HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

This webcast presentation is for Bank of America clients only. If you are a member or representative of the media or press, please disconnect now. Thank you all for joining us at this late session. I'm absolutely delighted to be hosting Noel Quinn, group Chief Executive of HSBC. Now I've got a list of questions for HSBC, which are more forward-looking. But now I'm going to start with this week's elephant in the room. It's probably been one of those things that have recurred over the years in a picture of very strong underlying Chinese growth. But it certainly feels like there's at a heightened level of uncertainty possibly around single name developers, but also around policy in China just now. And if you have any kind of opening statements about HSBC's position as a group with respect to that.

Yes. Alastair, happy to do that. Let me probably, first of all, talk about HSBC specific, and then I'll go more broadly into the overall environment. So HSBC specific, I can't be -- I can't talk about individual clients. It would be wrong for me to do so on a confidentiality basis. But what I can point you to is we're very focused on our CRE business in China and Hong Kong. We focus typically on the Tier 1 cities, Tier 1 properties, Tier 1 lenders. We have a well-managed exposure there. We're not unduly concerned by that exposure. It's performed well, is performing well. So I feel comfortable with our own balance sheet commitment on CRE in China. Generally, what we find is we're lending to clients that we've known for many years. We've had an international banking relationship with them. So our Hong Kong clients enter in China or China client enter in Hong Kong. It tends to be a combination of security on the individual building, but also access to corporate covenants. So you get sort of double security that way. And we're very selective on what projects we focus in on and what clients we are focusing. That was clearly evident in our half year results. Now if you look at our Stage 1, Stage 2 modeling on predicting losses in Hong Kong, China, you wouldn't have seen any surprising movements in that modeling. And if you looked at our Stage 3 provisions for the first 6 months of this year, again, you wouldn't have seen anything in that, that indicated we were concerned about our CRE exposure in China. And nothing has happened in the recent weeks, and we changed that position in my mind for us as a bank, as an institution. Now I'd be naive to think that the turmoil in the market doesn't have the potential to have second-order and third-order impact, clearly with the changes that are taking place in the overground situation is concerning. And there is a potential for second- and third-order impact, particularly on the capital markets and the bond markets, and we've got to stay close to that. More generally, if you broaden this out then sort of the regulatory environment, I think what you're seeing is -- and this is not new news. There's been a lot of signals over the past few years, last couple of years particularly, where market segments that are starting to get into excess territory or going too far in terms of some of the market development and are possibly importing risk. There is generally a theme to try and make sure that the regulatory environment is adjusted to accommodate and to adjust for some of those excesses. So I think -- I don't think the regulatory reform that we see necessarily is wholly unexpected because there have been some strong signals, particularly around shadow banking, around the commercial real estate market that some of the regulatory regime was going to change in that regard. And that's been sort of well broadcast and well forecast. So I'm not wholly surprised by what's been happening. You've got to stay close to those signals to understand the potential for change on the client base.

Thank you. Clear. Turning that context, I guess the signature part of your strategy or the new piece is the wealth focus, growing -- very quickly growing business for. You've hired about 600 frontline staff in the first half. It's really a bid business, about $8 billion of revenues last year, 2/3 Asia. And you have a big aspiration and $3.5 billion of investment into wealth. How quickly does that come through and how long before it will return to profit? I guess how much does the cost lead the revenues as you build that up?

Yes. Well, listen, I should say, we already have a large wealth business in Asia anyway. And that business in Asia also has international connectivity. So our Asian clients want global solutions to their wealth management needs. You know my background. First, my background is 34 years principally as a corporate banker, so I'm not going to pretend to be the absolute expert on wealth management. But I do believe it's a huge opportunity for us to continue to leverage our business in Asia. Wealth for me is not just private banking wealth, but it's also wealth for the mass affluent. So our premier brand, our Jade brand, our private banking, our asset management business and our insurance business. For me, it comes under the umbrella are building a more holistic and dynamic wealth business. We're very strong in Hong Kong. We've invested to build out our business in China through direct investment and through joint ventures, our joint venture in the insurance business. We want to continue that investment curve, and we've done that with the investment in Pinnacle. We've announced that we intend to hire about 3,000 wealth managers in China over the next few years. We have built out a digital platform to supplement that face-to-face capability. We're on track for our hiring. The hiring that we've done we feel we can go even faster. And therefore, we're expanding into an additional 5 cities in China. And in addition, we expect to hire more wealth managers in Asia than we had originally planned this year because we are making good progress. Now it's about an extra 100 on top this year from that, which we are already going to hire. In Pinnacle, in China, the business case assumptions we had are being met. So the conversion from opportunity into written business, is meeting business case expectations. But this is very much a long-term build out. Why are we doing that in China in particular? The organization that has taken place in China is driving significant consumption in many cities. And we have footprints in more international -- in more cities in China than any other international bank. I have relationship managers on the ground in 50 cities in China. Most of the international banks are focusing in on 3 or 4 cities. So I'm very much interested in the organization that's taken place that's driving the move into the middle class that then is going to move into consumption of wealth management products, insurance, investment products. It isn't just about the super rich. So we're building capabilities in product manufacturing and distribution that are going to be there to take advantage of that shift. Now what I also want to do is invest outside of Greater China. We grow in organic growth in Hong Kong, organic and inorganic growth in China through joint ventures. And then in Asia, the rest of Asia, including India, I think we're principally pursuing an organic strategy or we've been very clear that if we can buy bolt-on acquisitions that accelerate our organic build-out through product capability and distribution capability, then we'll accelerate that organic build by buying bolt-on capabilities and AXA is a good example of that. The combination of what we already have on the ground plus AXA probably advances our build-out time by about 3 years once that acquisition is completed and embedded. And that's good. Now I am looking at 2 or 3 or 4 other similar types of things that could be bolt-on acquisitions that accelerate our organic build-out. But this is very much -- can it turn into business fast. Yes and no, some of this is deliberate for the medium term. Some of this will deliver short term benefit. Pinnacle is already delivering revenue growth to the bank in China. It's got to get scale. If you look at our private banking business and asset management, we saw good inflows of net new money into our business in the first half of this year relative to the first half of next year. Very happy with that growth. Where are we sourcing that business from? Around about 60% of the business, the net new money that comes into our private bank is coming from our corporate clients, people we already know. So my cost of acquisition is cheaper than going straight into the market for new-to-bank clients, and it's a more robust and loyal client base that's coming in. And I think around about 75% of the assets under management came from referrals from our corporate banking clients as well. That's GB clients and commercial banking clients, again cost of acquisition lower. So that's the near-term benefit we can get from it. Alastair, I hope that helps.

Thank you, Noel. Very clear. And perhaps to me as much as anything, is the opportunity in the Mainland with customers new to the bank, customers the bank to be building out already? Or is it because Wealth Management Connect is enabling customers to do more with you? So what's kind of the business case? Is it that the regulation changes for you is that you keep growing or that you can do more with the existing customers?

I think Wealth Management Connect is a huge opportunity, and certainly, we'll be very focused on that and seek to take advantage of that development. And that really bridges -- we have a very strong footprint, obviously, in Hong Kong. But we also -- my predecessors, thankfully, put down a very strong platform of capabilities in the Greater Bay Area. We were -- we expanded our branch footprint there. We expanded our commercial banking footprint in the Greater Bay Area. We're, by far and away, the biggest international bank in the GBA. So anything to do with connecting GBA to Hong Kong, we're well positioned and that's a huge opportunity. But -- so we already have a client base that's very accessible. And if you just look at what's happening in the Greater Bay area and more broadly in China, you're looking at a doubling of the middle class over the next few years and further urbanization to go. So it will be about customer acquisition as well. They won't all be existing HSBC clients. I think the middle class is expected to double from 300 million to 600 million over the next few year. That's a huge opportunity.

Thank you. Thank you. Now I'm going to shift gears a bit violently now because we like to keep your new tariffs. So capital, so capital, so this is a remote bag of opportunities. Capital, I mean, HSBC's always like to have a lot. Certainly, that's one of the defining characteristics. But 15.6% is awful lot. And you're sort of well above peers while trading, as I'm sure people have mentioned to you, on a decent discount to book value. So can you just talk around the organic and inorganic opportunities to use that capital, including any capital returned.

Listen, we're not changing our target capital, 14% to 14.5%. We think that's a sensible level of capital for a bank of our nature. We like to have strong capital. So that's the right sort of target. But clearly, we're winning in excess of that at the moment at 15.6% at the half year. And that's a function of 2 things, really. We traded better in the first half of the year than we had originally expected. Because the recovery -- with the success of the vaccination program in many of our markets, the economic recovery was stronger than we had potentially assumed. And therefore, we had lower ECLs and stronger trading performance. Plus, the RWA drift as a result of Crane migration was lower than we anticipated. So that's a stronger capital position than we had expected, which is why at the half year, we signaled a different position, so that which we signaled at the end of last year. At the end of last year, we were definitive. We were not intending to make a buyback decision in 2021. Because we had a -- it was the very early days of the vaccine program, it was hard to predict how the economy will recover, and we wanted to be more cautious. At the half year, we changed that signal and said let's see how the next few months continue. If this trend continues, then we're willing to keep the option of a buyback under review for 2021. So we've signaled the change. It was not a definitive commitment to do a buyback, and that was not a definitive commitment not to do a buyback. It's -- we're open now to considering that depending on how the year trades for another few months. And that's what we'll do. We'll assess it as we come to the close of the year and make a decision at that point in time. I don't want excess capital to run above the capital that is necessary. Now the gap between the 14% to 14.5% and 16.5%, we do believe there's growth opportunities. So some of that capital, we think we can deploy possibly either into M&A for bolt-ons or organic growth. But if we can't and there is surplus there, then we will consider buybacks. I don't want to hang on to excess capital unnecessarily. Our track record is where appropriate, we've done buybacks. So I think we've done about $8.5 billion of buybacks in recent times. So I am not averse to buybacks.

Thank you. And then to try and draw you on trading, which I know HSBC hates, but maybe just on one piece. So in the second quarter of last year -- on the first half of last year, it's about $8 billion of loan loss reserves. It's hard to tell at the time whether you had a really bad book or you were just very conservative. And I think it's clear now you were just very conservative. You arrived here with north of $2 billion of management overlay. It's not clear that that's economically necessary at this point. Could you just talk us through your thoughts on that?

Yes, happy to do that. And I think we're really pleased with the way the ECL performance weighs in the first half of this year. We had very low Stage 3 losses. The migration from Stage 1 to Stage 2 was well below modeled expectations. And that's a function to really good economic rebound in some of our key markets, particularly the U.K. and Hong Kong, but also the U.S. and Europe. But it's also a function of great work that our teams have done in risk managing the situations that emerged last year, and I got to give credit to them. Now what we said is if things continue to improve, there is potential for more releases in Q3 and Q4. If we don't see retrenchments in the economic recovery and the economic recovery continues, there is potential for more releases between now and the -- between the half year and the end of the year. However, we did signal that it's unlikely we would release the full amounts of the COVID provisions in that final 6 months of the year because it is still wise to prepared be for a twist that could emerge from further variants. And therefore, we would probably carry some of that provision through to the first half of next year. And that's why we signaled the first half of next year, we see on losses are probably going to be below normal trends because there'll still be some provisions sitting there at the year-end. Now how much of that in excess of $2 billion that we had on the balance sheet at the half year will be released in the final 6 months and how much will sit there? We'll make those decisions at Q3 and Q4. But you expect should some to be released if things continue the way they're going, and some of that provision will remain there at the year-end to give us a little bit of cushion in the event of a downturn in the first half of next year.

Now you mentioned your long and storied history in commercial banking, so I'll get on to a couple of questions on that. You mentioned at the half year, a strong pipeline building up. Is that actually translating for you right now? What are the corporate clients -- banking clients?

So the journey that I've seen is -- and it isn't just Commercial Banking is Global Banking as well. In Q4 of last year, we saw a lot of activity between RMs and clients, where clients were asking for facilities to be increased or renewed or changed to get them ready for economic rebound. But it didn't translate into drawdown. So the balance sheet was fairly flat on a drawn down basis. In Q1, we saw the first evidence of that drawdown happening in working capital lines. So as the economy refloated, supply chains were reactivated. Lending to our trade finance business, I think, grew by about $3 billion in the first quarter of last year -- of this year. I continued that growth story in Q2. So trade picked up, drawdowns emerged. We also took market share in that time as well in the first half of this year, not insignificant market share. You're talking a couple of 3 percentage points, which was great. What I didn't see in Q1 was a drawdown on term lending. So lending to fund investment and capital didn't materialize in Q1. But I did see that materialize in Q2. But early signs, and it was across all geographies, not just Asia. I saw that activity pick up in all of the markets we operate in, all the geographies. It's tentative, it's early, but it's the first signs of a return in economy. It's fair to say, with the holiday season in August, it was a bit more muted. So we've got to wait and see now what September, October, November, December brings on continued progress on term lending. But the pipeline is still very strong. Activity levels are strong, and we've got to see the continued economic recovery will lead to further drawdowns. But time will tell on that. So I'm encouraged. If you look more medium-to-long term, I'm very on comfortable our ability to continue to grow the lending book. I'm also very cognizant of the fact that the world has got a huge amount of investment to fund on the whole area of sustainability, replatforming their technology basis for a sustainable future and working on the investment programs necessary for that are going to lead to growth opportunities.

And then on to trade more broadly, I mean, you're kind of a definitive world trade bank. And you can't switch the radio on without trade frictions being part of the story and commodity prices spiking being the other part. So I guess that's -- so the question is what sort of a picture is that for you? Typically, trade volumes up, high commodity prices is a better environment for HSBC. Is -- are frictions in the global trade chain, are they good for you because you provide working capital to all parts of the chain? Or is there a measure of concern for you there?

Listen, I'm quite agnostic on where world trade happens. I mean world trade, supply chains change, world trade changes its geographic disposition. That's life. That's -- and the beauty of us, we're able to go with those changing patterns. And so as supply chains adapt for the new circumstances, then we're able to adapt with them. So we're seeing growth. We're seeing some changes in where goods are supplied from and the types of goods that are supplied. That's been a feature of trade for as long as I can remember in my 34 years in the bank. And I'm pretty sure it will be a feature of trade going forward. If I look at my clients, they're still trading internationally. If I just look at the growth in our international accounts opening for our commercial banking clients, I think this year, if I remember correctly, that's up around about -- in north of 15%. So if you think about world tensions and geopolitics, clients are still international. They may change their international footprint, they may adapt their supply chains, but they're still international. And our job is to help them navigate wherever in the world they want to do their international activity from.

And just while we're talking about the business sort of less international, but a big part of your balance sheet, mortgages, Hong Kong has been remarkably strong and the U.K. has been remarkably strong. So is there anything unsustainable in either of those from your point of view? And then I guess different questions, can you maintain your strong position in Hong Kong, leading position in Hong Kong? And then what's your appetite to keep gaining share in the U.K.?

So the answer is yes, we've seen extremely strong growth in both of those markets. I'm really pleased with the Hong Kong business because we're getting strong growth in well-structured deals. So the loan-to-value ratio of the market in Hong Kong is very conservative. Our overall book probably has an LTV of around about 50% in it on the mortgage market. So there's a lot of equity there to absorb any market volatility. And that's actually encouraged by the regulatory environment in Hong Kong. They don't want high leverage in the mortgage market in Hong Kong, and they're quite prescriptive on that. So that's good. The U.K. mortgage market, very strong first few months of the year. It took a bit of a dive in -- once the stamp duty changed for all banks. I think people were pushing their pipeline through pre-stamp duty change dates, and that pipelines have got to be rebuilt. So we'll have to see how strongly that comes back in subsequent months. And again, we're very happy with the LTVs and the nature of clients we've taken onboard in that growth phase. More generally, in the U.K., so I want to put it into context. For far too long, we as a retail bank in the U.K. had a market share in mortgages that was way below our natural banking footprints. And so we were out of kilter with all other banks in the U.K. We had a -- we didn't have a market share in mortgages that matched our market share of banking clients. What we're doing is bringing that back into a more normal ratio. We're not outgrowing what is a natural footprint for HSBC. And we're growing that footprint in good quality premier-type clients with good LTV, so I'm comfortable with our growth strategy. And I do believe we're just regaining what is our natural market share as opposed to pursuing an unrealistic market share in the U.K. market. And there's more of that to do. We're not finished that journey yet.

No, I guess 2 of the clear decisions, the hard decisions, but necessary ones that you've taken since assuming the role for the exit of U.S. and French retail. I mean I guess they were tricky ones, but they're done and they're well done. Is there more thinking about the shape of the bank to be done along those lines?

I mean I think I'm pleased that we have done them. And it's never an easy decision to say, sell a business and take a $2 billion hit on that sale and a $300 million restructuring charge and a $700 million goodwill write-off, so $3 billion in total. But it was the right thing to do. And why was it the right thing to do? Because we didn't have scale in retail, but also as a market, it's not a hugely profitable retail banking market, particularly for anyone that doesn't have scale. And if I didn't take that decision to crystallize those losses, those losses would have emerged over the subsequent 5 to 10 years anyway through -- we could have improved the profit, i.e., turn it from a loss to a small profit, but it still would have been a drag on economic profit because it would be hard to get above cost of capital when you don't have scale. And then the U.S. is different. U.S. is a more profitable market, but we just didn't have scale. So we're trying to do those 2. We've got to close those deals and execute them and do that well. And that allows us then to restructure the remaining cost base in France, Europe and the U.S. And that was particularly important. And just one thing I just want to emphasize, and then I'm going to come back and answer the next question. By agreeing the sale of the French business, it allows us to file a social plan to restructure the French business and the European business. And it allows us to file a social plan to restructure the remaining wholesale bank. So we're going to be a wholesale bank in Europe now, not a lot of wholesale and a small retail bank. And that allows us to not only restructure for retail, but to restructure of what we wanted to do in wholesale banking as well and the cost base necessary to support that. So finding that single social plan allows us to move forward on a broader cost restructuring program. To answer your question, is the more fine-tuning we can and should do to our business model? We're always looking at any underperforming parts of the bank, whether it's a country or it's a business line within a country. And I'm not afraid or not unwilling to take out any business area that does not meet over the reasonable time frame our ambitions to cost of capital. It's very clear I want to be a global wholesale bank where I'm able to serve commercial banking and global clients in the key markets of the world. But to do that, I don't have to be a global retail bank. So we will position our retail banking capability to be fit-for-purpose in each of the markets within we operate in. And if there's some retail banking activities that aren't necessary, are subscale, are not meeting returns, then we will do everything we can to restructure or exit that activity. But I'm not go into preannounce what those markets are, but that's something we constantly look at.

Thank you. So I have a ton some more questions. I'm going to ask you one more then there's some from the audience. So just in terms of better mortgage growth, better outlook for trade, good pipeline in commercial, does better revenues mean that you can have a different cost lens? So you've had some very clear and falling cost goals. If you have better revenues, does that shift? Or that's the discipline that you're embedding?

No, we're sticking to the cost discipline that we talked about when we gave our strategic update. We've given our ambition for our cost target. We're on track to deliver that. We think they're still appropriate. And as ever, there's swings in roundabouts. I think this year, we're doing better on our underlying costs, our BAU costs. But we're doing some top up to VP to make sure we remain competitive in the market. We're delivering on our cost-reduction program as planned, and we'll continue on that path. So I'm not signaling any change in the cost position of the bank at this stage. I just want to come back maybe to my previous question as -- my previous answer. Even in global wholesale banking, and this is my cost discipline, I'm not the same wholesale bank in every market in which we operate in. In the 60-odd markets we -- or 64 markets, we are wholesale banking. I don't do SME banking in all 64 markets. So even in wholesale, we select which bit of wholesale banking or corporate banking we think we have relevance in and capability. So the depth to which we go into corporate banking in each of the 64 markets is a very deliberate and conscious decision. Now I don't have a huge corporate banking presence in certain markets where they're competitive, highly competitive, very low-return markets. Give you an example of Korea or Japan. It's hard to compete with the domestic Japanese banks on domestic corporate lending. But I do have a presence there to serve my international clients who want inbound capability in Japan and Korea. So even in Wholesale Banking, we've got a definitive very model where we position our corporate banking to be fit-for-purpose for what it is we think we have the best chance of success. And that's why I'm staying true to the cost discipline, very targeted business model, not trying to be everything to everyone, playing to our strengths and position the cost base as such and then slim down the head office, so that we are not a cost burden on those markets.

Right. Shifting to questions in 5 or 6 minutes. So I love the market. I'm sure you do. So I'll put 2 questions together. One is a follow-up on the excess capital question. How quickly can we have the money back, please? And could the capital be even lower? But then the second question is, do you need more capital in the light of the climate stress test coming up? So there you go, that's both sides of the question for you.

I'll do with the second one first. The answer is no. I mean we're all -- we as an industry are going through how do you do a climate stress test, how do you run through that? And it is not my expectation that the climate stress test requires any more capital from HSBC. I think all banks are coming out now with plans their to help the world transition to net zero. My expectation, we have the ability to help our clients move from carbon-heavy to carbon-light. We will therefore manage the risks. If you look at the climate stress test, it's a point in time stress test. And it assumes you can't change any variables, like you can't factor in changing client behavior. You can't factor in your own mitigation strategies. It's free [indiscernible] running out as if nothing could change. Well, that's not reality. The reality of life is, our clients are going to change, and we're going to change. We're going to risk manage. They're going to risk manage their business models. Therefore, I do like to expect the climate stress test to be a flow-through to capital requirements. Your first question, I think was when will we be able to update on buybacks. We've said we'll update before the end of the year on our position in 2021. I can't give any more guidance than that. We'll update clearly with our Q3 results, our tradings day, and that will inform our view on buybacks. On can we have more, is it possible to change the range? We're not anticipating changing the range. We constantly look at the ways that we can improve the capital efficiency of this bank, but we're not anticipating changing the range at this stage.

And then I think probably to finish on there's 2 questions, which are the same thing and going back to the start. So in the event that there is a meaningful adjustment in real estate prices on the Mainland, how do you think about the risks to HSBC from that? You've, as you say, the largest nondomestic bank, but your book typically hasn't been concentrated on the large, say, enterprise or developers. But if there's a broader correction, how do you think about the capital consumption or the risks to you from that?

We feel pretty comfortable with our exposure. We do a lot of stress testing. We adjust our balance sheet. I'm not unduly concerned by any correction in prices, our LTVs, the credit covenants of our clients, the structures of our deals, our knowledge of them. So we're feeling pretty comfortable. And in the grand scheme of things, it's not a huge exposure for us. I think our onshore CRE book is $6 billion with Tier 1 lenders, Tier 1 properties in Tier 1 cities -- sorry, Tier 1 borrowers. So we feel pretty comfortable. And what we also have is, you got to remember, it's quite unique in the Asian markets relative to some of the western markets. You also have access to corporate covenants. So many of our deals, if you think about it, you've got low LTVs relative to a lot of the Western markets. You have security over the property very often, over the property. But you then have very often access to corporate covenants from the conglomerate and the holding company. And that's not a normal feature. That's particularly true in Hong Kong. It's not true in all of the China deals. But for the clients that we do business with, our structure is not the norm that you would expect to see in a market like New York or London, which tend to be much more project finance based.

Thank you, right. Now we've actually got a minute, so I'm going to ask you to...

You're going to ask me about us in [indiscernible] and will they win the [indiscernible]?

That's less than 1 minute, answer now, come on. I'm not going there. No, it's the interest rates. So the market thinks that will go back up. I'm sure you'd be delighted if they did.

Yes, please. Yes, please.

Yes. I mean how do you plan on that? So now is a very interesting time because interest rates are awful for you at the moment, but the market thinks they're going to be better. How do you run that when you're looking at spending plans and return?

We've assumed they're not. In our plans for the medium term, largely, we've assumed than others. I think there was a small adjustment towards the end of our planning period of a very small amount. I think it was 15 basis points, that a small amount. But we've largely not assumed the rise in interest rates when setting our cost targets, our ROCE target. So if interest rates do go up in the near term, one could assume that, that is enhancement of ROCE. There is only one caveat to what I just said. We did have HIBOR, assumed there are higher rates than it currently is. So we are getting a drag on HIBOR at the moment relative to our plan. But we didn't assume significant amounts of U.S. dollar interest rates or GPV interest rates going up in the planning period. So there is a bit of a short-term drag on HIBOR. But we haven't assumed a lot of upside from increasing interest rates.

Now that's been outstanding. Thank you for your time. I hope we can see you again next year, and hope you can be as positive again next year. Thank you.

All right, thanks, Alastair. Thanks.