HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

Yes. So what's the outlook? I mean, not what has HSBC learned, but having planned for that'd be a downturn, we've had a downturn, what are the next steps? I mean, are we out of the woods or?

Listen, I think it was tough for 2 reasons. One of them is accounting, tough, under the IFRS 9 principles. You run your models, you play in your new economic factors and you try and model what you think future losses might be. And it's the first time we've used IFRS 9 in [ Venngo ]. So it's an experience result. So we've anticipated those future losses given that future economic modeling. Only time will tell whether the credit quality of the book performs in line with those modeling assumptions or better or worse. So we've got to see how that plays out. But we have pull forward those future losses under that accounting treatment. It's also fair to say it's tough in that the commercial banking franchise as being founded upon global trade and global economic activity. And as the world slow down and global trade slow down, clearly, our earnings are impacted. It's also tough in that we're a highly liquid commercial bank with a very significant amount of excess deposits over assets. And therefore, in a low interest rate environment and low HIBOR, it's impacted us more. I don't see that impact as a strategic -- it's a strategic challenge in the near term, but it will never change my view that being a liquid balance sheet in Commercial Banking, I don't change my view that that's a good thing to be liquid. What I've got to try and do is replace that lost earnings through other means. But I'm not going to change the fundamental strategy of commercial banking based on 1 or 2-year or 3-year interest rate scenarios. I need to try and mitigate that lost earnings through other means, and that's what I'm working on. Now I fully expect the loss ratios in commercial banking to be higher than they would have been under normal circumstances. You cannot go through a crisis like this and have no losses. It's going to emerge in the ECL line. The question will be, will it be what we've modeled in IFRS 9, better or worse, and time will tell on that. Bank confident, particularly in our -- touchwood, our Asia book. If you look at our loss modeling, it's actually impacting our European business more than our Asian business and/or our western markets more than our Asian markets. And that's largely a function of the amount of asset protection we had in many of our books in Asia.

So Global Banking and Markets, always a movable-faced good in part, perhaps from the first half. Where would you say your -- you feel like you're winning that the first half demonstrated the strength in the franchise? And where would be the pieces that you feel like there's been highlighted there's some work to do?

If I'm pleased with one thing, the update we gave in February to the market, where we said there were parts of our Global Banking and Markets business that were underperforming were strategically less relevant, and we needed to take action. They're actually the bits of the bank that performed poorly, Global Banking and Markets business. And where we say there were bits of our franchise that we wanted to protect, continue to invest in and grow, Asia, Middle East, foreign exchange, debt capital markets, they performed extremely well. So I think if I needed any confirmation of our strengths and weaknesses, I think the last few months has confirmed that. And therefore, it's confirmed the direction of travel that we are going in, in February. What I'm going to do is double down on the runoff of the bits that aren't performing well. I think I would double down on the growth in the bits that are strategically well positioned and are performing well. So I'm expanding in Asia and I'm continuing to invest in our debt capital markets in part of our equities business in Asia. And yes, I'm also running down parts of the business elsewhere. So I'm pleased that we've actually had confirmation of the broad strategy that we set upon. And I think it's actually important that we recognize that GB&M creates offset to a lower interest rate environment, on some of the fee income generation capacity of our GB&M business, particularly in Asia, Middle East, U.K. has created their offset and compensation for other parts of the bank that are hurting at the moment. And I wouldn't want to lose that. And -- so that's reinforced my view that we're not walking away from GB&M, we're reshaping it, and we're reshaping it to play to our strengths and eliminate the commitment of capital to those bits of the business that aren't our strength.

So you talked about February a little bit there. One of the fix in February was a quite ambitious cost program for the group. Things have moved on quickly, but it was pretty aggressive at the time. And in the first half, down 7% year-on-year in -- well, Q2 costs were down 7% year-on-year. So a remarkable number. Now Ewen did tell us don't go and put that in your spreadsheets. Maybe we can't do that again. But clearly, a focus, you've restarted the restructuring. How do we scale the cost ambition now?

Yes. So we're going to give more of an update on scaling the ambition for 2021 and 2022 later in the year. And I don't want to cover that now because it would be -- we'll do that later. But let me give a couple of context comments into this. Firstly, when I talked in February about our ambition to be $31 billion or less in 2022, let me decompose that $31 billion for you a little bit. In 2019, we finished with a total cost base, so I think, of around about $32.5 billion. In February, I talked about us embarking upon a cost reduction program, a transformation program that would look to save $4.5 billion costs over a 3-year period. So if you were to only take those 2 statements, you'd say, well, $32.5 billion drops to $28 billion. But I gave the market a statement that said, I want with $31 billion or less in 2022. So implicit in my statement of $31 billion was an expectation that I'd be investing -- reinvesting some of those savings, either into true investment for growth or technology reengineering or inflation. And by definition, therefore, I was reinvesting in growth, inflation and technology, potentially $3 billion of incremental spend. Now I have a choice. Do I continue with that $3 billion in the light of the new economic scenario we face between now and 2022? Or -- and/or do I still have an ambition of $4.5 billion? Or do I have a higher ambition than $4.5 billion? And they're 2 levers I can pull depending upon the view of the economy we now have or will have by the end of this year relative to the view on the economy and the interest rate scenario we had back in February. And what I'm not doing is rushing to give you at the moment, absolute clarity and do I reinvest that $3 billion, and do I -- and\or do I go for more than the $4.5 billion. Because I still want to see how the economy recovers. I started this dialogue with -- actually parts of the world are recovering quite nicely, Asia. And therefore, they may be a better investment case, and I want to continue to invest in Asia for the growth to offset some of the lower growth I'm getting from interest rates. And there are other parts of the world where I might need to go harder on cost because the growth opportunities are not as great. But I just want to play -- I just want to see how the world continues to evolve over the next few weeks and months before I reach a definitive view on that. And that's why I'm delaying updating the market on how I balance back or do I balance back to the $31 billion or do I just there, and I'll give more of an update on that as the year progresses as I get greater certainty on the economy and then understand from that. What I don't want to be is a cost-only story. What I want to is to make sure I do have the capacity to invest for growth. Areas of investment are clearly Asia, Middle East. Also within that, clearly wealth, and I particularly like to continue to grow our business in wealth in Asia, particularly in parts of Southeast Asia. I believe our Global Banking and Markets business in Asia and the Middle East is an opportunity for further investment and growth to cement our already strong position. And I also believe that our Corporate Banking business, Commercial Banking business in Asia, and not just in Asia, but globally, will be a rebound story at some stage, and I don't want to cut off that rebound potential from Commercial Banking. So it's balancing act at the moment, and I will update on how we fall on that balancing act as we go through the year and as we report full year results. But I have levers I can pull and I've given you some of the boundaries to those levers, and I'll update in more detail later.

Very clear. Now having established that you can't predict the future, I'm going to ask you to predict the future again. It's like the weather in Cornwall, I mean, you read the weather forecast, but then you just need to look out the window, and it's -- the 2 bear no relation to one another. But in that light, your impairment charge. So you -- HSBC has a very long track record of when it sees it, it provides for it, right? So I mean that's certainly my experience over the last 20-odd years. And I think it goes back a long way before that. So $8 billion to $13 billion was your best stab at this year's bad debt in the first half. We've all -- we all try to backfill how conservative some of things on employment is versus somebody else. But just how do you think about the impairment cycle? I realize how difficult that is to judge with government guarantee schemes and furlough schemes and everything else. But…

I've got to say, in my 30-plus years of banking, this is the most difficult period to predict future ECLs. Because whatever modeling we've all done in the past, it's -- the models will struggle to model COVID because you've got a breakage between inputs and outputs, normal economic inputs and outputs. The relationship between GDP and unemployment is not a normal relationship. The relationship between a downturn and a recovery is not a normal economic relationship. And by the way, I'm nowhere near an economist. So -- but I just know for a fact that you get a downturn as severe as this, under normal economic modeling, you would expect a much longer recovery and much higher levels of unemployment. But because of government support schemes, because it's a temporary shark, but by temporary as in is it a year or is it 18 months or 2 years, you're going to get a different pattern of recovery for that level of downturn. So it is hard to predict, which is why we've given a range. And we've given some scenarios and some parameters for you all to try and assess the relative impact. My own view, again, look at it, we all hope that under IFRS 9, and we all believe that we've done a good job of modeling to the best of our ability on IFRS 9. But what we've done is we've taken Stage 1 and Stage 2 provisions into the balance sheet. From here on in, one would expect those -- and those provisions have been done on the basis of future economic forecast. So the future economic forecast of Q1 were more positive than the future economic forecast at Q2, as you're in -- actually really going into the big downturn. Now time will tell, by Q3, what those future economics forecast will be. Will they have worsened? Will they have plateaued? Or will they be starting to improve? If they worsened, one could expect some more Stage 1 and Stage 2 provisions. If those future economic forecasts have improved or plateaued, you probably should see a stabilization in Stage 1 and Stage 2. You shouldn't necessarily see a top line, you should see a stabilization. And if those future economic forecasts have started to turn the corner, and they're starting to factor in recovery, one could possibly start to see some recovery of your Stage 1 and Stage 2 provisions in Q3 and Q4. So what you're then going to get is the tail effect of Stage 3 feeding through. So the provisions that we created in Q1 and Q2 will migrate into Stage 3. But what -- if you get in a recovery in the economy, you'll start to see a recovery in your Stage 1 and Stage 2, offset your creations in Stage 3. And the real acid test, therefore, is going to be we'll have a good indication in Q3 and Q4 as to how all of that will play out. But what we basically inherent in our $8 billion to $13 billion was we were expecting a lower charge in Q2 -- in the second half of the year than that which we created in the first half of the year because we would be expecting either a stabilization of the future economic forecast or a slight improvement. And therefore, inherent in that range is that migration from down to the trough and then you're starting to get better looking after. Time will tell.

No, no, no. I realize. And I'm going to just -- I'm going to press this. It's a very technical one, if I may. I'm an analyst, I can't help it. But a very strong capital ratio right at the top of -- well, above the top of your sort of ambition of 15%. You did talk at the half year about how that was likely to be dragged down by risk-weighted asset inflation, which is related about debt charge and whether they come through. I suppose that it's a 2-part question, really, is there anything you can do to act on the amount of capital that you need? There's very elevated level that you're holding. So the sort of bank and expectation is high. And then is there anything you can do about the risk-weighted asset inflation coming through so to liberate some of that capital, I guess?

Yes. So let me deal with the second one first. Yes, there is. And we're actively working the risk-weighted assets. The first thing I can do and should do is the RWA rundown plans, we talked about in February. I want to make sure we execute on that, and we are executing on that, and we are on plan for the quantum we set aside for reduction in 2020. So I'm not going to ease off on that. I'm going to deliver that plan. Because if I got RWA inflation coming through because of credit migration, the last thing I want to do is to frustrate that by not delivering on the plans I already set out for RWA reduction in the underperforming bits. And in fact, I'd like to exceed it. So that's my first ambition. Deliver on the promises or exceed it. My second ambition is to look for forms of mitigation for credit migration. And we are seeing some come through but we're making good progress on that. And I think, overall, we're seeing a positive performance, but we've got to wait and see how it all matures over the next 3 to 4 months between now and the end of the year. But we are looking at ways to offset some additional balance sheet so that we don't get quite the RWA migration we feared when we talked about this at the half year's day. With respect to the CET1, again, I start very much as I start with liquidity. Strong liquidity is good, not bad, even though it's not earning a huge amount of money at the moment, it's good to have a liquid balance sheet. And strong capital is good, not bad, particularly when you're in the middle of a crisis like we're in at the moment. So I'm not unhappy with 15% CET1 at this stage. It gives us good contingency, good buffer to make sure that we can ride this crisis out well without having to take dramatic action. But clearly, that is not our target range. 15% is not our target. And we want to make sure that we can manage any economic shocks that we get between now and, say, the end of next year with a strong capital position. Now clearly inherent in that, if the economy starts to recover, well, what we want to be in a position is to recommence dividend payments. And that's a topic we will revisit when we have our full year results. But we want to make sure that with the strong capital position, as soon as we can, we recommence dividend payments. But we'll make that call with our full year results and our position at the end of this year.

Noel, you've been generous with time, I guess. A last one that this has been again probably seen throughout your 3 decades with the group. But Asia is the future until every now and again, it's not, right? There's all the doom says, and the growth has been unsustainable. It's about to come to an end. The Chinese economic vehicle is about to be revealed. Based on everything you've seen this year, is that the future?

I've only been here 33 years out of 155 years. Asia has been our future for 155 years. It's been the future of my 33 years. I still think Asia will be the strategic future, not only for the group of HSBC, but I still think it's a huge opportunity. Yes, it's challenged at the moment, the geopolitics is challenging. But as an economic block, the intra-Asia trade, the intra-Asian wealth is phenomenal and it's a huge opportunity. So I still think it has a -- is that the center of everything that we do as a group. I am confident that it will weather the storms that are currently there. And we want to be part of that future. If you look at it as a consumption market, it's growing rapidly. If you look at it as a trade block, it's changing, and we need to be cognizant of that. Trade will change as it has been over 155 years, and we'll follow that trade around the world. But it's still a huge manufacturing base, all of Asia is not just China. And China is a huge manufacturing base, that still has a place in the world. So I'm still positive. We're still very focused on it, and I'm still investing in Asia.

Thank you, sir. Really appreciate your time today. And yes, look forward to picking up this conversation with the third quarter results. Thanks, Noel.

It's a pleasure. Thank you very much for your time.