wanted to remain cautious. There are a number of refinancing taking place in Q3 in the China real estate portfolio commercial real estate portfolio, which we would like to stay cautious on.

Speaker 4

And we continue to watch some of the U. K. SME space, in particular those heavily reliant on discretionary consumer spend Before we revisit the guidance. We intend to revisit this guidance at the H1.

Speaker 3

Just one additional comment from me please, if I can. You'll notice on the capital schedule, I can't remember what slide it was, but there's a capital walk on CET1. And in there, you'll see that we've accrued dividends of 50% of the profit generation in Q1. And if you do the maths on that, the accrual on dividend is higher than the $0.10 that you've got In the Q1 declared interim dividend. So we're accruing capital distribution at a higher rate dividend distribution at a higher rate than the payment of the $0.10 So that's just factored into our CET1 ratio as well.

Speaker 3

Thank you. Next question, please.

Speaker 7

Thank you very much.

Operator

Thank you. And the next question today comes from Manas Sinha with Autonomous. Your line is open.

Speaker 7

A couple, please. On that slide you were talking about, Noel, about the RWA walk, I noticed that The risk weighted assets from Silicon Valley just short of £10,000,000 which seems quite high relative to the loans that you've taken on. I wondered if you could Share with us what the nature of those assets is and give us some indication about asset quality within the Silicon Valley Bank acquisition, What you've seen so far? And then secondly, with the thought to the structure of the group, you've obviously showed some willingness to make some acquisitions recently And the disposals where possible. I just wondered if there will be any interest in further news.

Speaker 7

In particular, I'm wondering if there will be anything around some of your business Such as insurance manufacturing, which you might think about being on core to the group going forward.

Speaker 3

Thank you. Thanks, Venice. Just on the asset quality of SVB, everything that we've seen since we bought the business, I don't know, Lost track of time, must be about 6, 7 weeks ago now. It's been a busy quarter. Everything we've seen reinforces the view that we had at that weekend when we did Due diligence, the book was a good quality book.

Speaker 3

We've seen no nasty surprises. We did do a bit of mark to market on acquisition accounting, But that was evident to us when we did due diligence that weekend. George can give you a little bit more detail on that. Well, fundamentally, the asset quality of the SVB book is as we expected it. The team have done a good job in building that business over the past 14 years.

Speaker 3

They've got good client relations, good quality book and good business development potential. And on the back of that, we decided to Invest in putting more people on the ground in some of the key markets around the world that have strong technology and life science centers to take that business model not just to the U. K, but to take it globally. So we're invested in that as well. So no nasty surprises on that.

Speaker 3

And then in terms of other acquisitions that we may consider or M and A activity, I mean, I think the insurance business is a key component of the wealth proposition that we have. We have a very profitable insurance business in Hong Kong. It's a combination of manufacturing and distribution. The team have done a good job in building out the product lineup in Hong Kong over the past few years to put us back into a market leading position in Hong Kong. And we get access to the full value chain.

Speaker 3

One of the challenges we've often faced in the past is getting full recognition of that value as a bank shareholder in an asset in an insurance manufacturing business. But you can rest assured the economics of that business are very strong. And we've got a market leading position. So We obviously, like all businesses, keep the strategy under review. And if we think there's a better position to take, we'll take it.

Speaker 3

But at the moment, we're pleased with the way the insurance business is performing. George, was there anything else you wanted to add?

Speaker 4

Maybe just getting some of the math. So we acquired a loan book that is just shy of £6,000,000,000 that's about $8,000,000,000 We've acquired $10,000,000,000 of RWAs. So if you consider those loans and some of the additional RWAs on treasury books, operation risk, etcetera, you kind of land on these numbers. And Manus, we also acquired $1,500,000,000 of capital after the fair value adjustments. So you're talking about effectively a 15% CET1 ratio business that we acquired.

Speaker 4

So we think it is where it should be.

Speaker 3

Thank you. Next question, please.

Operator

Thank you. And our next question comes from Omar Keayin with Credit Suisse. Your line is open.

Speaker 8

Omar, hi.

Speaker 3

Good morning. Thanks

Speaker 9

Hi, thank you very much for taking the questions. I just had a quick question on rate sensitivity. And if I look at your rate at the end of 'twenty two. It looks like you've been quite purposely bringing down your rate sensitivity on the year 1 view. And I was hoping you could perhaps give us a little bit of color of the direction that Color about that respect would be really helpful.

Speaker 9

Thank

Speaker 3

you. George, do you want to answer that?

Speaker 4

Sure. Thank you, Omar. So we At the end of 2022, the rate sensitivity on the downside, 100 basis point scenario, was reduced from Around €6,000,000,000 at the half year to around €4,000,000,000 The That €2,000,000,000 reduction for NII sensitivity reduction, 400 basis point is for about a third of it justified by the structural hedges that we started putting in place or that we continued putting in place as of last year. And 2 thirds of it Is due to the fact that we are at just higher level of rates and therefore, we have less convexity on the negative convexity on the downside. If you look into Q1, we have not published a revised rate sensitivity, but we continued the trajectory of our structural hedges.

Speaker 4

Now just as a reminder, structural hedges will reduce somewhat our rate sensitivity and our target is to take that $4,000,000,000 in the medium term to circa $3,000,000,000 Well, and we are on that journey. We certainly have not I think I've addressed your points actually, Omar.

Speaker 3

Yes. Excellent. Thanks, George. Thanks, Omar. Next question, please.

Operator

Thank you. The next question is from Perley Ma with KBW. Your line is open.

Speaker 3

Hi, Perley. Thank you.

Speaker 10

I've got 2 questions. The The first one is, well, obviously, the big day was very strong and a lot of it comes from non interest income. And it appears that a lot of it is from commercial banking and maybe some from Global Banking and How much of that do you think is sustainable? Presumably, you wouldn't encourage us to annualize the whole lot. How much of that do you think is sustainable?

Speaker 10

And secondly is, I guess, on the ATM on Friday, so I guess a lot of the attention on Friday around the debate you are having with Ping An. And they obviously recently published an announcement that made some critiques, especially around your cost income ratio and royalty. Well, you've obviously printed very strong numbers today. But in terms of you have guided to a lot of it already, especially around POTS. And I'm sure you've also been communicating with them anyway.

Speaker 10

So why do you think those critiques were still made?

Speaker 3

Okay. I'll deal with the second one later. Sir, I'll ask George to deal with the non NII first, if

Speaker 4

that's okay. Sure. Sorry, we're expecting many of you will adjust your full year numbers to reflect our Q1 outperformance, and that's a fair assessment, Perni, but I'll caution you not to annualize Q1. So if I just unpack it, The non NII relating to the funding of our trading activities, dollars 1,400,000,000 It's fairly reasonable to assume this number will annualize. The wealth business, obviously, with the outlook improving in wealth, fairly reasonable to assume we will see regain traction And bounce back in particular in Hong Kong, whereas some of the other activities such as the foreign exchange trading outperformance, I would caution you not to annualize this number and just to bake it in as a Q1 outcome.

Speaker 4

And then Q2, Q3, we'll see how they fare.

Speaker 3

So just on that and on the Wealth performance, you said most of the non NII was CMB and GB and M. I think it's also fair to say In WPB, the Wealth business performed well in Q1. Its revenue was up 13% in Q1 relative to Q1 last year. So So I think what George is saying is I think we've seen a recovery taking place in that wealth revenue. We're not expecting that to just be a Q1 phenomenon.

Speaker 3

That is something that will continue in Q2 and Q3 and Q4. But it's still early days to predict whether the 13% is an annual number or it's higher than that or lower than that. So But we don't expect it to disappear in Q2, Q3 or Q4. So there should be a level of annualization on that as well In the WPB non NII line. And with respect to the AGM comment, look, I think we've said for a while that We believe the safest and fastest way to achieve higher returns, better performance, Better dividends and capital generation was the existing strategy.

Speaker 3

I think the Q1 results provides A lot of evidence that, that is the fact, that, that is the best way. We guided the market Over the last 12 months to a 12% plus ROTE. I did emphasize at the year end that we should focus on the plus, not the 12%. And I think you see in Q1, even excluding the notable items, we've done a ROTE of 19.3%. I would just draw attention to the fact that in that ROTE of 19,300,000,000 there is a tax credit, and George can probably cover that as well.

Speaker 3

Our tax credit is not something that will repeat every quarter. But even if you adjust for that, it's still a very healthy return on tangible equity. So I think it's in the what we're focused on is driving performance on behalf of all our shareholders. And we believe Doing what we've done is the best way to get improved returns, improved performance rather than some more radical corporate restructuring action. So we believe Q1 is strong evidence of that.

Speaker 3

But George, you just want to clarify the tax situation.

Speaker 4

So we've basically shown $1,900,000,000 as a tax charge, which is an effective tax rate of 14%. But I just want to caution you that 3.2% relate to the provisional gain on SVB, which is a non taxable item And another 3.3% relate to the release of provisions for uncertain tax provisions, which is also a one off item. So therefore, if you adjusted for those 2, we still expect a 20% ETR guidance for the rest of the year.

Speaker 3

Thank you. Next question please.

Operator

Thank you. The next question comes from Andrew Combs with Citi. Your line is open.

Speaker 11

Good morning. One strategic question and then one numbers question. On the strategic question, if the proposed French retail So no longer goes ahead, what would be the plan? Would you get back on the block again? Or would there be a plan to reabsorb it into the border HBC Group, don't you think you can sell plans for France given that sale process and where it got to?

Speaker 11

Secondly, on costs, you've actually had a very good cost trend this quarter. You're down 2% year on year on a constant currency basis, and yet you're still guiding to 3% cost growth or 4% with SVB UK. So is this a timing issue? Is it a case of the wage inflation come through from Q2? Anything you can elaborate there?

Speaker 11

Thank you.

Speaker 3

Two good questions and George will cover the second one. I'll cover the first one. I think Listen, we still believe that a sale of the French Retail business is the right strategic outcome. That business probably has a stronger future in another purchaser's hands. However, we have been in discussions for a few weeks now with Current buyer to try and overcome the challenge they have on their acquisition accounting impacts on their capital base.

Speaker 3

We'll continue that dialogue. We're hoping we can reach a mutually agreeable settlement with them on that, But we can't be guaranteed of that outcome. We have to consider what is financially the right decision for all shareholders. And it's hopeful that we can reach an agreement, but it's not guaranteed. In the event we can't, then I still think We'll continue to run the business.

Speaker 3

But I still think over time, we wouldn't see that as a long term strategic hold. But we'll have to wait and see what happens thereafter. We're very much focused on trying to reach an agreement with the current buyer to bring that transaction to a close. So that's the update I have for you. On cost, I'll hand over to George.

Speaker 4

Sure. Thank you. Thank you, Noel, and thank you, Andrew, for the question. So our reported costs on a constant currency basis is down 2% Q1 last year to Q1 this year. If you adjust for notables And remember, last year Q1, we had $450,000,000 of additional cost due to the CTA program.

Speaker 4

So So if you extract that notable item from last year's base, our reported cost adjusted for notables will show us up 2% Q1 to Q1. This is the basis on which we're measuring ourselves for this year. And it's on that basis where we would We are targeting to achieve a 3% annualized number where our quarter one basically is coming in at 2%. Now why from 2% to 3%? Just want to highlight a few things.

Speaker 4

The first one is we still haven't incurred by and large the severance costs which we announced at the year end and now we expect to incur the majority of it in Q2 this year. And the second element just to highlight is that some of the pay increases have only been factored partially in Q1 starting March and will start kind of being fully affected in from Q2 onwards. And this is why our 3% target for the full year is where it is. And as you said, Andrew, just for avoidance of any doubt here, the acquired cost of SVB and some of the additional investments we need to do there We'll add another 1% to that 3% target.

Speaker 3

So just a couple of additional comments from me. On the That reconciliation between the headline reporting number and the cost target, what we're trying to do is be very straightforward and not try Bake in what was a CTA last year into the cost base of this year. So we're adjusting down The prior year reported number for the notable CTA last year, so that the cost target of 3% is on an apples and apples basis with the cost base of this year. So we're not looking to take an easy option on that. We think it's the right thing To do.

Speaker 3

But as we say, we're 2% against the 3% target in Q1. And then on SVB, I just want to clarify as well. The SVB business we bought, we acquired a cost base with that and we acquired a revenue stream. And that revenue stream was in excess of the cost base. So We've acquired a positive P and L that was contributing, if I remember correctly, around about €80,000,000 to €90,000,000 of PBT.

Speaker 3

So although we've acquired 300, sorry, we've acquired The majority of the 300 is the acquired cost base of SVB. It is a profitable cost base.

Speaker 4

And Andy, just to finish off, we provided a reconciliation on Slide 30 to show you the walk from reported cost to our cost target, And we will be showing this slide every quarter.

Speaker 3

Thank you. Next question please.

Operator

Next question comes from Guy Savage with SE Therabists, Zane.

Speaker 12

One on net interest margin and one back on SEB. So On NIM, I guess the U. K. Ring Funds Bank did quite a lot of the heavy lifting this quarter, allowing for 1 basis point sequential NIM growth. As we look ahead, perhaps that tailwind stays at least in Quantum.

Speaker 12

So is that going to make it tricky from here to deliver NIM sustainability or is the drop in HVAP and the headwind from deposit mix in particular likely to fade in your view to allow for some sort of stable NIM backdrop? And then the second question on SVB. In addition to the acquired cost base, you flagged incremental investment spend and plans to build the business outside the U. K. So could you talk about sort of associated revenue ambitions and what sort of time frame You expect a steady noticeable uplift there.

Speaker 12

I mean, sort of how big a shift in that $80,000,000 to $90,000,000 PBT reference Could we see of SEB Inside HSBC with that incremental investment? Thank you.

Speaker 3

Okay. Thank you. I'll take the second in a moment. I'll ask George to cover the NIM please and U. K.

Speaker 3

Ring fenced bank.

Speaker 4

Sure. Thanks, Norde. Thanks, Guy. So indeed, you did call out the Headwinds, the possibility of headwinds in the UK, obviously there may be still 1 or 2 rate hikes for which we will be passing most of that to customers through pass through rates. And we do see continued headwinds in Hong Kong with Around 1% per month migration into term deposit with the mix now at 25% term deposits across both our entities in Hong Kong.

Speaker 4

This being said, we also have tailwinds. The first one is We still have a strong momentum from Q1, which we're carrying over. The second tailwind is HIBOR normalization. I mean, just for reference, In Hong Kong, HIBOR and exchange fund bills rates in Q1 were 6535 basis points lower on average than where they were in Q4. And that was a major headwind for us in Q1.

Speaker 4

We are seeing now over the last Few weeks, we've been seeing normalization in those rates. If we continue to see normalization, and just for a reminder, we're about 200 basis points off their equivalent rates in dollars. If you continue to see normalization, this will provide us material tailwinds in the Hong Kong base. And the other tailwind is our resilient deposit and loan base. We continue having stable deposits and loans despite some of the competitive pressures.

Speaker 4

And we continue to aim for mid single digit growth in both In the medium term, which should give us some supportive tailwinds.

Speaker 3

So just to reinforce what we said at the full year results in February. We said to we noted the guidance that was in existence when we reported in February. And we said we were not uncomfortable sorry, with the consensus. We noted the consensus that was in existence in February. And we said we were not uncomfortable with where consensus was.

Speaker 3

We still have that view. The only adjustment you need to make NII is for the IFRS 17 adjustment. Everything else remains, as we said in February, that The guidance that existed at that point in time, we were not uncomfortable with it. The same is true today. Just adjust for IFRS 17, Which is around about a $2,000,000,000 adjustment from IFRS 4 to IFRS 17.

Speaker 3

That's the only change that needs to be made based on what we've given you as an update today. And then on SVB, we acquired Sorry, we recruited 40 people over 40 people in the U. S. To build out our SVB capability in the U. S.

Speaker 3

It will we did not bring a book with them, purchase a book. So they will be in build out mode. So there will be a payback period on that investment. We think it's a relatively short payback period based on the quality of people we've hired. We're looking at other geographies around the world.

Speaker 3

We think it's a sensible and modest investment to do that organically, And we're pretty confident on the payback. We'll be relatively short. We'll provide more details once we complete that build out. Hopefully, by the half year, we'll be able to give you more information. So there will be a profit drag to a degree probably in the 1st year, 18 months.

Speaker 3

But then I think it will be back into profit territory even on those organic build out strategies. But we'll give more of an update at the half year. I think strategically, it's absolutely the right thing to do for the medium term. This is a sector of the economy that is critical for all geographies and has huge growth potential on revenue. Thank you.

Speaker 3

Next question please.

Operator

Thank you. The next question comes from Rob Noble with Deutsche Bank. Your line is open.

Speaker 13

Hi, Rob. Most of my questions

Speaker 8

If we just talk about the LCR, it's relatively low in the European context, obviously, the deposit base is

Speaker 6

a different kind of structure. So you're

Speaker 8

happy you're running with that level, the medium term going to be uncertainty in the market? And how do you expect the Regulation or approach to liquidity to change given what's happening in the U. S. Thank you.

Speaker 3

George, do you want to handle that?

Speaker 4

Sure. Thank you, Rob. So we don't target LCR. We are continuing to target medium term Single to mid digit loan growth in our portfolio, and we obviously continue to cherish deposits and attract and continue wanting to attract deposits. The LCR would be an outcome.

Speaker 4

I think insofar that we look at our liquidity management, it's the high quality liquid assets ratio that we look at. It's the cash and cash equivalent within it that we look at. And in terms of loans, again, if the short term is Somewhat subdued in particular in Hong Kong. In the medium term, some of the bounce back and some of the trade bounce back that we're seeing as well may support that loan growth ambition in the medium term.

Speaker 3

And I think on the regulation impact, I think we have to wait and see What the various regulators around the world do on regulation. But I think the way I look at it, the primary responsibility for running a prudent balance It is on the management and the Board of a financial institution. That's a responsibility we've taken seriously throughout our history. Our high quality liquid assets has been a feature of our heritage. Our high quality cash and cash equivalents has been a feature of our heritage for many decades.

Speaker 3

So we put the primary responsibility on liquidity management on ourselves, and then we'll see what the regulatory environment does as a consequence of some Some of the recent changes, but thank you. Next question.

Operator

Next question is from Aman Rkar with Barclays. Your line is open.

Speaker 14

Aman, hi. Good morning, Noel. Good morning, Noel. Good morning, George. So I just need to come back to revenues.

Speaker 14

Both Both your net interest income and your non interest income are performing really well in Q1. And they are annualizing at levels that would suggest pretty material upside to market expectations for both of those lines. Your net interest income is annualizing

Speaker 2

north of $36,000,000,000

Speaker 14

on the Q1 number. Your guide is obviously greater than 34%. I appreciate there's lots of moving parts here. But I guess to be more specific, Noel, in terms of your commentary around consensus for

Speaker 2

full year and

Speaker 14

now, there's a kind of 1 point $7,000,000,000 gap between where the Street is and what you're guiding for, Street's at $35,700,000,000 It doesn't actually sound like You see much downside to that consensus number at 35.7 Unless there's something here around term deposit mix or it feels like there's a lot of conservatism in that NII guidance or there's something I'm missing. So Can you help us with that? And then secondly, on the noninterest income, I totally appreciate your markets business might have over earned in Q1, but You are also pointing towards a Wealth Management business that's trending higher and underlying momentum in your fee business. As you talked about strategic There's a full year behind that. So like to what extent is that revenue number an over earn?

Speaker 14

Or Is this the kind of level that we can expect to crank out on the year because this is well ahead of where the Street is? Any color you can give us there would be really helpful. Thank you.

Speaker 3

Aman, two good questions. And let me just clarify what I said about what we said in February. I think you're right on your math. So I think If you go back to what we said in February, there was we talked about 36 plus and when people were Talking about RNII, they were sort of annualizing it to about 38. And the consensus was around 37 to 37.5.

Speaker 3

And I think we said we were comfortable with that. So I think if you go back to then, we sort of said, yes, we're sort of comfortable that consensus had a calculation on the plus bit of the £36,000,000,000 that put it sort of north of £37,000,000,000 That was a roundabout consensus back then. And what I'm saying to you now is the only thing you need to adjust for is IFRS 'seventeen, which takes about £2,000,000,000 off of that. So we're talking about £34,000,000 plus and that therefore would put you north of £35,000,000,000 So I think what we're saying is there should be we're sort of saying the Street has probably got NII around about the right place back in February of last year. And we're saying there's no need to change what the street is.

Speaker 3

You only got to do the mechanical adjustment for IFRS 17. Hopefully, that helps. And then George, I think, do you want to just come back on the non NII? Because I think You're right. There's elements of our non NII performance in Q1 that George is saying annualized.

Speaker 3

There are just some elements that are saying It may be unwise to annualize them fully for some of the trading income, but George, you just want to re clarify what you said.

Speaker 4

Sure, Noel. So, If I kind of unpack the non NII, some of the outperformance that we've seen with regards funding of the trading book Where we've seen $1,400,000,000 this quarter against $0.1 quarter 1 last year because rates were at 0, But against $1,300,000,000 quarter 4, so somewhat flat to just slightly up from quarter 4. That number is, it is fair to annualize it, given current rate forecast consensus. Equally, as Noel mentioned earlier, the discussion on wealth, the growth in NIA in wealth, The resumption of activity in Hong Kong in particular bodes well for the future and I think it is fair to assume that we will see continued performance in wealth. On the other hand, some of the outperformance in Some of the markets activities such as foreign exchange trading, which had a record quarter, may not be repeated.

Speaker 4

And obviously, we will have to look at it quarter by quarter in terms of what business opportunities are there. And While you can bake in and factor in the results, the Q1 outperformance, I would caution you not to annualize that outperformance. But in general, Ahmad, if I take a step back, it is a good set of results and we are confident about the future. And in light of the strong Q1 performance, we will have to review and we will review the guidance in H1.

Speaker 3

Okay. Thank you.

Speaker 14

Thank you so much.

Speaker 3

Next question please.

Operator

That comes from Martin Leitgeb with Goldman Sachs.

Speaker 8

Yes. Good morning, Noel and George. First of all, congratulations for the good set of results.

Speaker 3

Thank you.

Speaker 8

Just one broader question on growth and one follow-up on deposits, please. And Just looking at the much improved profitability levels of the group, with now NII being around BRL 2,000,000,000 to BRL 3,000,000,000 of quarter, is great capacity to scale up growth. And I was just wondering, if we look into So we can turn more or start in 'twenty four. Do you see the hope for the group to lean more into growth so that that mid single digit loan growth could potentially be higher? Or should we just think that any increase in profitability And secondly, with regards to the deposit trend, I was just wondering if you could comment have been delivering that stable deposits in the quarter.

Speaker 8

And I was also wondering with regards The deposit migration part of CASA into time, whether you have seen any change in trend. Is this are we towards the end of that

Speaker 3

Okay. Just a couple of comments, one comment from me on growth. Listen, I think clearly we want to pursue growth. But I think we have the capacity in our dividend payout ratio of 50% to pursue growth And with the option of doing buybacks as well. Now at the moment, I think we've seen a relatively subdued lending market in corporate banking.

Speaker 3

I think the demand for term loans around the world is not particularly high at the moment and probably isn't going to be particularly high in the very near term. As George said earlier, I mean, once we get to 2024, one would expect there to be an increase in demand starting to emerge. But for the near term, for the next few months in 'twenty three, given the economic uncertainty, we're seeing subdued loaned demand. So I think the message I'd give you, in a 50% payout ratio world, we believe the second 50% After we pay the dividend, there is potential to fund both growth and buybacks. And that's our plans going forward.

Speaker 3

George, do you want to just cover the deposit trend, the inflows, the outflows and deposit migration?

Speaker 4

Sure, Martin. So Yes, I mean, if I start with some of the outflows that we're seeing and then I go into the tailwinds, so some of the outflows we're seeing, Particularly in the U. K, so obviously U. K. Retail Q1 is a tax payment period, so there is seasonality here.

Speaker 4

We're still seeing high cost of living resilient inflation in the UK, which is obviously draining some of the UK consumers' savings. We're, to a lesser extent, competitive pressure as well in the U. K. Likewise, for corporates in the Q4 was a year end where people showed up their liquidity, whereas Q1, most of the companies pay dividend. And then you can See some of the draining liquidity, we're also seeing deleveraging of loans using some of the deposits to deleverage on the loan side, especially for those with a strong rate differential between what they're paying on their loans.

Speaker 4

Hong Kong and all of Asia actually, we've seen definite deposit growth in the retail and the personal banking space. We have seen 5% growth of our deposit base in commercial banking in the U. S. So we were one of the beneficiary banks of the deposit migration From medium sized banks into large banks. And we obviously continue to cherish our Positions and deposits to continue attracting deposits at the right price.

Speaker 3

Okay. Thank you, Marty. And next question please.

Operator

Thank you. We will take our last question today from Tom Rayner with Numis.

Speaker 13

2, please. First one, No, just on the loan growth. I mean, you flagged the corporate demand, and maybe that is the answer. I was going to ask because you're quite upbeat on the The economic recovery you're seeing now in Hong Kong and China and the U. K, I think you said was quite resilient.

Speaker 13

So is there any other reason why you're so sort of cautious in the short term on loan growth? Or is it purely a lack of demand from corporates? And Well, second question on costs, please.

Speaker 3

Okay. What's your question on costs? Do you want to yes.

Speaker 13

Yes. I mean, really, it's the sort of looking at the 3% target for this year I'm thinking forward to next year because I guess you're still enjoying some of the flow through this year from cost savings from the previous cost program, which has now ended. So I just wondered if you or George would comment on your sort of approach towards costs In 2024, whether you'll be thinking in terms of an absolute growth, maybe similar to this year or whether a jaws approach Might be more appropriate. I don't

Speaker 6

know if

Speaker 13

there's anything any color you could add,

Speaker 8

but thanks. Yes.

Speaker 3

Thanks, Tom. Just on loan growth, listen, I think your points are fair, Juan. I think If there is a place where I think loan growth could pick up more in the near term, I think it would be Asia. I think Middle East is another option. So I think I am being a bit cautious on the near term loan growth.

Speaker 3

I think probably it will We start to emerge more in the working capital side of the balance sheet, trade finance, before people start investing in fixed But I think there is a level of nervousness out there in the corporate world about Taking long term investment decisions in fixed capital, that is aside from sustainability. I think there's a lot of infrastructure spend taking place. And I could see some loan growth coming in and around that sustainable infrastructure investment. So maybe I am being a bit cautious on loan growth at the moment. I think I'd rather be that way In the near term, but I don't think I do believe there's going to be medium term loan growth.

Speaker 3

And I think it is fair to say that Asia has the potential to pick up faster Than elsewhere in the world. So yes, I think it may be fair that I'm being a bit cautious.

Speaker 4

If I kind of just adding to Noel's comment, Tom, if you look at Hong Kong in the retail space, both Cards and mortgages have been growing in the Q1. Even in the UK, we are seeing green shoots in the mortgage sector. I mean, our market share in the mortgage sector in the UK for the 1st 2 months of the year is at 15%. That's for new business. That's against the book market share of about 7.5% and the Q4 new business market share of 9%.

Speaker 4

So we're certainly there in the Retail space where we're seeing growth. On the wholesale side, I just want to add one comment to Noel's description, which is Also bear in mind the rate differential between China and Hong Kong. So all those Chinese companies who used to use Hong Kong as a base for raising funding internationally will be less doing so as long as the rate differential between dollar rates and onshore China rates Are that wide, it is cheaper for these corporates to raise funding in Mainland China as opposed to Hong Kong and That will remain the case up until the time we see a reversal in that rate trend. If I move to your second question, Tom, we have not share targets for 2024 as yet, but the few guiding principles I can share with you. The first guiding principle, paramount guiding principle is that you should expect our focus on cost discipline to continue.

Speaker 4

The second guiding principle is that we will continue doing transformation and restructuring as part of our BAU cost base and expect some of those saves to flow through also into 2024 and beyond. And case in point is the spend on severance, which we're planning now to do in Q2 this year for which the benefit will flow through mostly into 2024. And thirdly, at this stage, we're still looking to guide towards a dollar cost number as opposed to jaws in the way we will be looking at 2024 as we come to be able to give you additional guidance later in the year.

Speaker 13

Thank you very much.

Speaker 3

So thank you all for your questions. Really appreciate you taking the time. To close our Q1 results, I just want to say that the Q1 results provide further evidence that our strategy is working. We had a strong first quarter profit performance, Cost discipline remains tight, and we're clearly on track to deliver our ROTI target. We've resumed quarterly dividends and announced a share buyback of up €2,000,000,000 But I'm also confident about the rest of 2023.

Speaker 3

We built a strong platform for future growth and our geographical footprint puts us in areas of high growth. I look forward to speaking with you soon. Have a good morning or afternoon. Thank you.

Operator

Thank you, ladies and gentlemen. That concludes the call for HSBC Holdings Plc's Q1 2023 results. You may now disconnect.

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Earnings Conference Call
HSBC Q1 2023
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