HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us. My name is Jason Napier. I run financials research for UBS here in Europe. I'm thrilled to have Pam Kaur with us today from HSBC, the CFO.

You've been in the seat now for nearly a year. I assume there are days when it feels like it's longer than a year. But you've been with HSBC since 2013, predominantly in risk functions. Would you mind just giving us a little bit of a sort of a potted history of your roles at the firm, and then we'll move on to talk a little bit about what you found when you were made CFO.

Thank you, Jason. So I've been with the firm since April 2013, and I've always been on the top table as part of the Management Board, and then we have the Group Executive Committee, and now it's an Operating Committee. And that says in itself how the momentum in the organization has changed. It's become much more operational, execution driven. And as a starting point, when I joined in this role, I had been working with George on what was the clear direction of travel for us. And the clear direction of travel has been initially how do we simplify the organization. We reduced the number of our operating committee members from 18 to 12, and that says a lot in terms of the number of decision-makers you have and as a consequence, the agility in the decision-making. So that's a change from the past. Also in terms of a business, we have the conviction to clearly call out the 4 key areas that we want to invest and grow in. The 2 home markets, and we are very blessed to have 2 home markets, plus 2 very important businesses, one driven by our international network, our presence in 50-plus countries, as well as the Wealth business, which is very natural for us given our heritage and our positioning in the highest growth markets of Asia and the Middle East. With all that, in the organization, I feel now the focus is truly on growth. And it's not because my roles have changed; in the past I was a defender and I'm not so much playing defense, but it's just where we are in our own journey. When I joined, we had to go through the DPA, the derisking of the organization. Obviously, in my time as the Risk Officer, there were multiple macro challenges that we navigated very ably. And now we feel, with the conviction we have in the focus of the areas we have and the scale we have, we have momentum behind us, and that's delivering us the results as well as the ability to invest in the areas that truly matter to us where we can drive operating leverage. So an exciting time for HSBC, but having been there for a long time, not many surprises. So in terms of sort of -- it's just starting on the job day 1 and being able to hit the ground running, that has been little easier, though I must say, even this year, the macro environment always gives you challenges, and through that, opportunities as well.

Yes. Perhaps you could talk a little bit more about the agility and the pace of change. There are some folks I know inside the bank that are saying they've never seen anything quite like this from this bank before, but specifically from the outside, new divisions, or 18 to 12, does that really accelerate the metabolic rate of the bank? How are you making it more agile and faster to do things?

So let me talk a little bit about what we have done in terms of streamlining the footprint. We have so far announced 11 transactions this year. And we are also in progress of completing 3 very specific strategic reviews, Australia, Indonesia, Egypt for our retail footprints. That to me shows that it's not just you make a decision, but how quickly you follow through on that. We are also delivering on the savings that we said we would deliver actually ahead of target in terms of $1.5 billion simplification savings, which we want to bring to the bottom line at the end of next year, we've already taken actions for $1 billion of those, so by the time they come into the P&L, going through into next year. But the cost that we have taken to the bottom line this year would be $400 million compared to where we thought we would be at $300 million. So we're ahead of target. So that gives me a huge degree of confidence. Also, when we are redeploying our cost base from some of our subscale businesses into high-growth areas, we don't wait for everything to finish. We have the agility to say when you have $20 million, $30 million, $40 million, whatever available, it comes straight to the top of the house. And we have a list of growth priorities over and above which we have already committed to in our investment for the year, which are literally queued up and prioritized. And once that money is available, we immediately lean in to support those areas of growth. And one area this year was security services, where given some new customer mandates we were getting as well as increased volume we wanted to invest. So that gives me another touch point. And I'm a great believer to say, if I can't actually inspect and see the touch points, I don't really believe. I'm a lady of numbers. That's how I work. So that, to me, was very important to see that through. But underpinning all of this is the cultural change in the organization. And that cultural change is being driven through how we lead program. The things we want to lean in more in our culture in terms of accountability, speed of execution, simplicity of decision-making and frankly, trying to move away from the acronym, which we don't really like of HSBC, how simple becomes complicated. That's what I heard when I joined. So I really have to make sure that by the time I retire many years from now, that's in nobody's even distant memory. So that's kind of one touch point. Now obviously, when you're going through change, there is going to be a degree of concern, a degree of people feeling a little uncertain. But I think that's healthy, because that keeps us on our toes, that makes us constantly able to respond to the challenges we face as opposed to just think what we always did, if we continue doing, we will progress. Having said all that, there are things about our culture, which are very strong. For example, collaboration, which really helps us to drive cross-sell and revenue flows through our various business lines. So we have such a precious commercial banking business in many markets because we actually go and bank not just top local corporates, but we go further down the chain for mid-market and smaller corporates. And they give us the natural flow and connectivity to their entrepreneurs and employees as they get through their wealth journeys, and that helps our Wealth business. So those things we want to absolutely preserve, but we just want to keep that momentum going, and this is just the start.

So as you mentioned, there have been additions to the list of businesses that are up for review and the disposals are not all complete. I wonder -- just the spreadsheet jockey and me is interested in whether you have negative operating leverage, the revenues go away, the costs don't quite -- or they're reinvested elsewhere. How big a deal is that for the next year or 2 in your mind?

Thank you, Jason. That's a really important question. From my perspective, I look at each of these individual announcements we've done and also we're kind of 2/3 of the way in terms of thinking of things that we know we are going to derisk and particularly in market participation choices rather than for geographic footprint shifts. Most of them individually are a couple of hundred million maximum from a revenue perspective. So overall, even if I add it all up, it's not going to be a material drag on HSBC's revenue. From a cost perspective, it's the agility with which you deploy the cost transfer from what's available to where you want to go next. And for that, the preparedness and prioritization upfront is really important rather than having a scramble to say, I suddenly have money, now where do I invest. So we've got that pretty well ironed out. So from an operating leverage perspective, given the positivity and the tailwind we get from these investments, as you've seen in our results, particularly through the Wealth business, but also transaction banking, as well as investment in Hong Kong this year, the benefit we get there leaves very little, what I would call, drag factor, if any at all, in terms of these divestments, because these are areas we are divesting either because we don't have scale, or we don't have a competitive strength and advantage, or frankly, they may be, from a revenue production, of a certain scale, but they have low returns.

Right. You referenced investing in Hong Kong. And disposals aside, the biggest announcement over the last few months was the offer to purchase the Hang Seng minorities. I appreciate there are legal structures around the things you can say, but what can you say? This is a $13 billion investment in one of your home markets.

So what I'd say firstly is, it's on strategy. It's in a market that we understand well. It's in a market where we have a lot of confidence, both in terms of it being the largest cross-border hub for Wealth going forward, but also from the capital markets opportunity perspective. It is also an entity we know. So when you're acquiring something that you know well, there is less risk for a negative surprise. From our perspective, what it really gives us is an on-strategy opportunity to scale up and grow in some very specific areas like leveraging the revenue-generating capabilities on the fee income side in terms of wealth products for the retail customer base in Hang Seng as well as capital markets and bringing to bear our international network and transaction banking more to the wholesale side, because given the fact it's a listed company, from a competition rules perspective, at this point of time, that cannot be done. So that gives a real important revenue-generating leverage from the transaction perspective. In terms of the other criteria, I mean we do stand by the criteria we called out in terms of our acquisition hurdle rate. So we are very comfortable on strategy, scale, growth, not a distraction to organic opportunities, because the organic opportunities trajectory should continue. And given it's a known quantity, we don't think this would be a distraction. But last, but most importantly, even though we haven't called out synergies as of now, given the qualitative feedback I've given you, we feel very comfortable that it is accretive from an EPS perspective compared to share buyback.

The -- and I'm not sure whether you'll be able to add to that in any detail, but the gap between the RoTE of Hong Kong as it stands as a group and the RoTE of this business, is it -- because it's really a pretty efficient business from a cost-to-income perspective. Should shareholders be of the expectation that there can be a bridging of that gap somehow? Is that a realistic expectation? Or is it just a different mix of business?

Some areas are easy to call out. So for example, in terms of the capital, which relates to the $3 billion plus for the minority shareholders, that comes to holdings straight away. So that is a benefit upfront. So that makes it a more efficient business. In terms of the mix of business you can do, in terms of the balance sheet-driven business as well as fee income, that gets to be healthier. That gives the performance of the business some degree of stability even when it's going through a cycle from a credit crunch perspective. So those are the areas I would look at would be supportive of closing the gap.

That's helpful. And so if I turn to Q3 results, very strong in net interest income, up. Despite the fact that the cuts aren't over, you managed to produce sequential growth in NII. The hedge is rolling. That looks like to us might be $1 billion of tailwind next year, loan growth. Should we get better loan growth, could do much the same? Is it outlandish to think that next year, NII might be roughly flat or even up on this year?

So I'm not going to give a guidance for 2026, but nice try. I'm going to try and give you some qualitative considerations. So firstly, if I look at just the fourth quarter compared to third quarter, I don't see any big surprises. It's continuing well. Deposit momentum continues. I expect the deposit momentum to continue into next year. We have strong customer franchise, customer relationship-driven franchise with a great trust from our customer base in all currencies, in every jurisdiction, in all markets. So we feel very happy about that. If I look more broadly into some other tailwinds, you're quite right. The structural hedge tailwind of circa $1 billion continues into next year. Of course, there's a headwind in terms of what the market is calling out 3 rate cuts from the Fed and 2 from a sterling perspective. But then there are other compensating factors that HIBOR being stable, and we had HIBOR as a headwind in the second and third quarter. So that continues well where it is. And last but not least important is the deposit migration trend, when interest rates are falling, works as less of a headwind and more of a tailwind in terms of the proportion of time deposits to CASA. So all in the round, feel comfortable for next year, but not giving any guidance.

No, that's fair. That's reasonable. I had to have a go. The other highlight of Q3, of course, was phenomenal numbers out of Wealth and Insurance. Everybody, I think, has got their favorite stat of just how big the opportunity might be there. The Mainland Chinese deposit base at $43 trillion versus the U.S. at $17 trillion is mine. Could you talk about the sustainability of the growth you're seeing? And perhaps with your CFO hat on, how far into the future that projects, things like the unwind of the Insurance CSM and so on, does that derisk the outlook for that business a little?

So a couple of things from a macro perspective. We are in a unique position, given our Asian heritage, to be in prime position, not just in Hong Kong, but in many other markets, which are part of the Asia growth wealth story. And if Asia wealth is growing at 8% to 10% per annum, of course, we feel confident and comfortable that we should be able to maintain our mid-teens growth levels over a midterm perspective, or longer. So that's kind of the starting point for us. Of course, every quarter, there are going to be some ups and downs. So if I just unbundle a few of the drivers, I'll come to insurance straightaway, which has had a spectacular quarter and few quarters. Now it's perhaps the most annuity-driven business, because as you write the business with IFRS 17 for the next 9 to 10 years, you know that income is going to flow through. And our Insurance CSM balances at $14.6 billion, up $2.4 billion year-on-year, shows you that that's going to continue. We have strong growth in our customer numbers, overall customer numbers, but also our premier customer numbers, and that's not just in Hong Kong. We see that growth in Singapore. We see that also in the UAE, Mainland China and India, albeit from a smaller baseline. If I like -- more broadly, there are some unique factors for this year. The equity markets have been very strong. That sort of helps. But having said that, there's a normal activity level, which is quite high in terms of transaction activity as customers rebalance their portfolios. So I think that should continue. So overall, in line -- look at even in terms of net new invested assets, they've gone up $76 billion in the last 1 year. They're sitting at $1.5 trillion. We are one of the major wealth providers in Asia on top of a deposit base globally, which has grown another $86 billion over the last 1 year, and that's sitting at $1.7 trillion. So it's a very diverse flow of income coming through the various -- both from a wealth perspective and a deposit base. And I think the deposit base is important, because once the customers trust you with their money from a deposit base, the next step always is Wealth, Insurance products, and we see that migration through. So strong underpinnings of customer trust, a real unique position in a high-growth region, and then with the strong product proposition and flow of products, including annuity income flow from CSM makes us quite comfortable in terms of the future of the IWP business.