HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us. I'm Fais Yousaf, Group Treasurer; and I'm joined by Greg Case, Head of Debt Investor Relations; and Neil Sankoff, Global Head of Investor Relations. I'll keep my opening remarks brief as I'm sure you've had a chance to go through the results already today. There is a comprehensive deck for fixed income investors available on our website, and we'll flash up a few selected slides as I talk. Once I'm finished, we'll go straight to Q&A. So today, we announced a half year reported profit before tax of $21.6 billion, or $18.1 billion, excluding notable items, stable versus last year. The return on average tangible equity was 17%, excluding notable items. We expect to deliver mid-teens return on tangible equity, excluding notable items for 2024 and have today added guidance mirroring this for 2025. Significant changes have been made to our business over the last few years. And during the first half, we completed the sale of our Canadian, French retail and Russia businesses, alongside progressing towards the sale of our businesses in Argentina and Armenia. This has allowed us to increase our focus on the core franchise, our scale activities in Hong Kong and the U.K. as well as our international wholesale bank and wealth proposition. The business model continues to be strongly capital generative. And in 1H '24, we also benefited from the gain on the sale of our Canadian business. Our CET1 ratio of 15% remains above our target operating range of 14% to 14.5%, and you should expect us to bring it back down to this level over time. At the midpoint of our target operating range, we will have a comfortable 300 basis point headroom above our MDA hurdle requirement. We remain conscious of where we are in the interest rate cycle. As such, we will continue to be focused on lowering our earnings sensitivity through hedging, driving growth in noninterest income and cost discipline. Banking NII of $10.9 billion was down $0.4 billion versus the first quarter, largely due to the disposal of Canada. We've updated our guidance on banking NII and now expect this to be around $43 billion for 2024. The sensitivity of banking NII to interest rates continues to reduce. A 100 basis point parallel shift down in yield curves would reduce our banking NII by $2.7 billion based on a static balance sheet and 50% pass-through assumption. This compared to $3.4 billion at year-end and approximately $7 billion 2 years ago. The reduction in sensitivity is driven by the deployment of additional hedges, current interest rates and natural changes to the mix and shape of the balance sheet. Our structural hedge increased by around $25 billion in the first half to $504 billion, with an overall average duration of 2.8 years. We have further improved our disclosures, allowing you to analyze the runoff profile of hedge assets during the remainder of 2024 and 2025. Over this period, we will replace around $160 billion of assets, which have an average yield of 2.8%. Turning to credit quality. The ECL charge for the second quarter was $0.3 billion or 15 basis points as a cost of risk. The low charge was driven by recoveries and releases. Excluding these, the Q2 charge was broadly in line with our expected 30 to 40 basis point range. In the first half, the charge was $1.1 billion for 22 basis points, including balances held for sale. We've updated our 2024 ECL guidance to within our medium-term plan range of 30 to 40 basis points. Stage 3 balances were 2.4% of customer loans, up $1.4 billion compared to the first quarter. This was driven by the refinancing of loans in the Hong Kong commercial real estate book, which had a limited impact on the ECL charge because of the high levels of collateralization. Our Mainland China CRE [indiscernible] continues to reduce and generated an ECL charge of $126 million in the first half. The level of net loans booked in Hong Kong has more than halved since the end of 2022, standing at $3 billion, driven by repayments and maturities. Now moving on to the balance sheet initiatives. As I noted earlier, our CET1 position is strong at 15%. Our MREL ratio was 31.8% of RWAs, broadly flat on the year-end and 4.6 percentage points above our requirements. The group retained strong levels of liquidity with a well-diversified deposit base. We have a total deposit base of $1.6 trillion, and our loan-to-deposit ratio is 59%. We hold almost $800 billion in the high-quality liquid assets, and the group LCR was broadly flat in the first half. As I've said before, the group consolidated LCR is calculated into conservative assumptions. We primarily mentioned liquidity at the subsidiary level, and our major subsidiaries all operate LCRs that are significantly higher than the group ratio. Finally, on to issuance, starting with HoldCo senior. This year's plan remains lower than our usual run rate with negative net issuance anticipated. We see gross issuance of around $10 billion against maturities and calls of around $12 billion. In addition, we tendered for $5 billion of HoldCo senior in the second quarter, which will further reduce the net reduction of senior HoldCo outstanding. We have largely completed the HoldCo issuance plan with $7.5 billion issued to date, and we aim to be largely finished towards early autumn. In Tier 2, we expect to issue $2 billion to $3 billion gross in 2024 against $2 billion in maturities. This will be broadly half the amount we issued in 2023. So far, we've issued $2.5 billion, and we anticipate that any further issuance would likely come in relatively modest size, targeting smaller currency markets. With respect to AT1, we plan to issue around $3 billion of gross AT1. We've issued just over $1 billion year-to-date in a very successful Singapore trade, demonstrating the strong support we enjoy from our Asian investor base. You also know that we recently announced the call of our U.S. dollar AT1, removing $2.25 billion of AT1 from the market in September. So wrapping up before handing off to Q&A, another strong half building on the 2023 performance. We maintained prudent capital, liquidity and funding positions and we have modest issuance needs in 2024. On that note, let's open the call for Q&A. Greg?

Thanks, Fais. [Operator Instructions] We have had a few pre-submitted questions. So I'll probably start off with those while we give people an opportunity to signal for a question. So Fais, we got an anonymous question to start. So the question is, can you give us an idea of how you think about refinancing for the remainder of this year? Is that something that you'll use? And if so, could you give us an idea of what kind of products or currencies you'll think about there?

Okay. Thank you, Greg. Well, let me start by just recapping some of the things I said in my preliminary statements. So in terms of where we are in the overall issuance plan for the year, as I said earlier, $10 billion of senior HoldCo is the plan for '24. That is a net negative issuance. We've got $12 billion of calls, and we've tendered $5 billion, so negative $7 billion in total. We have probably about 2 or 3 trades left to do this year. We've done about $7.5 billion against that $10 billion target. On Tier 2, we indicated $2 billion to $3 billion in terms of the overissuance plan. We've done $2.5 billion at this stage. If we do something, it will be in -- probably in a small amount in some of the non-G3 currencies. And then on an AT1 -- from an AT1 perspective, we're looking to do about $3 billion in total this year, of which we did $1 billion, and that was the same dollar trade earlier in the year. The real focus for me at this point is to complete that funding plan. And my expectation would be, all things being equal, that we could get there by late autumn. That's the focus. I'm not going to rule out prefunding, but at this stage, it's not the central outcome. Just to remind everyone that we have a window now to issue senior HoldCo in January, should we choose to, right at the beginning of January. So that relaxes the pressure a bit on 2025 funding plans.

Thanks, Fais. So we've got a question come in from Dan David at Autonomous.

Great. Congratulations on the results. I've got three quick ones actually. The first one is just building on what you just mentioned, Fais. So if I look at your MREL requirements half-on-half, I can see they've ticked up a bit. So a question, just can you provide some insight on what's driven those changes in MREL? And is this a trend that we should continue to see? And then noting that you're a net negative issuer on MREL this year, I guess I'm just thinking about where you want to get to longer term on MREL. Is the CET1 target headroom kind of a reasonable expectation for MREL headroom as well? And then the second one, just on legacy. I guess we noted that you made some pretty strong progress on legacy, but it stalled somewhat over the recent quarters. Can we expect you to revisit any of those legacy positions this year? And also, does the PRA expect you to make progress in a given time? So I guess I'm thinking of June 25 as the next important date. Can we expect some more progress on legacy before that date?

Okay. Thank you very much, Dan. I'll probably go at it in reverse order actually, so perhaps start with the legacy. So I mean the position as things stand at the moment, we -- over the past couple of years, we've reduced the balance by around $6 billion. It is something I'm very focused on. As I'm sure I've said in previous calls, we want to reduce that legacy stack in line with the Bank of England expectations. But really, any actions we take need to be appropriate and proportionate. So we really do continue to look out for opportunities for further reduction. We're maintaining active dialogue with the regulators who, I'd add, have a full and close understanding of the position. The factors that we consider in that space really haven't changed. And I guess in no particular order, we'll look at the complexity and the options available, the economics, fair treatment to both bondholders and shareholders and regulatory guidance as well. Where we take action, it's going to be action that's rational to do so. We are willing to take some cost, obviously, but we will assess the situation at each point when opportunity arises. You mentioned as well, I think in your question, that we reached the end of the [ ECR ] grandfathering period in June 2025. There are some of our New York-issued securities which we undertook a liability management exercise on in 2022, and we've reduced the stack a little there pretty much by 1/3. A number of the core investors took part in that. We are very much looking at that and looking at the options on that as well. But at the end of the period, at the end of June '25, there's potential inflection risk, which we have no intention of letting happen. So we will address that issue. We're still a year away, though. So nothing definitive to communicate to you now, but we'll come back when there is. Then going to your other questions, perhaps I'll take question 1 or 2 together in terms of the MREL and the MREL requirements and kind of how we think about the issuance on a go-forward basis. So we have, as you will have no doubt seen from our slides, about 460 basis points of capacity at the moment. We are also running, though, I would add, above our CET1 ratio or target operating level. The target operating level is 14% to 14.5%. Our current CET1 is 15%. It's our intention to get us down within that target operating range. And if you were to take us down to, let's say, the midpoint of that range, like 14.2%, 14.25%, that reduces the overall buffer by about 80 basis points. And that's probably where I expect us to end up. We're not -- we're pretty comfortable with that kind of buffer, and that kind of range gives us the capacity on a go-forward basis. And whilst we've been a net negative issuer this year, I would say this is probably a one-off. We typically issued, certainly on the senior side, between $15 billion and $20 billion over the past 4, 5 years. And I think we're going to return to somewhere in that range going forward, obviously, subject to our -- looking at our funding plans, loan demand and what have you. But you can see, this probably is an exceptional year. I'll just check with Greg whether there's anything he wants to add to that.

No. No, that's okay. That's clear. So thanks for that. [Operator Instructions] So we've had some pre-submitted questions. So firstly, both Lee Street at Citi and Paul Fenner at SocGen asked a similar question on the development of Stage 3 loans. So Lee asked, can you explain the drivers of the moves in the Stage 3 construction and real estate balances? And what are your expectations going forward? And Paul adds to that, just in terms of what can we expect for the NPL ratio at the group level. And do you think that they've peaked from here?

Okay. Thank you both. Well, look, the increase -- most of the increase that we saw was in domestic Hong Kong commercial real estate, which was up $2.6 billion in 1H '24. Outside of Hong Kong, that book or the books were broadly stable. What we've seen is the increase in interest rates has created debt service challenges for some of our borrowers. However, if we look at Hong Kong, if we double-click on Hong Kong, collateral levels remain very strong, and we have not seen that translate into increased ECL. As always, our main focus is on supporting our customers. My view is that the cash flow pressures will recede as interest rates start to reduce. And over the long term, we're very confident in that sector and in the property market in general in Hong Kong. Overall, you may have caught from our disclosures that we have circa $36 billion of Hong Kong commercial real estate loans. About 60% of that portfolio is secured. I think this was mentioned in the equity call earlier in the day. The collateral levels there remain strong. We have LTVs on the impaired portion of around 55%, and loans rated substandard have an average LTV of 50%. On the uncollateralized portfolio, these are typically loans to strong listed commercial real estate developers, generally members of conglomerate groups who have diverse sets of cash flows. There's been relatively little credit deterioration in that part of the portfolio. None of it is impaired and around 90% are rated strong or good, which is our rating effectively [indiscernible] to investment grade or above. On NPL, more generally, I mean, we don't guide towards NPL. The NPL ratio is an output of both inflows through defaults and our outflows through curing and write-offs. So we're not going to give explicit guidance on that.

Thanks, Fais. So additionally, Lee asks, the U.S. has been gradually imposing additional sanctions on Chinese and Hong Kong companies. Have you had to terminate any relationships with any sanctioned companies?

Okay. So as you know, we apply sanctions as we are required to do so in all of our markets, and that includes Hong Kong. So the approach we take is no different to other banks that are active in Hong Kong. There's not much more to say on that.