HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

Good morning and good afternoon, everyone. Thank you for joining the European track of the Barclay's Global Financial Services Conference. I'm Aman Rakkar. I work in the European Bank's equity research team here at Barclays. Delighted to have HSBC with us. Today, we have Ewen Stevenson, CFO of HSBC Group. Ewen, thank you very much for your time today. Appreciate you making yourself available for taking our questions.

Yes. Look, thanks. And thanks for the opportunity for everyone who's on today.

As we -- before we kick things off, I just wanted to highlight to people, in the top-right corner of your screen, you should be able to see some options around participating in audience response survey questions. Six questions, you can answer them at any point through this 40-minute conversation, so please do take part. You also have the ability to submit a question. You should see an option above there. So please, if there's any question that we haven't addressed and you think that we should, please submit that in. So again, Ewen, thank you very much for your time. Just to kick things off then, I mean you're an Asian-centric organization. Can you give us an update on activity levels and business momentum in your key Asian markets?

Yes. Thanks. I mean just as a sort of reminder to everyone, obviously, we've got a very significant operation in Hong Kong. But other priority markets for us for growth, Mainland China, Singapore and the ASEAN region around it and India. Yes, it's back. We've got a very significant organic and inorganic investment program at the moment. We've committed to spend about $6 billion over the next few years to organically grow our investment business. And we've started to also supplement that with some inorganic moves. We recently purchased a small insurance company in Singapore, Access Singapore, which will double the size of our Asian -- Singapore and insurance franchise. We've got big aspirations. We want to be #1 in Asia Wealth. We want to be #1 in Asia Wholesale. I would say in terms of the specifics of recovery, it -- I mean as you all know, it's very dominated by COVID-19. So Delta variant is clearly having an impact in many markets there. And you see very, very different levels of vaccination rates currently. And lockdown policy is also very quite markedly across the region. But overall, I think what we are seeing is a sort of continued steady recovery in customer activity. But given the Delta variant, I think it will be above the recovery. But if we go back relative to where we were 6 months ago, we can definitely see activity levels amongst customers progressively improving.

If I was to turn to one of your success stories in the first half of the year, your Wealth Management business currently enjoying quite a strong growth rate above your medium-term double-digit revenue CAGR target. What are the key drivers of that strong underlying growth in H1? And what do you think about the H1 run rate being sustained through the second half of the year?

Yes. So well, particularly Asia Wealth, we see as a decade-long massive opportunity for us and others. We think we are relatively uniquely positioned in terms of, I think, we are in the region. For us, when we define wealth, it's a pretty broad definition covering affluent all the way through to ultra high net worth and also including life insurance and asset management. Yes, if you look at the underlying growth rates, wealth balances, I think globally, we're up about 18% Q2-on-Q2, and revenues were up just over 10% if you backed out insurance volatility. In Asia, specifically in -- Asia is about 2/3 of that likely for us in Asia. We still are in the first half, I think, very good customer activity levels in Hong Kong, particularly mutual funds, particularly in domestic insurance sales. We've launched a whole bunch of new digital channels, which are seeing good growth at this point. I would say that the first half is always seasonally stronger for us than the second half. And I think a lot of what we're doing in the region, you won't see the real revenue benefits for a couple of years. We've launched this new life insurance vehicle in China that's now set up in 5 cities called Pinnacle. Access Singapore that I just talked about doubles our Singapore and life insurance market share. And we are investing heavily and effectively building much better collaboration between commercial bank and our Global Banking and Markets operation. Over half of our customer referrals into the private bank organically generated within our own network. So we're bulls on Asia Wealth. Second half will be a bit slower than the first half. And again, I think as we come out of COVID across the region, customer confidence will increase, and Wealth sales will increase.

I guess, perhaps [indiscernible] Hong Kong is a key region for your business, and China is a key region for you. The border between the 2 regions is currently closed. How has that border closure affecting your business [ sales ]? Are you hopeful of making up lost ground when that border eventually reopens?

Yes. I mean there's -- the Mainland China border into Hong Kong, I guess, has a direct and indirect impact on us. Yes, the most direct impact is, yes, about 40% of our insurance sales in Hong Kong were to Mainland Chinese tourists. Obviously, that has gone to close to 0. But we have a bigger domestic business than, say, either Pru or AIA, so we're less impacted than others. And then the other thing is tourism [indiscernible] impact, there were over 50 million tourists from Mainland China to Hong Kong in 2019. That is now a trickle. Pre COVID-19, I think tourism was around 4.5% of Hong Kong GDP. 7% of jobs were tourism related, and 80% of the tourists were from Mainland China. So we don't expect a full border reopening anytime soon. We think it is going to start gradually. But the only thing I would say is even if the border doesn't open, we are seeing on things like Wealth Connect the ability to engage digitally with China customers in a way that we couldn't have done a few years ago. But that border reopening, I think, is important for the business.

I guess relatively, focusing on China specifically, it's an important strategic region for HSBC. The market continues to look at the implications of recent policy developments in China, which I think raised uncertainty levels in the minds of investors. What do you see as the key risks and uncertainties for HSBC? And how are you navigating these?

Yes, I mean I sort of understand the market sensitivity around the news flow out of China, but I would say there's very limited impact on our business. Yes, the policy developments that you've all seen are not really directly impacting us or our customers. Yes, we spend far more time on things like natural conflict that exists between some of the existing legislation, such as the Hong Kong Autonomy Act in the U.S. is in conflict with the National Security Law in Hong Kong. But to date, we've been able to comfortably navigate this. Yes, if you looked internally, by far and a way the bigger impact on our business has been the impact of COVID and the consequential impact on HIBOR rates. On the direct impact of China policy development, so it's hard to point to anything meaningful.

Just a gentle reminder to everyone, please do participate in the ARS [ part ]. You see we've got quite a few responses to that. If you haven't done so, that would be great. And as a reminder, you can submit questions in directly. Okay. Just to change tact for a moment then into your trade finance businesses, an indication of an inflection point perhaps in Q2, your trade volumes grew Q-on-Q or for a period of pretty subdued activity. How do you think about the outlook of trade particularly given news flow around supply chain disruptions? Is that a short-term thing or not?

Yes. Look, we do think a lot of the noise around disruptions in the supply chain is a near-term thing. Yes, 2Q on 1Q trade business balances grew at 9%. We saw market share gains in all of our key markets like Hong Kong, Singapore, U.K. I mean we're very confident as we start to recover out of COVID, trade levels will recover strongly. I think we remain massive long-term bulls on global trade, growing faster than underlying global GDP. We've had an extensive investment program over the last few years into effectively digitizing our trade offering, so we now feel that we've got a very competitive technology capability underpinning it. And we are the clear #1 trade bank globally. So there clearly is some noise around supply chain disruptions, but it's not having any material impact on the recovery in our trade business government.

Yes. I guess trade -- the recovery in trade balances and loan growth, that's going to be part of the recovery, hopefully, in net interest income. I think you indicated that H1 '21 results that net interest margin stabilized in Q2. I do note that HIBOR was a touch lower probably since we spoke to you. So it would be interesting to know if that means anything. And I think the view was that, that stabilizing net interest margin would be combined with rebuilding loan growth. And actually, you could see growth in NII into 2022. Could you help us understand the kind of moving parts behind NII from here on? And what do you see is the kind of key upside risks and downside risks?

Yes. I mean absolutely critical to our equity story and underpinning the valuation is to get back to revenue growth. Yes, Q2 on Q2 revenues were down 10%. Yes, the big driver in that was the very substantial fall that we saw in interest rates going on last year. The bulk of that has now passed through the business. We're very sensitive, as you all know, to HIBOR. That is now broadly stable. I think if we look quarter to date, yes, 1 month HIBOR, I think, is a basis point lower than what it was averaged in the second quarter. Volume growth is coming back, well, which is very, very strong both in Hong Kong and the U.K. We are seeing some recovery starting to come through in unsecured lending. And we've got building volumes and trade and commercial lending facilities. Yes, there was a bit of noise in the second quarter numbers because we had about $15 billion of Hong Kong RPA loans. They've now reversed out. But overall, we're still -- we've said that we expect to grow our lending volumes by mid-single digits in 2021. That implies much stronger growth in the second half than the first half. We still remain on track to do that. And if you just think about the pure optics, if NIM is stabilizing, volume growth will then, I think, progressively see over the coming quarters a recovery in net interest income. In terms of repricing opportunity, there's probably not a whole lot, I think, either positively or negative we see going through at the moment. We do see some opportunity with our [indiscernible] deposits to take more -- take greater risk appetite in our treasury franchise. So -- but that would be relatively modest, I think. But overall, the big driver in the recovery of net interest income is NIM stabilization and a return to volume growth.

Yes. I guess related to that topic then, you kind of partly answered my follow-up, but I mean should we just think about pure NIM expansion? Does that rely similarly on rate hikes? It sounds like the opportunity for self-help from here on [indiscernible].

Yes. I mean I think we've done a lot of the management of the liability books that we can. And we don't see much opportunity for asset side expansion. The -- so I think the bulk of it will come through from a shift in the policy rates. So I mean if you asked us 6 months ago, I think we were looking at a scenario where we didn't really see any shift in policy rates until late '23, '24. I think we're now more confident that we can start to see policy rates going back up in the second half of '23 in the places -- '22. In the places like U.K. and the U.S. Again, we've got relatively short-dated books, as you know. So as those interest rate rises come through, it will have a decent impact on our P&L just in interest rates across the curve we're 100 basis points higher today, that would add about 3 percentage points to our return.

Yes. If I could turn to GB&M growth markets, we've seen H1 revenue performance was affected by kind of industry-wide normalization. But that division is also being restructured at the same time. So I guess from outside, it's perhaps somewhat difficult to kind of how it will impact of that restructuring on revenue performance. How much reshaping of that business do you see left to do? And what -- how should we think about the revenue implications into next year as a result?

Yes. I mean look, I think that Global Bank and Markets team has done a good job in reshaping the business. That made a lot of progress and the fact that we centralizing the balance sheet and the Western European business. The RWA rundown program, but they've been embarked on, substantially progressed, but there's still an amount to do in the second half of this year and to next year. The revenue impact on that is going to be relatively modest, I think. Yes, we've said consistently that we expect 2021 revenues to be below 2020 but ahead of 2019. I think that still continues to be the case. Yes, we've obviously got a different business mix than some others. But overall, I think in terms of what we've seen so far this quarter, no real surprises.

I mean I guess on that, can I trouble you for an update on what you're seeing in terms of trading Q3 to date?

Yes. I mean it's weaker than a year ago. But yes, I mean our franchise tends to be very customer focused. We're not in specs. We have less exposure to the advisory business. We have a smaller equity franchise than others. But I think overall, the fixed income businesses are doing okay for us and nothing really to call out.

Yes. Okay. I guess final reminder around ARS questions, if you haven't had a chance to participate, please do so. So we've got a couple of questions come in by the audience. I'll run through that in a second. I guess we've touched upon Wealth Management improving trends there. Trade finance, the outlook looks to be improving there. And NII, you're talking a constructive message. I guess if I was to bring that together then in aggregate, it does look like -- to what extent do you see revenue hitting an inflection point in Q2 in aggregate? And when you look out and you factor in all the various moving parts, do you think the runway is clear? Or do you think there's additional kind of bumps in the road to overcome?

Well, with Commercial Banking, I think we're almost at that tipping point now, where a return to customer activity levels or stabilization of NIM should begin to see them turn the corner on revenue growth versus the previous quarter a year ago. We're approaching that position, I think, in Wealth and Personal Banking. I think Global Banking and Markets are still suffering a bit by a very, very strong 2020, so the quarterly comparisons year-on-year is still a bit weak. But yes, I think by the time we get into the first half of next year, we should definitely be back into a cycle of progressive revenue growth coming through. but how that plays through the different operating divisions, I think, in the next few quarters will vary.

You are targeting quite strong medium-term revenue growth at the same time as holding your cost base flat, which together is going to deliver pretty strong operating leverage. Your targets are, I think when you sit down there, they're credible but ambitious. What gives you confidence in your ability to deliver on this? And I guess relatedly, particularly in regards to some of the cost inflation pressures that you've indicated in H1, how does that feed into your plans?

Yes. Well, I'm responsible for the bank's cost program. So part of the confidence comes from the fact that I run the program. But look, it's a core part of our equity story to be able to keep costs broadly flat while growing revenues decently. Yes, we've had a pretty comprehensive cost program now running for the last couple of years. I would say,the organization has got a whole lot better at how it's controlling costs. We're not talking about stuff that's kind of at the margin. We've announced, for example, that we're going to get out of 40% of our commercial real estate footprint ex branches. If I look at what I'm doing in finance, I'm taking -- basically creating a single data set up on the cloud and taking all of my reporting engines up on the cloud. And that will allow me to take about 1/3 of the headcount out of finance in the next few years. Yes, so what you see is fundamentally technology-driven change driving very significant productivity level uplift in the business. We are seeing some wage pressures. I think we were open about that in Q2. We've accrued about $300 million more into the variable payroll this year so far. Keep that in context, that's about 1% of our cost base. But we do think it's important that we remain competitive and we intend to remain competitive on compensation. But equally, I would say COVID-19 has opened up a whole bunch of new opportunities. The fact that we're able to get out of 40% of our commercial real estate is because we're remote working. I'm not actually staying in an office. I gave up my office months ago, and I now hot desk with Noel, and that sort of open environment we have for the executives. Yes, so I think the whole evolution of Zoom and the fact that we've had this working from home experience has allowed us to effectively rethink. So there's probably $200 million to $300 million of real estate savings involved in that. Our travel budget used to be $400 million a year in 2019. We're committed to halving that going forward. So there's another couple of hundred million dollars of savings. And we've also had massively accelerated digital take-up from our customers last year. So -- and I think that will allow and open up opportunity for an accelerated rundown of physical channels. So yes, there's some wage pressures, but we've brought out other cost levers that we didn't think that we had previously. We're still committed to our cost targets, which keep costs broadly flat this year, and to take them lower in 2022.

Yes. Asset quality, if we were sitting here a year ago, I probably ask you a number of questions around asset quality, but it's not regulated -- regulated to further down, no question on this. Any update on your broadly positive H1 messaging around ECL provision releases in the coming quarters?

Yes. Well, we're not going to update the market at this point on where we are on ECLs, but I think the broad messages of what we said at 2Q remain. We still expect ECL releases over the next 4 quarters. We still retain about $2.4 billion or 60% of the Stage 1, Stage 2 buildup we saw in 2020. I don't think we really expect a return to normalization in credit costs until probably the second half of '22. And just as a reminder, what we said on that is normalized for us is 30 to 40 basis points through the cycle. So I think we're in a period where we're going to continue to see, yes, either very, very low levels of ECLs or potentially further [indiscernible]. Aman, as you know, we're not -- as we saw in 2Q, even though it's effectively a one-off benefit for us, but I would say there's a decent portion of that $2.4 billion over the next 4 quarters that we should look to write back.

Yes. I mean I think this is a related topic, but around the implications to capital.

Yes.

In terms of the asset quality at the moment. I mean you're operating part of your 14, 15 month medium-term CET1 target. How do you think about surplus capital? How much do you think you have? And I'll ask it now, but you indicated a greater appetite for buybacks, I think, at H1 perhaps we expected before. Can we expect a buyback program to be launched to full year '21 results?

We're definitely in a stronger capital position now than we thought we were going to be at this point. Yes, we're several billion dollars better in terms of profitability driven largely by ECLs but also because there has some of the cost to achieve budget that we expected to spend this year will just be pushed into the first half of next year. That's really just a pure timing issue, I think. And also on the risk-weighted asset side, things like credit rating migration has been a lot less pronounced than we might have expected. So we've got lower RWAs and for profits means our capital position is much stronger than we thought. On the headlines of -- so we have softened our buyback language. At the start of the year, we said absolutely no. Now we're now saying maybe, and we'll continue to keep it under review. Yes, there is a few adjustments to the headline core Tier 1 ratio or software intangibles. We know we've got some losses coming through the sale of our French retail business. We know we've got some regulatory outlook coming. But even when you back all of that out, I think over the next couple of years, the payout ratio of 40% to 55% might be enough to normalize. So we're absolutely committed to normalizing our capital position over the next few years, and therefore, buybacks has to be part of that armory, I think.

Yes, going to take an audience question actually related to capital. Why would you buy the -- your recent acquisition [indiscernible] business in India? Is that a -- why buy back when buybacks are potentially so accretive at current valuations? How do you think about that trade-off between your growing [indiscernible]?

Yes, so we don't view the 2 as mutually exclusive. Yes, we are -- we think we will do a mix. We've been quite open about the fact that we are looking at a number of small bolt-on acquisitions, which I think in totality probably sum up to no more than $2 billion. We think that set of acquisitions are all highly accretive to the strategy that we're trying to execute on Wealth in Asia. And that will not prevent us that level of M&A activity or will not prevent us being able to do meaningful buybacks over the next couple of years.

I'm going to take another audience question here, some different topic. Back to China, given the Chinese government's intervention on large tech companies, do you see that in any way as a risk for banks? Or is this a blip in the road for a fast-growing region?

Well, I think it's sort of speculative. But at least in terms of what they've announced so far, as I said earlier, it's hard to point to direct consequential business impacts on us. The fact that large tech has come under greater scrutiny, in some ways, we could be a net beneficiary of that. Firstly, it encourages, I think, some of the listings that were going to be done in the U.S. to come back to Hong Kong, the fact that some of our more assertive fintech competitors are potentially going to be a bit more constrained, yes. And equally, on the wealth side, all wealth strategy in China has been mainly focused on emerging middle class wealth. If there's going to be wealth distribution from the ultra high net worth down, I do think that has a material impact on our wealth strategy. So you have to sort of read on it and speculate what might come next rather than what we can currently see.

Okay. Great. I'm going to switch back towards our ARS questions, which I'm delighted to see a really strong response from the members. I'm going to read the questions out and the answer to that. I don't think you can see it [indiscernible]. So question one, what would cause you to become more positive on HSBC shares: number one, positive revenue surprise; two, greater cost savings; three, better asset quality; four, stronger capital distributions; and five, deescalation in geopolitical tensions. Strong consensus is positive revenue surprises with 43% of responses, followed by deescalation in geophysical tensions. Doesn't seem -- I think that's not so surprising. I don't know if you've got a view on any of that.

Look, I mean, yes, we're obviously focused on what we can control. Yes, we can control revenue growth. We can control cost discipline. I would agree that asset quality shouldn't be a major driver from here in terms of share growth -- near-term share price performance. And we can control capital distributions. So on those 3 things, I think those are all drivers that we're focused on, that we think we can have a material impact on. On China and China-U.S. relations, et cetera, that's not an area that we think we can have a material impact. So...

Question two, what do you expect to be the biggest influence on HSBC's revenues in the next 12 months: one, volumes; two, pricing; three, policy rates; four, fees and commissions. The outstanding response here is policy rates at 71.5% of the answers.

Again, my reaction to that would be that's not something we can control. So we think we're building a business that can get to cost of capital returns in this rate environment. That was the core thesis that we set up at the beginning of this year. If policy rates come back, so we'd be delighted because we, as I said, [indiscernible] kicker towards improved rate environment. But yes, I'm surprised it's overwhelmingly in favor of something we're not in control of.

And then yes, then question three, how do you think about HSBC's cost development versus expectations: likely to beat cost; likely to meet expectations; likely to meet; likely to miss due to inflation; and would like to see more savings. The answer that's come out here is likely to meet expectations, particularly remarkable there. If I switch to question four, how do you see HSBC positioned on capital and dividends: number one, upside surprise when distribution resume from lower requirements; upside surprise from better earnings; downside surprise from weaker earnings; downside surprise from regulatory developments. Number one came out with the strongest response. 2/3 of respondents had upside surprise from lower requirements. Question five, I guess I'll get your view on this. Around ESG, how do you see HSBC positioned on ESG: number one, above average; two, below average; three, in line with average; four, not sure, I haven't taken a view on ESG. Interestingly, 1/2 of respondents said in line with the average, whereas 1/3 of respondents said not sure, haven't taken a view yet. You've got anything on that?

I mean I would say our internal view is that we're slightly above average and with aspirations to be well above average. The -- we've got an enormous amount of investment going on across the organization, yes, partly fueled by where we're domicile. The Bank of England stress test is being run at the moment on climate. I think it's the most comprehensive regulatory stress test that's being run on climate, which means we and all the U.K. banks, I think, are going to be further ahead of the curve. We've got a customer base globally where transition risk is -- managing transition risk well is critical. So we've seen it as effectively the next Industrial Revolution over the next 10, 20 years of amount of industrial [ games ] that has to be driven to meet climate commitments. And we want to be front and center of that with our customer base. So we view it as sort of mission critical that we are above average in how we're approaching ESG.

Question six, where do you see the biggest opportunity for HSBC to grow revenues: number one, wealth management; two, GB&M; three, investing in loan growth across the existing footprint; four, inorganic acquisitions. Half of respondents said wealth management, 1/2 has said investing in loan growth across the existing footprint.

Yes. Look, I would say it's a combination of loan growth and wealth. I think we see it probably the biggest 2 opportunities for us over the next few years. So I would be more -- yes, given it was a binary question, you're always going to get one answer being referred to others. But -- and we've also made it a priority to -- we are a very interest rate-centered stock, and we have been duly impacted over the last 18 months by ultra low interest rates. So we did also see it as a priority to diversify into greater sources of noninterest income, for which wealth is a big part of that.

Yes. I'm going to ask you one final question in a couple of minutes that we have left. I'm a U.K. bank analyst, so it would be remiss of me not to ask you a question on the U.K. mortgage market. The backdrop has been very strong over the last 12 months, but there is evident normalization in terms of activity, and pricing has fallen. How do you think about the mortgage market from here? And is your strategy changed as well?

No. I mean our strategy, I think, has been clear in the U.K. mortgage market for several years now. Just to repeat, we have got about 13% to 14% of the current account market by value. Our current stock share of mortgages is 7.4%. If you went back a few years, even though, as you know, about 70-plus percent of distribution is through brokers, we had a very, very underdeveloped broker channel, which we've now developed. We've been consistently -- we've got a lot of liquidity trapped in the U.K. room fence bank. We've got even more liquidity there now because of the result of COVID and the flight to safety and a massive influx of deposits we've had over the last 18 months. We think we're earning very, very good returns on the front book of mortgages. We think we can consistently grow mortgage franchise above our stock share as we've been doing for the last few years and continue to do so.

Okay. Great. I think we -- we're just about done for time. So Ewen, I wanted to say thank you again very much for your time and thank you very much for taking your questions. Thank you everyone that's dialed in the session. Thank you very much for your taking part in the audience response survey questions. And without further ado, thank you very much.

Yes, thanks, everyone. And hopefully, we will see you in person at some point over the next 12 months. Thank you.