HSBC Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 13 speakers on the call.

Operator

The analyst and investor webinar on the Q3 2024 results for HSBC Holdings Plc will begin in 2 minutes. Following the presentation, there will be the opportunity to ask your questions. For analysts and investors joining via the zoom link provided, please use the raise hand function in zoom to register your interest in asking a question. You may raise your hand now or at any other time during the call. Please ensure your camera is also turned on.

Operator

If you're invited to ask a question, please accept the prompt to unmute your line. Please note that it will not be possible to ask a question if you are joining via the webcast link on HSBC's website.

Speaker 1

Welcome, ladies and gentlemen, to the Analyst and Investor Webinar on the 3q 2024 results for HSBC Holdings Plc. For your information, this Webinar is being recorded. I will now hand over to Georges Haderi, Group Chief Executive.

Speaker 2

Thank you, Louise. Hello, everyone. Thank you for joining today. I'm here with John Bingham, our Group Financial Controller, who is acting as Interim Group Chief Financial Officer. We delivered another good quarter, which shows that our strategy is working and we have a strong platform for growth.

Speaker 2

I am committed to building on that. Before John takes you through the Q3 numbers, I'd like to make a few comments. We made several announcements last week. First, Pam Kaur will take over as Group Chief Financial Officer with effect from 1st January. Pam is an exceptional leader who joined HSBC in 2013 as Group Head of Audit and is currently our Group Chief Risk and Compliance Officer.

Speaker 2

With almost 40 years' experience in the financial sector, she brings a global perspective to the strategic challenges and opportunities we face today. I look forward to partnering with her for the next stage of the bank's growth and development. I would also like to thank John for his outstanding support during the interim period. 2nd, we announced a reorganization to simplify and streamline the group. We are currently organized around 3 businesses in 5 regions.

Speaker 2

From the 1st January, we will operate through 4 businesses: Hong Kong and the U. K, serving Personal Banking and Commercial Banking customers in our 2 home markets Corporate Institutional Banking and International Wealth and Premier Banking. We will also streamline our geographic governance structures, reducing them from 5 regions to 2, further enhancing our ability to serve our customers' needs throughout our global network. Our current Group Executive current Group Executive Committee of 18 members will be replaced by a new Group Operating Committee with 12 members. The analysis we've done so far demonstrates that the reorganization will result in net cost savings with a relatively short payback period on any upfront costs.

Speaker 2

We will share these details with you at our full year results in February as part of a wider business update. And 3rd, turning to the external environment, I welcome the clarity provided by the U. K. Government on its prudential rules. The PRA's second near final policy statement and rules on the implementation of Basel 3.1 bring an end to years of uncertainty and will help the banking sector to support growth in the U.

Speaker 2

K. Similarly, I am encouraged by the recent policy measures in Mainland China and in Hong Kong. I'm confident that the monetary stimulus announced last month and potential for the fiscal and other measures will help to stabilize key sectors and strengthen Mainland China's economy. Meanwhile, Hong Kong's easing of macro prudential constraints is proportionate and timely, and we expect these measures to have a positive impact on the Hong Kong economy. With that, John will take you through the Q3 numbers.

Speaker 2

John?

Speaker 3

Thanks, Georges. In summary, we had another good quarter. Profit before tax of $8,500,000,000 was up $900,000,000 or 11% on the Q3 of last year on a constant currency basis. This brings our annualized return on tangible equity for the 1st 9 months of the year to 19.3 percent or 16.7 percent excluding notable items. Revenue of $17,000,000,000 was up $1,100,000,000 on last year's Q3 and up $300,000,000 on the Q2 this year, underlying the good momentum within the business.

Speaker 3

We've announced today a further $4,800,000,000 of dollars of distributions, consisting of a 3rd interim dividend of $0.10 per share and a new share buyback of up to $3,000,000,000 We intend to complete this buyback during the 4 month period before our full year results announcement in February. Last week, we also completed the share buyback announcement at the half year results in July. We've now repurchased 9% of our share count since the start of last year. As you can see on the next slide, strategic transactions, principally the disposal of Canada in the Q1, were a small impact on the year on year revenue and profit growth. Excluding this impact of these transactions, profit before tax, excluding notable items, was up 13% on the Q3 of last year.

Speaker 3

Revenue of $17,000,000,000 was up $1,100,000,000 on the Q3 of last year, driven by a $1,600,000,000 increase in fee and other income. This included a $700,000,000 increase in wholesale transaction banking and wealth. The remaining $1,000,000,000 increase primarily reflected strong performance in equities and global debt markets with global banking and markets and adverse items in the Q3 of last year that did not repeat, including $300,000,000 of treasury disposal losses and other notable items. Banking NII of $10,600,000,000 was down $300,000,000 on the 2nd quarter on a reported FX basis, primarily due to a loss arising from the early redemption of legacy securities. Excluding this, the banking NII run rate was stable on the previous quarter.

Speaker 3

Our 2024 Banking NII guidance is unchanged at around $43,000,000,000 Our guidance includes the impact of the $300,000,000 early redemption loss taken this quarter. It also assumes a $1,000,000,000 contribution from Argentina this year, which is what we reported in 2023. Argentina has contributed $1,200,000,000 to banking NII in the year to date, but the volatility created by hyperinflation accounting makes that number very difficult to forecast from quarter to quarter. Accordingly, I would encourage you to think of our guidance as being around $42,000,000,000 excluding Argentina. Turning to fee and other income.

Speaker 3

Wholesale transaction banking was up 7% on last year's Q3. The key driver was global foreign exchange, which grew 12%, benefiting from an increased client activity. Higher volumes also contributed to growth in both Global Trade Solutions and Global Payment Solutions. WELP was up 32% on the Q3 last year. It was our 3rd consecutive quarter of double digit growth in wealth as our continued investments in this business and the importance of Hong Kong as a global wealth hub have enabled us to capitalize on a favorable operating environment.

Speaker 3

There was double digit growth in all wealth products, but life insurance was the biggest driver. About half of the growth in life insurance was from the non repetition of a charge we took in Q3 last year. Excluding that, life insurance still grew well into double digits, mainly because a higher CSM balance drove an increase in CSM release. The CSM balance is a store of value. All else remaining equal, growth in the balance means growth in future earnings.

Speaker 3

And our CSM balances continue to grow. In the 1st 3 quarters of this year, we've generated more than $2,000,000,000 of new business CSM. This has driven our CSM balance to $13,200,000,000 a 22% increase since last year's Q3, creating a foundation for future revenue growth. Hong Kong continued to benefit from inflows of international customers. There were 243,000 new to bank customers in the 3rd quarter versus an average of just over 170,000 per quarter in the first half.

Speaker 3

Net new invested assets were $26,000,000,000 in the quarter, $11,000,000,000 of which were in Asia. On credit, you'll recall that our 2nd quarter had a low ECL charge due to recoveries and other items. The 3rd quarter ECL charge was $1,000,000,000 or 40 basis points of average loans. The wholesale ECL charge was $600,000,000 driven by $400,000,000 in Hong Kong, of which $100,000,000 related to Hong Kong commercial real estate, whilst the personal charge was $400,000,000 This brings our annualized ECL charge to 28 basis points of average loans for the year to date, which is broadly in line with our 30 to 40 basis point guidance for the full year. Next, on costs.

Speaker 3

Costs were up 6% in the 1st 9 months of the year on a target basis, which was 1% lower than for the first half. As we explained in the previous quarter, the phasing of performance related pay and the additional levies from the end of last year will give us a tailwind heading into the Q4. We're on track to meet our target of around 5% cost growth for 2024 on a target basis and remain committed to cost discipline. On lending and deposits, loan balances were stable in the Q3. Deposits were up 1%, driven by a $16,000,000,000 increase in Hong Kong WPP.

Speaker 3

This reflected short term flows between invested assets and deposits, and I've cautioned against annualizing that number. Term deposits were 39% of total Hong Kong deposits, unchanged since the Q2. Next, our CET1 ratio was 15.2%, up 20 basis points on the 2nd quarter as strong organic capital generation was partly offset by distributions. CET1 grew $3,100,000,000 during the quarter on a constant currency basis. This growth included $2,900,000,000 of other movements, mainly gains in the market value of securities classified as held to collect and sell, which are fair valued through other comprehensive income.

Speaker 3

RWAs grew by $14,000,000,000 on a constant currency basis, mainly due to broader balance sheet growth. Finally, I'd like to point out a number of upcoming events, which will help you with your modeling. First, we expect the buyback we announced today to have an impact of around 0.4 percentage points on our CET1 ratio in the Q4. It remains our intention to return excess capital to shareholders through a rolling series of share buybacks. Secondly, we expect to complete the sale of HSBC Argentina in the Q4.

Speaker 3

As a reminder, around $5,100,000,000 of historical foreign exchange translation and other reserve losses will be recycled to the income statement on completion. This has already been recognized in capital and there will be no incremental impact on CT1, TNAV or distributions. These losses will also be excluded from our dividend calculation. We expect the completion of the sale to reduce RWAs by around $8,000,000,000 equivalent to around 0.1 percentage points of CET1. 3rd, we intend to begin to actively market our $8,000,000,000 legacy French home loan portfolio during the Q4.

Speaker 3

We expect to reclassify this portfolio as held to collect and sell in the Q1 next year, leading to a recognition of an estimated $1,000,000,000 pretax loss equivalent to around 0.1 percentage points of CET1. Finally, the PRA recently published near final rules on Basel 3.1. These are incrementally better than we previously expected. We continue to expect them to have an immaterial impact on our CET1 ratio upon implementation. To conclude, our guidance remains unchanged, namely a mid teens return on tangible equity, excluding notable items for 2024 and 2025 banking NII of around $43,000,000,000 in 2024 ECLs for the full year within our normal medium term planning range of 30 to 40 basis points.

Speaker 3

Cost growth of around 5% for 2024 on a target basis and mid single digit loan growth over the medium term. With that, Louise, can we hand over to Q and A?

Speaker 1

Thank you, John. Our first question today

Speaker 4

Two questions, please. One, firstly, just on the Reorgan strategy, a very simple question. Given the new structure, where does that lead Mexico? So any thoughts on Mexico would be appreciated. And secondly, on the financials themselves, on that non NII strength, where fees and other income were up 32% year on year.

Speaker 4

And you've highlighted you've now had 3 consecutive quarters of double digit growth. Previously, if I go back to your Investor Day in 2023, you talked about high single digit growth for Asian Wealth specifically. You're clearly running well ahead of that and consistently running well ahead of that. So to what extent do you think we can extrapolate that double digit growth into future quarters in next year? Thank you.

Speaker 2

Thank you, Andrew. I'm going to take your first question about Mexico and John will address the second one. So we have Andrew, we have a good market position in Mexico. We have good performance in Mexico. Our wholesale business in Mexico is in particular strength in our global network of connectivity.

Speaker 2

It's very strongly connected with our North American business. It's equally very strongly connected with our Asia Pacific business and therefore is a key strategic anchor stone for our customers. Our retail business in Mexico will form part of the new business segment of International Wealth and Personal Banking. As you know, all our Personal Banking businesses outside the Hong Kong and U. K, our 2 home markets, will be part of the International Wealth and Personal Banking and Premier Banking business, which will be focused on growing the affluent segment of the in the market and creating a strategic differentiation for us in the market, where we operate in the personal banking space outside home markets.

Speaker 2

John will take the second question.

Speaker 3

Andrew, as you know, we've been investing in our wealth capabilities for some time. Wealth was up 32% year on year in Q3 and 20% year on year for the 9 months. That growth was particularly driven in Asia, where we see a favorable operating environment, but we are seeing broad based growth across the main segments. That's supported by strong customer growth and growth in net new invested assets. So we have guided previously to high single digit growth.

Speaker 3

I think it's fair that we may well outperform that in the short term.

Speaker 2

Thank you, Andrew.

Speaker 1

Thank you. Our next question comes from Aman Raghkar at Barclays. Please accept the prompt to unmute your line.

Speaker 5

Good morning and good afternoon. Thanks very much for the presentation and the questions. Yes, I had a question on one on restructuring and one on net interest income, please. Just trying to scope the degree of ambition that you might have around restructuring. It looks like efforts to restructure the business are focused on delivering net cost saves.

Speaker 5

You're clearly doing very well on revenues at the moment, particularly the fee businesses are presumably a source of near term upside to market expectations. But I think the outlook is volatile. A lot of these things are outside of your area of control. So what is the scale of the ambition around what you'd be looking to achieve on things like costs and indeed RWAs as you try and kind of future proof the medium term return on tangible equity outlook? And then I had a second question on net interest income.

Speaker 5

So I think the I'm taking the kind of banking NII guide at face value and trying to mix out Argentina. I think it's implying a kind of annualized run rate of around €41,500,000,000 at the 4th quarter as a jumping off point into 2025.

Speaker 6

Maybe a bit

Speaker 5

of a low value question, but interested if you were able to at this stage just to comment on banking net interest income as per consensus in 25. I think the Street is at around $41,000,000,000 So you know versus that $41,500,000,000 not looking for too much attrition from here. It'd be great to get, if you're not willing to put a number on it, but how you see the moving parts are there, please? Thank you very much.

Speaker 2

Thank you, Hammad, for the two questions. Again, I'm going to address your first question on the reorganization, and John can take us through the NII elements. So, Aman, the primary reason for the reorganization is to create a simpler, more dynamic, more agile, leaner bank. It's really to allow us to empower our frontline staff and make it faster to make decisions and ultimately serve our customers better. That's the primary reason.

Speaker 2

Now as a result of simpler, leaner, more efficient bank, there will be cost saves. The costs takeout will be essentially in the form of severance or related costs. It will be affecting senior roles that will be deduplicated or the reduction of the number of senior roles will drive this. We will be giving you those details about the figures about the upfront costs as well as the benefits realization in the full year results in February. What I can say is, number 1, the benefits will exceed the upfront costs and the payback is going to happen in a short time frame thereafter.

Speaker 2

And then the second point to share with you is that we remain fully committed to cost discipline. I've been sharing this in my days as Group CFO. I carry on this mission of being fully committed to cost discipline, and this is now embedded in the firm, as you could have as you have seen from our Q3 results. For 2024, we remain on track to deliver on our cost target. We are committed to it, and we're confident we will be able to achieve it.

Speaker 3

John? So on Banking and I, thanks for the question, Arman. If I might be forgiven giving you a slightly longer answer to this. So if we start on 2024, we've reiterated our guidance on 2024 of banking NII of around £43,000,000,000 but encourage you to think about that as £42,000,000,000 ex Argentina. In total, we've printed £31,600,000,000 for the 9 months to date.

Speaker 3

And we think the Q3 run rate of £10,600,000,000 is a pretty clean run rate for you to think about modeling 2025. We don't provide guidance at this stage on 2025 Banking NII guidance. But if you take that clean run rate of the £10,600,000,000 which I agree is about £42,000,000,000 we'll have disposed of Argentina. So therefore, we then think of the building blocks for you to model this along four factors. Firstly, rates, the reduction in rates implied in markets will be clearly a headwind.

Speaker 3

The cuts during the Q3 given the timing of them, they had a relatively modest impact on the Q3's results, but we'd encourage you to use our banking NII sensitivity against market implied rates to generate that component. We then have the structural hedge that will provide a tailwind. We've got the reinvestment of maturing positions that will enable us to reinvest them at higher rates. We've signaled that for 2025, we've got £115,000,000,000 maturing at an average yield of about 2.9%. So think about those maturing and being placed at something along the lines of 5 year bond rates.

Speaker 3

We've then got volume growth. Whilst volume growth has been relatively subdued in 2024, we do hope that with interest rates coming off and economic activity picking up that we will see more loan growth. We continue to guide to mid single digits in the medium to long term. The timing of getting there will be unpredictable. And then lastly, we keep an eye on time deposit migration.

Speaker 3

That has been relatively stable, particularly in Hong Kong at 39% over the last couple of quarters. But the impact on that as rates come off will be variable. It depends on competitive pressures and customer behavior. So all of those factors is how we have thought about it and modeled it and included that within our mid teens ROTE guidance for 2025. Thanks, Alain.

Speaker 2

Thank you, Arman.

Speaker 5

Thank you. Could I just one follow-up? Thanks very much for that really detailed answer. In relation to the mid teens ROTE aspiration next year, does that include or exclude any potential kind of upfront costs as part of any restructuring?

Speaker 3

So the mid teens ROTEY guidance is excluding notable items. We will come back to you in February with full details of the benefits and costs of the reorganization.

Speaker 5

Thank you so much.

Speaker 2

Thank you, Aman.

Speaker 1

Our next question today comes from James Invine at Redburn. Please accept the prompt to unmute your line.

Speaker 7

Hi, good morning to you both. Good evening. I've got 2 please. The first is on the Wealth business. So clearly, not some really good revenue numbers.

Speaker 7

I was just wondering if you could kind of explain the slight disconnect with the net new invested asset number in Asia, which certainly was positive, but probably not quite as positive as I might have expected given how good the revenue line was? And then second, could you just share your thoughts about the outlook for corporate loan growth across Asia? So in fact, loan growth more generally across Asia. So I think in the second quarter, we saw both Hong Kong and kind of ex Hong Kong fall slightly. But I think 3 months ago, Noel was sounding a bit more positive at least on Hong Kong.

Speaker 7

Also we've had the announcements in China about a month ago. So just where do we go from here on the Asia loan volumes?

Speaker 2

Thank you, James. I'm going to share some thoughts on your two questions, and I'll ask John to go into more details about both of them. First, our Wealth business, as you've seen in quarter, has exhibited double digit returns. This is the 3rd quarter in a row with similar type returns. Wealth business, as you know, has generated from 4 segments, one of which performed quite well, which is the trading activities of our customers.

Speaker 2

And that manifests both in the private bank as well as in our invested assets. They have been very strong, and they've been even stronger following the measures we've seen in China. On the outlook for corporate loan growth in Asia, we are as I shared earlier, we are very encouraged by the policy measures that have been taking place that have taken place both in Mainland China as well as the as well as in Hong Kong. We see these measures combined with the outlook on rates coming down as supportive of future growth specifically in our Hong Kong book. Outside Hong Kong, the rest of Asia remains resilient.

Speaker 2

Southeast Asia and South Asia have remained quite strong in terms of loan growth, although, of course, a different size in our books than Hong Kong. John?

Speaker 3

So just to amplify your comments on Wealth. So we're seeing good growth in Wealth. We see the net new investor assets. We're very pleased with that. In Asia, they've grown by £11,000,000,000 in the quarter and £49,000,000,000 over the 9 months.

Speaker 3

You will see some movements as we grow our wealth franchise. We also had £16,000,000,000 of deposits, which Georges talked about. We'll see also deposits increase. They will ultimately feed into the wealth share of wallets that we've grown. So continue to be encouraged.

Speaker 3

On corporate loan growth, nothing more to add than George's comments. Thanks.

Speaker 2

Thank you, James.

Speaker 7

Thank you.

Speaker 1

Our next question today comes from Kunpeng Ma at China Securities. Please accept the prompt to unmute your line.

Speaker 8

Hey, good morning, George. Good morning, Jia. This is Kunpeng of China Securities. I got one question on transaction banking because we've seen a slight recovery in the transaction banking income in the Q3, but I think that's maybe driven by the FX volatilities. But going forward, maybe we can see more red cuts going forward and we can maybe we're going to see continued FX volatilities going forward.

Speaker 8

So could you please give me a little bit more color on the future outlook of the transaction banking income? If you could comment on both NII and non NII, that's going to be quite appreciated. Thank you.

Speaker 2

Thank you, Kompang. I'll ask John to comment on this area where as you've heard us saying, an area of strategic differentiation for us for our wholesale customers and where we keep investing and do expect continued growth in this space given our investments and our leadership in this space. John?

Speaker 3

Yes. So we've been pleased by the growth in wholesale transaction banking in the quarter, up 7%. As you say, an element of that is client driven activity around FX and rates volatility. But within that, we continue to invest in Global Trade Solutions and Global Payments. And Global Trade Solutions, we continue to grow our market share in both Hong Kong and the U.

Speaker 3

K. And so as that market comes back, there is the opportunity for us to that be a platform for our growth. Similarly, you'll see us to continue to invest in global payment solutions, and we see a very optimistic path for the payment markets going forward.

Speaker 1

Our next question today comes from Amit Goel, Mediobanca.

Speaker 9

Hi, thank you. Two questions for me. One, just coming back on the simplification program. Just curious, I guess in the past, the group hasn't opted to combine commercial banking, GBM. So just curious what's kind of seen as different now, which makes this more feasible and easy to execute with less maybe revenue attrition or up consideration?

Speaker 9

And then secondly, just on the ECL charges, those were a little bit higher than what I anticipated. It looks like a bit of that's from Hong Kong, wholesale and in the U. K. Ring fenced bank. So just curious if there's any kind of additional color you can provide on that and how you're thinking about the kind of 40 bps in the context of the guidance into next year?

Speaker 9

Thank you.

Speaker 2

Thank you, Amit. Let me address your first question, and John can address the ECL charges question. So the primary reason of this reorganization is to simplify the bank, as we shared. But we've been on a multiyear journey to simplify the activities we do in the bank. We've been exiting activities that were non strategic.

Speaker 2

We've been reshaping our portfolio. We've exited markets or activities that currently we're on track to complete the sale of our Argentina business and our Armenia business and announced 2 additional exits in September, including South Africa as well as the private bank in Germany. Now that activity was addressing the what in terms of what we do as a strategy. The reorganization we have announced last week is basically addressing the how we execute our strategy. Is not changing the what, it's changing the how.

Speaker 2

And the reason we could effectively execute the how we change our strategy, as in be simpler, more agile, is because of the work we have done over the past few years in simplifying the what we do. So there is a it is the right time now to address how we operate, how we execute our strategy because we've simplified what we're doing. We've clarified what our core strategic areas for us where we have competitive strength and where we have leadership and opportunities to grow. So the timing, therefore, is a natural kind of conclusion of the various activities that we have been taking through the transformation over the last 5 years. I want to say that outside the U.

Speaker 2

K. And Hong Kong, where we're merging all our commercial banking activities with Global Banking and Market activities to form the Corporate Institutional Bank. It will comprise our core products, including our balance sheet related products, credit and lending and deposits, our transaction banking products as well as our other products such as investment banking or markets. And this should give our customers a more seamless way to deal with HSBC across all this product spectrum that we offer them. John?

Speaker 3

So thanks, Amit. I'll give you a bit more color on the ECL There's a £1,000,000,000 charge in 3rd quarter, which is 40 basis points of average loans. That's actually a more normal charge because Q2 benefited from releases and recoveries. If you then dissect the 3rd quarter charge, there's 3 things within there. So firstly, the U.

Speaker 3

K, which is a £200,000,000 charge, again, that benefited from the release releases in the 2nd quarter. It's a more normal charge. There's nothing more going on in there. Hong Kong, in total, we incurred a GBP 500,000,000 charge. As you say, that was mainly GBP400,000,000 charge in wholesale, which included GBP100,000,000 of Mainland China CRE and €100,000,000 of Hong Kong CRE.

Speaker 3

The rest of it was across a number of sectors, again, nothing of particular note. And then relative to Q3 last year, we did have an increase in our Mexico retail charge. So that went up to £200,000,000 charge. That's actually been relatively normal through the quarters of 2024, but relative to Q3 'twenty three is a little higher. So we're confident as we see this that we will be in our 30 to 40 basis points planning range over the medium term and certainly there for 'twenty four.

Speaker 2

Thank you, Amelior.

Speaker 1

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

Speaker 6

Thank you for taking my question and congratulations on a good set of numbers. I have 2 and mostly follow ups. First is on wealth and then we'll move to Hong Kong CRE. On wealth, can I check with the so called policy rescue in China only a month old and for this reporting quarter, maybe a quarter, maybe only a week? So have we seen like from August as we transitioned into September, good wealth management income traction better than what we are reporting in the Q3 and then in October that continued, maybe it even accelerated.

Speaker 6

So some color there would be helpful. And then on Hong Kong CRE specifically, not talking about Hong Kong in general, can we get numbers on the NPL ratio within the overall global CRE book and also the Hong Kong CRE book? As at the half year, we were 9% Stage 3 loans in both. Thank you very much.

Speaker 2

Thank you, Gurpreet. Let me just briefly address Wealth, and I'll ask John to compliment it and address your Hong Kong CRE question. So there are 2 trends in Wealth. There is the underlying trend, which is a continued growth in our Wealth business, which has been there quarter after quarter. It's a result of both our increased investment in the space.

Speaker 2

It's a result of us winning market share given our brand and franchise, it's also a result of the underlying market growing. As you've seen, Hong Kong is now expected to become the largest private wealth hub in the world by the end of the decade. So that is definitely a trend and we're privileged with our position in Hong Kong to be able to benefit from it and benefit our customers from it. That is the first component, which is an underlying continued investment and growth trend. You add to that, obviously, the additional activity we've seen following the measures that have been taken in China.

Speaker 2

This has created additional activity, which has been, as you said, for a week or so in the Q3. We do see this activity continuing and obviously normalizing, but we do see these measures that have been taken to be supportive measures, certainly of the economy at large, but in particular supportive measures of the financial markets and the revival of some of the financial market sluggishness that we've seen in both in Mainland China and Hong Kong over the last few quarters. John? So if

Speaker 3

I pick up your second point on Hong Kong CRE, it's actually a very similar picture to that we described at the Q2. So a few customers continue to face cash flow pressures. Some of that is rates resultant. And as rates come off, we would hope that begins to abate some of those cash flow pressures. If you look at the Asia Wholesale Stage 3s, they were up £1,100,000,000 in the quarter.

Speaker 3

Some of that relates to Hong Kong CRE. That also drove a modest amount of additional RWAs. The ECLs on that, we've referred to the fact that there was a £100,000,000 charge on ECLs. That was both across Stage 1 and Stage 2. The Stage 3 ratio is slightly up quarter on quarter.

Speaker 3

But we continue to see good collateral across that portfolio. And so we don't see this as a material ECL driver going forward. Our focus is really on supporting our customers through this period. And as I say, pressures we should see start to reduce as rates recede.

Speaker 2

Yes. And as we said, Gurpreet, we are confident about the outlook of the Hong Kong economy at large and the Hong Kong commercial real estate sector in particular, partly because of the rates receding, as John was just mentioning, but also partly due to the policy measures and the countercyclical measures that have been taken this month to support the sector. We see these as having positive developments for the outlook of the market. Thank you very much, good, Perit.

Speaker 1

Our next question today comes from Jeremy Hu at CICC. Please accept the prompt to unmute your line.

Speaker 10

Good morning, George. Good morning, John. My first question is on the structural hedge. I think, George, you mentioned that RMB25 1,000,000,000 is a good run rate for you for how you to build up the structural hedge in the second half. But in Q3, that increased by RMB27 1,000,000,000 and maybe most of that comes from FX impact.

Speaker 10

So do you still stick to a $25,000,000,000 run rate or you would like to accelerate it? And the second question is on I'd like to hear your thoughts on what area HSBC can further make investments? Because it feels like over the years, our strategy always emphasized that the bank had to make excellent good cost discipline and we did it. And we made some investments, but mostly small ones. So if we look forward, do you see any opportunities that may help us to further drive growth and take market share?

Speaker 10

Or do you think it's better to stay cautious as we are still facing some top line pressures? Thank you.

Speaker 2

Thank you, Jeremy. Let me address your second question on investments, and then John can address your structural hedge question. So first, as you said, cost discipline, I've taken it from my role my days and my CFO role with me as CEO. It is embedded in the organization, and we will maintain cost discipline. You should expect this to be ingrained in the way we think, spending wisely and in the right places.

Speaker 2

In terms of strategy, we've basically in the reorganization we announced last week, we are basically organizing ourselves alongside our strategic pillars. So this creates clarity and this also creates simplicity in the way we can execute our strategy. We have 2 home markets where we have scale, a leading market position and great growth opportunities and certainly very strong competitive edge. In our Corporate and Institutional Banking business, we have a global connectivity capability and a transaction banking capability that is second to none, that is very leading and providing excellent services to our customers. Our positioning is very cherished and very valued by our customers.

Speaker 2

And then we have Wealth and Premier Banking, which is really the proposition aimed at the affluent segment for investment needs in particular across our network and in particular so in Asia and the Middle East. Any opportunity we have to accelerate this strategy will be it organic or inorganic is an opportunity we will go after. We are looking these areas all exhibit fantastic growth opportunities. We have a real competitive edge, and we will continuously invest in them both organically and inorganically if the opportunities arise. What I should say there is we do have the capital to support our needs.

Speaker 2

We have the capital to support, obviously, our dividend distribution, to support organic growth and to support inorganic opportunities should we find some that can accelerate our strategy and allow us to gain market share.

Speaker 3

Jeremy, if I pick up your question on structural hedge. As you rightly say, we have increased our structural hedge during the period from €504,000,000,000 at the 30th June to €531,000,000,000 at the 30th September, but that was mostly FX driven. The duration of that remains 2.8 years. We would continue to expect to increase our structural hedge, but that will depend on market conditions that we have. And I would say that the big increases of our structural hedge are probably behind us.

Speaker 3

So further increases from here will only have a modest impact on our banking and AI sensitivity. Thanks, Jeremy.

Speaker 2

Thank you, Jeremy.

Speaker 1

Our next question comes from Katherine Lay at JPMorgan. Please accept the prompt to unmute your line.

Speaker 11

Hi. Thanks, Josh, and thanks, John. So my questions will be 2. The first one I would like to ask about NII. I think the confusing thing here is that I think on the headline NII actually slightly missed expectation.

Speaker 11

But if we work out the banking NII, there's a moderate beat. And also we try to calculate what is the banking net interest margin. It seems it's by and large stable. Despite that in 3Q, HIBOR actually went down kind of like on average 50 basis points. So may I ask like what is driving the stable net interest margin?

Speaker 11

Would it be from the liabilities management side? Just now John gave us some color in terms of like say deposit migration, but is that possible to give me some give us some like numbers to work around like what is the Casa ratio in Hong Kong and how the trend has changed? So this will be my first questions. My second question is that when I look at the RWA migration, I saw on the numerator I saw that in the migration side and there is a 2 billion addition to CET1 Capital due to movement in reserves. Can we get a bit of, how to say, color on that ones?

Speaker 11

Will we be seeing some kind of movement like similar type of movement in the coming quarters? Actually, I have one slight additional questions is on the loss that we were talking about the legacy securities. Can you give us a bit of color on this one and understand that management put this into notable items so supposedly to be one off, but is it really one off in nature? And we have other securities, perpetual bonds that we would like to redeem in the future? Like say, for example, do we have another 10% type of perpetual bond currency in our book that we may be looking to redeem it when opportunities arise?

Speaker 11

Thank you.

Speaker 2

Thank you, Catherine. I'm going to let John answer the three questions, but allow me one comment on the legacy securities. We have said that we will look at our legacy securities continuously, but we will take action that are accretive or neutral. We will not take action on legacy securities that are detrimental to our investors and our shareholders. In this case, we've taken an action on a legacy security that has a more than 10% coupon that could be naturally and easily replaced with much lower rates and therefore there is a positive impact on the net present value basis of the actions we've taken and these actions we will always look at where there is value in it.

Speaker 3

John? Yes. So thanks, Catherine. Three questions there. So if I start on your net interest margin, we give some detail on the net interest margin on Page 17 of the slide deck, But effectively, the net interest margin has moved from 1.62 to 1.46.

Speaker 3

There's 3 things driving that. 1, the loss on the early redemption of legacy securities, as you've mentioned 2, some Argentina volatility And then the remaining is on we've allocated more funding to the trading book. And as you know that will be a drag on net interest income but also an equal and opposite benefit on non net interest income. So our preferred measure and the way that we think about it is through the banking NII lens. There you'll see that our clean run rate ex Argentina and ex the notables has been relatively stable period on period, reflecting the fact that the Q3 rate cuts had, given their timing, had a modest impact on Q3.

Speaker 3

If I you'd also asked about deposit migration. We've again got some detail in that on Slide 17, but that has remained relatively stable at 39% for the Hong Kong deposits. If I move on to your CET1 question and then particularly the change in other adjustments for CET1 capital, that is around the fair value movements of our securities that are classified as fair value through OCI. So we've generated a gain on those, which has given us also a capital benefit on that. I think on legacy securities, Georges has covered most of the questions on that, but we're not signaling anything at this stage around further legacy securities redemptions.

Speaker 3

Thank you, Catherine. Thank you, Catherine.

Speaker 1

Our final question today comes from Edward Firth at KBW. Please accept the prompt to unmute your line.

Speaker 12

Yes. Good morning, everybody, and thanks for taking the questions. I just have two questions. Let me just do a clarification. Just to be clear, the CHF 1,100,000,000 increase in Stage 3 loans in Hong Kong, is that all CRE?

Speaker 12

That's just to be clear on that. That was the first question. The second one is, we've obviously got a U. S. Election coming up in the next couple of weeks.

Speaker 12

And I just wondered if you could give us some thoughts from your perspective in terms of the possible sort of risks and opportunities that you see that could come out of that, I guess, with the 2 realistic options? And I guess just related to that, there was a lot of press comment that your reorganization was driven by splitting up the Asian and I guess the U. K. Or developed markets businesses. Is that actually right?

Speaker 12

Or is that just sort of idle speculation from journalists?

Speaker 2

Okay. Thank you, Ed. Let me take your second and third questions, and John can address the Stage 3 question. So look, this is a matter for the U. S.

Speaker 2

Electorate to choose their president. I'm not going to speculate or comment. We will see the outcomes on the 5th November. But what is important for us is that we serve our customers. We have been serving our customers through various through an evolving set of rules and regulations on the global scale.

Speaker 2

We serve them for their needs, especially for their cross border needs, where we're unique at being able to do so. We obviously comply with all rules and regulations. We will make sure that our customers are able to comply with all rules and regulations and so far that their financial needs are concerned. And any new rules and regulations which may come with any new administration are things that we will obviously comply with and support our customers to comply with. What I can say though is it remains a distinctive skill that we have in supporting our customers' cross border needs.

Speaker 2

This is one of our unique areas of competitive edge and this remains unchanged. And our customer needs remain broad based and global, and we will continue supporting them on that mission. And with regards to the reorganization, this is categorically not either an intent or a preparation as has been speculated by some splitting of the Asia business or etcetera, absolutely not. This is a simplification of the bank where we today govern ourselves through 5 regions and we're bringing this regional setup down to 2. That is part of the simplification.

Speaker 2

It is also meant to help us speed up the build out of what is a very promising corridor between the Middle East and Asia. We're seeing material growth in this corridor over the last few years. Our customers across both Middle East and Asia are looking for opportunities of trade and investments between them. And we've been we have a leading we have a unique position to be able to help our customers across this corridor. That simplification should also help speed up the build of that corridor.

Speaker 2

And I remind you, in our Western geographies now, we're essentially a wholesale bank. We have sold our retail banking activities in France. We've sold the mass retail activities in the U. S. We've sold the bank in Canada.

Speaker 2

We've sold the bank in Greece. We are in the process of selling the bank in Argentina. And with that, we'll be left with what is essentially a Corporate and Institutional Banking business that also bring some simplification aspects to the way we govern ourselves in this region. These are the reasons why we did the simplification of the organization we announced last week.

Speaker 3

John? On your CRE question, Ed. So of the GBP 1,100,000,000 increase in Asia wholesale Stage 3s, most of that was Hong Kong CRE. The picture is very similar to how we described it at the Q2. We could see more migrations into Stage 3 until interest rates begin to ease the cash flow pressures in those businesses.

Speaker 3

But given the collateral levels that we have against that portfolio, we don't see that as a major driver of ECL risk going forward. We're focused on supporting our customers through this transition period. Thanks, Ed. Great.

Speaker 2

Thank you very much, Ed.

Speaker 1

That ends today's Q and A. So I will now hand back to Georges for closing remarks. Thank you.

Speaker 2

Thank you, Louise, and thank you, everyone, for your questions today. To recap, we delivered another good quarter, which shows that our strategy is working. We have reconfirmed all of our guidance, including a mid teens return on tangible equity for 2024 and for 2025, excluding notable items, and I'm committed to building on this, which our organization will enable us to do by simplifying and streamlining the group. We will share more details at our full year results in February as part of a wider business update. Neil and the team are available to answer any questions, and I look forward to speaking with you again very soon.

Speaker 2

Please enjoy the rest of the day wherever you are, and thank you again.

Speaker 1

Thank you, ladies and gentlemen, for joining today's webinar. You may now disconnect your line.

Powered by Quartr

Key Takeaways

  • HSBC delivered a strong Q3 with profit before tax of $8.5 bn (up 11% on a constant currency basis), revenue of $17 bn (up $1.1 bn) and an annualized return on tangible equity of 19.3% (16.7% excluding notable items).
  • From 1 January, the bank will simplify its structure into 4 businesses and 2 regions, replace its 18-member executive committee with a 12-member operating committee and target net cost savings with a short payback period.
  • Pam Kaur will join as Group Chief Financial Officer on 1 January, bringing nearly 40 years of financial-sector experience, with thanks to John Bingham for his interim stewardship.
  • Capital returns continue, with a $4.8 bn distribution package (including a $3 bn share buyback and a third interim dividend) and 9% of shares repurchased since last year, supporting a CET1 ratio of 15.2%.
  • Fee and other income rose by $1.6 bn year-on-year, driven by a 32% increase in wealth income and a 7% rise in wholesale transaction banking, while the contract service margin balance grew 22% to $13.2 bn, underpinning future revenue.
AI Generated. May Contain Errors.
Earnings Conference Call
HSBC Q3 2024
00:00 / 00:00