HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

Hello, everyone. Welcome to the HSBC Fixed Income Call for our full year 2022 results. Thank you for joining us. I'm Carlo Pellerani, Group Treasurer, and I'm joined by Richard O'Connor, Global Head of Investor Relations; and Greg Case, Head of the Investor Relations. As usual, I'll mention a couple of things in the results, then a quick update on financial resources. And finally, we'll go into Q&A. I will not be referencing any slide as we go through. In terms of results, I just would like to mention 3 points. 9.9% royalty for the year, 1.6% up on the back of higher NII and good cost control, which more than offset a higher ECL charge, we expect royalty to improve to about 12% this year. Second, in terms of balance sheet dynamics, the reported loans and deposit numbers need to be read carefully because they include adjustments for the Canadian and French sales and FX. So if you exclude those loans actually decreased by $25 billion only in the quarter and deposits were flat. And then finally, credit quality remains quite solid. Full year ECL charge equivalent to 35 basis points of gross loans. Stage 3 loans remained low at 2.1% of total loans. And at this stage, we still see limited signs of deterioration in the loan book, and we are flagging an ECL charge of around 40 basis points for the year. Now on to financial resources, starting with capital. Our CET1 ratio, as you saw, was 14.2%, which is 80 basis points up in the fourth quarter, thanks to profits and lower adjusted RWAs. We are now inside our CET1 target of 14% to 14.5% and 3.3 percentage points above our MDA requirements. Second, on liquidity, it remains quite strong, most importantly at the legal entity level. We're also reporting 132% group LCR with total gross HQLA of over $800 billion. Our loan-to-deposit ratio is quite low at 59%, and hence, we have a meaningful deposit surplus, which positions us quite well in this higher rate environment. Our MREL ratio is at 30.1%, which compares very favorably to our 26.4% requirement. We intend to continue to operate with a prudent buffer of that minimum. From a funding perspective, we expect to issue a similar amount of gross debt to the one we issued last year, targeting $70 billion to $20 billion of holdco senior, $4 billion to $5 billion in Tier 2 and about $2 billion in Tier 1. Our legacy capital, good progress in 2022. We reduced this time by over $4 billion. We will continue to monitor the market for cost-effective options to manage this take down over time. So in summary, a good year. The group now becoming very capital generative. Our capital funding and liquidity positions leave us well placed to continue growing, and we believe our business model offers one's holders, one of the most diverse sets of restraints in Global Banking. On that note, let's open the call for Q&A. I'll hand over to Greg.

Thanks, Carlo. Hi, everyone. As we did last time, we'll be taking questions over Zoom. [Operator Instructions] So first question comes from Lee Street from Citi. Lee, we can't hear you, sorry. Moving on to Dan David from Autonomous.

Congratulations on the results. I have 3. Just wanted to touch upon the AT1 call, the $1.625. Was this decision taken on an economic basis? You mentioned before the call that the market wasn't pricing in the risk of extension. And I guess if I look at your spreads today and also your issuance plan versus your total cost this year, it suggested it could have been called out right, similar to what you've done in previous years. On the legacy, could you just remind us of your priorities whether there anything has changed there? And then just focusing on the make holes. You've talked about economics there in the past as well. I'm just wondering if you can pride to guide as to what sort of P&L or CET1 impact you'd be willing to book? And I guess I'm looking at the exercises that you've done so far and kind of thinking of 1 to 2 points that you've kind of paid. Is that reasonable? Or should we expect that you'd maybe take a larger hit as a result of the need to get rid of these securities? And then finally, just a quick one on LIBOR. Do you intend to use the synthetic extension on your dollar Disco s post-June '23?

Thanks very much for the 3 questions. On the AT1 call to start, yes, the decisions that we make are on economic terms. Now the way that those economics are calculated are a little bit more complex than just calculating the PV of the transaction. So broadly speaking, what we do is we take into account 3 components. One is the PV of a call versus automatically reaching the full amount. Second, what is the full amount that we need outstanding and whether we're going to have a period of time or an amount outstanding to replace that call, which is smaller. And as a consequence, there is a cost of carry that we are avoiding. And third, what is the impact on the future spread and the Asian markets. When you put all those things into account, it's a little bit of [enlarge] rather than a full science. We put all those things together, and we come up with the results. And you saw on the back of that, that we decided to call the transaction. That's probably all I can say on that one. In terms of legacy, you might remember from previous calls that I described that I think of these in 2 dimensions. There is a dimension which is how complex the securities are from a resolution perspective, and on the second dimension is what is the [call] of taking those securities out. So when you put all those 2 dimensions together, we ended up with a pecking order that has broadly speaking, 4 buckets. The first bucket is the holding company near low securities. Those are in the first bucket because they are out of our resolution entity, the holding company. And there is a lack of contraction rights of recognition of the Bank of England bail-in-able rights. So those are the first priorities. Second, we have the HP -- the non-ring-fenced bank fixed rates Tier 2s, then we have the Disco s and then we have everything else. So as you saw, we progressed along the first 2 buckets last year and those buckets continue to be the most important and we'll progress down from that priority list. Third on synthetic LIBOR, all I would say is, at this stage, consultation synthetic LIBOR hasn't concluded. So we'll have to wait for that before we can do anything about it.

Thanks, Dan. So we've got some questions in from Lee. I'll just read them out. I think he's having some trouble joining. So firstly, he asks a high-level question. With all the changes in the business model in recent years, which banks do we regard as our main peers. Additionally, what's the plan for the $4.3 billion of legacy that loses capital value in 2025? And also linked to that, should we assume that the $4 billion to $5 billion of Tier 2 will be a normal run rate over the next few years?

On the first question, HSBC stands pretty much on its own in the type of business model that we have. So we don't quite see ourselves having a very comparable peer around the globe. What we do is we look at each of those markets and we compare ourselves versus more local peers, with, of course, the caveat that the value of our franchise is actually the international connectivity. So it's difficult pretty much to give you a few set of peers that you can compare us against. In terms of the legacy securities losing value in 2025. What we're doing is we are prefunding that those amounts over the next few years to avoid a big [claim] risk in 2025, and that's incorporated into the $4 billion to $5 billion that we're flagging for this year for Tier 2. And then on your third question, looking forward, and I would say this more broadly across all the components of the stack, we are now more or less at a level where the distribution of the different components of the stack are pretty much where we think they should be. And from this point, we are about refinancing and financing growth. So if you take the current amount of spending and you divide them in, I don't know, 5 to 7-year average maturity, you end up with an annual amount of issuance, which is not that dissimilar to what we are doing this year, and that includes also the Tier 2s. So somewhere between, let's say, $3 billion to $5 billion on a stable basis every year. Richard, do you want to comment anything else especially on the first question?

On the payers, Lee, it's a very good question. And clearly, we can do benchmarking for example, while U.K. ring-fencing bank versus our bigger peer banks, and we do so. It's the same in [indiscernible], same in China and obviously in our own market in Hong Kong versus other large Hong Kong banks. But the short answer is at the group level, there's no one -- Carlo said there's no one sort of direct -- or we got peers in trade, we've obviously got 3 or 4 banks who are also global, but much smaller than us, we're double the size of them too. For example, in transaction banking, especially as Citi, and then you go down to peers who are lot more than us. You won't see it yet, but just so you're aware, the peer group for reminiscing purposes has changed this year and there are more Asian peers within it. So we have made a few changes to peer groups who are actually making more Asia-centricity growth for the bank and moves more to Asia. So that's all in the accounts. Go ahead and have a look at that.

Yes, sure. One last piece of Lee's question. So he also asks us, as it relates to the securities with LIBOR-based coupons, should we be expecting LIBOR consents solicitation to be announced by June 30 year?

So Lee, as we have said before, we have no intention of leaving investors with LIBOR risk without -- before offering them a modern alternative. That is, of course, depending security by security when that impacts you. In the case of the Disco s specifically, there is a more -- a closer time frame for us to look at that. So you should expect something imminent from us in terms of offering remediation for those. The form of that offering is still under discussion. We haven't concluded what it is, but you should expect something in that regard.

The next question has come from Rob Smalley from UBS.

First, on net interest margin developments. We've seen -- and you're projecting a continued strong growth in the margin even with a 50% pass-through of an increase in rates. Could you talk about the development, particularly Hong Kong versus the U.K? I think that some of your peers in the U.K. are seeing peak net interest margin now. And where are you seeing growth in yours? That's the first question. Second, U.K. related, again, you have a lot of liquidity at the bank. Any other plans to deploy it in any other way? I know that the easy answer is if we could, we would have already, but anything that changed there? And then finally, on the ECL charge, $600 million for Mainland China, $800 million for the rest of the book. Could you talk about the methodology there, whether there's more -- whether there's idiosyncratic risk in there? How much of that is model-driven? And how you came to that number?

Thanks for the questions. So let's start with NII. So as you saw, we had NII for Q4 of $9.6 billion. If you annualize that number, it gives you about $38 billion of NII. We had a lot of questions earlier today as to what should be our guidance of NII for the full year. And what we have said is we haven't changed our guidance. What we are saying is that we are flagging more than $36 billion of NII for 2023. Then we think about it is there are a few tailwinds and there are a few headwinds. On the tailwind side, we have still components of the rates that haven't repriced -- the rates that we have seen so far that haven't repriced yet in our book so that's a tailwind. There are some potential additional rate moves that are still in the tailwind. And FX calculations gives us about $0.5 billion upside versus when we flagged that more than $36 billion. Conversely, there are a few headwinds. The headwinds are potential increases in pass-throughs. Our pass-through so far have been inside a 50% long-term averages. We're expecting from this point on the pass-throughs start to become closer to the 50%, which implies more than 50% from this point on. An additional tailwind -- an additional headwind is also on the migrations of clients from savings accounts to term deposit that is particularly relevant in the Hong Kong market, which is extremely competitive, much less in the U.K. market. So when you put all those things together, we end up with the guidance and we provide at least $36 billion and more than $36 billion for the year. In terms of the U.K., the U.K. market is -- they're starting to see some sign of competition in the U.K. market, but it's still far from what we see in Hong Kong. So at the moment, we're quite confident with the guidance that we have given. In terms of liquidity, indeed, we are buying that ends up having a lot of liquidity. What we have done over the last few years is we have become very deliberate about our liquidity management, which clearly is helping us in this up cycle, having surplus liquidity is increasing rate is a competitive advantage. But broadly speaking, we created a framework to look at surplus liquidity in each of the entities that looks at what the liquidity should be. And then we look at what the surplus in each of the entities is, and then we lay out a framework that looks at how we deplore that liquidity, how do we invest that liquidity or how do we reduce if deploying and investing are not appropriate. Deploying is about business opportunities. Investments are at the margin if you have the liquidity, what you can do without increasing the risk profile for the bank. And the reduction is about offering different products to our clients and potentially finding intercompany solutions. So we put all those things together, we are quite active. I would say, given the current rate environment, the reduced dimension has become less of a priority than it was when we started this a couple of years ago. Richard, do you want to cover China?

Yes. Charges you expect is on a bottom line basis. But you're right, to some extent, the $600 million on [ECL charge] is based on a sort of on us view of our particular borrowers and their particular situation and circumstances. And then clearly, we then look at it at an overall provision coverage level, in a sense for what's the downside scenario. What appears in and so on and so forth. So as we said this morning, we're comfortable with that charge as of 31st of December. And we also set up the situation in that sector has improved. Since the year-end, it's still very early days. I think there's still a lot to work through, but I think you've seen positive policy developments in the last couple of months, whereas in Q4, you do see some deterioration. So it's still -- we're still very moderate on that sector, but more positive. The rest of the, don't know what to say really, 30 bps, broadly spread U.K., a pretty normal charge Mexico, pretty normal charge. Those are our big books. So again, broadly split between retail and wholesale. No big tool trees in there or no big sort of overlays or what are called [fig] adjusted for economic guidance adjustments. So a pretty standard quarter for the book outside the China CRE, $600 million chart, which we called out separately.

So can we assume that the go-forward ECL from a model-driven basis without anything idiosyncratic should be in around 30 basis points over the next several quarters?

We're hedged to 40 and that as you know, our sort of guidance range, if you like, is 30 to 40. So we're at the top end of that range. That reflects a difficult sort of economic circumstances at the moment with high inflation and so on and so forth, some companies going through cash flow difficulty seen in the retail sector. So that's the reason why we struck it at the top end of the range. Obviously, the CRE, as we mentioned already, has -- we've been making provisions there over the last 18 months or so. So 30 to 40 is our guidance range. And for now, West to get at the top of that range given our caution early in the year and given the -- dew to the economic circumstances, which much of the world has found itself in the last few months.

Thanks, Ron. So we've got some more questions submitted over chat. So from Rob Thomas, at T. Rowe Price. Rob asks, outside of China CRE, are there any areas of politic -- particular concern that you're monitoring closely? And also, can you update on the progress of the sale of the Canadian business, how is this transaction to occur? And what's the timing?

On the first, as you would expect, our 2 big books are, our books in Hong Kong and the U.K. clearly, in Hong Kong, the Hong Kong book joined CRE, which has been the issue, the book outside of that has been very, very, very solid and remain so during in 2022. And so clearly, whilst we're obviously watchful in the market, it's a big market for us. It has had economic difficulties in the last year, touchwood seems to be coming out of those difficulties with reopening pretty strongly, albeit it's still early days there, but certainly all or the signs are positive in terms of Hong Kong recovery during 2022 and beyond. And our other book is U.K. And again, it's really we watch them on small businesses and small and midsized companies, et cetera who -- some of whom have cash flow difficulties. As you're aware, a fair chunk of the small business market is the government guaranteed but even there, and we're obviously watchful. So those are the areas where we really watch full and elsewhere in the world. And I suppose since we're seeing credit risks in this particular sector. You can get 1 or 2 of those each quarter. But I would say those are the major points we watching at the moment. Except of Canada, nothing to add to. We only just announced it a month or 2 ago. We're working through regulatory processes, as you would expect. And that's on track with nothing more to say. I would expect us to give you a more fulsome update on where we're on the process probably at the half year, we do -- we continue to think that it'll take much of 2023 to work for all the various or the regulatory and other process we've got to work for it.

Thanks for the question, Rob. Another question submitted via text has come from Paul Fenner-Leitao from SocGen. I think, Paul, we've covered your first question. But on the other 2, specifically on Stage 2, a big jump in total balances, but no change in provision. Why is that? And also what can we expect for the remainder of the year or notice the jump is in retail, but you would have thought that corporates would have been the most volatile in the Stage 2 balances.

Yes. The -- I mean it's methodological change on U.K. mortgages, nothing to flag, it's just methodological change. U.K. mortgages do perform well for us. Especially It's a very slow in s class, so really, and it's explained in import account in more detail. It's more of a technical change than the other would flag anything there, particularly more and less concerned, book there perform very well for us. And nothing but to say again, Stage 2 in wholesale, obviously, you've seen some of the China CRE book going from Stage 2 to Stage 3 during particularly in Q4, but also some in Q3 as well, but nothing else to call out there in terms of anything more than normal quarterly volatility in the wholesale Stage 2 area.

All right. And thanks for those questions, Paul. [Operator Instructions] Otherwise, we have some more questions submitted over text for Ellie Dann at Morgan Stanley. Ellie, I think we've answered a couple of the questions that you've submitted, but there's a couple here that we should cover. So since I noticed that your AT1 issuance plan is $2 billion and is less than total redemptions for all the AT1 calls you have this year. given you've been operating above the efficient AT1 level of regulators happy to use to reduce your AT1 bucket in calling all of those and not replacing?

Thanks for the question. Yes, the answer is yes. The reason an AT1 bucket specifically in terms of regulatory requirements, right, there is a Tier 1 bucket. So we look at the Tier 1 in totality, where the amount of Tier 1 that we're issuing this year in comparison to the calls is indeed part of the plan to normalize the total amount of the AT1 stack to the levels that I -- we think we are comfortable with. So yes, we are comfortable with that. And also the discussion with the regulators is consistently.

And then I think it looks like last 1 from Ellie as well, just the state of the Canadian operations free up some cash for the redemption of legacy securities trading above par?

We -- that's a creative connection between one area and another which we don't quite connect at all. The way we think about the Canadian proceeds is priority 1 is to pay an extraordinary dividend that we are foreseeing to be $0.21. After that, it's going to be a combination of additional buybacks and investment for growth. We haven't quite decided what the proportion of the last 2 are. That's the way we're thinking about it.

Perfect. Okay. So well, that wraps up the call. So thank you very much, everyone, for dialing in and for your questions. Please do let us know by the usual channels if you can have any further follow-up questions. Thank you.