HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining our full year 2025 Fixed Income Investor Call. I'm Fais Yousaf, Group Treasurer, and I'm joined today in Hong Kong by Alastair Ryan, Global Head of Investor Relations; and from London, by Greg Case, Head of Debt Investor Relations. My remarks today will cover 3 areas. First, I'll provide a summary of group performance and progress against strategic initiatives. Second, I'll discuss the strength of our balance sheet, including capital, funding and liquidity. And finally, I'll highlight a few forward-looking topics relevant to debt investors, including an update of group targets and guidance and, of course, issuance plans. As I speak, we'll show some selected slides from our 2025 fixed income investor presentation. The full presentation is available on our Investor Relations website. And once I finish, we'll move straight into Q&A. Starting with the full year. Our results were strong and continue to demonstrate the power of our diversified and capital-generative business. I will refer to our results, excluding notable items and comparisons are on a constant currency basis, details for which are set out in the appendix of the presentation. Group revenue for 2025 was $71 billion, representing a 5% year-on-year growth. This included $44.1 billion from banking NII. Profit before tax was $36.6 billion. This is 7% up on last year and represents a record high for HSBC. The group generated a return on tangible equity of 17.2%, achieving our mid-teens or better target. Importantly, each of our 4 global businesses returned a mid-teens or better RoTE. I refer you to the main investor presentation for full business highlights, but a few standouts include: fee and other income from wholesale transaction banking, which grew 4% year-on-year within our CIB business. And also in IWPB, wealth fee and other income rose 22% with growth across all subsegments. Our robust performance allowed us to declare ordinary dividends for the year of $0.75 per share, an increase of 14% on the prior year. Turning next to progress we're making on strategic execution. As our CEO and CFO set out in detail on the analyst call earlier today, we've made significant progress this year in creating a simple, more agile, customer-centric bank, which is well positioned to deliver sustainable growth. Given that I'm speaking to you from Hong Kong, let me briefly begin with an update on the privatization of Hang Seng Bank. First of all, we were pleased to complete the transaction ahead of schedule, further strengthening our position in our Hong Kong home market. Hong Kong is not only a dynamic financial center, but also a super connector, a trade and capital gateway between the Mainland and the rest of the world. This transaction brings together global reach and local depth, allowing us to drive growth across both banks for all customers and investors. We've already identified initial synergies from the transaction, and we see further revenue and cost upside to come. Moreover, we believe growth and asset quality improvement will bring additional value. Beyond the privatization, we've continued to simplify the group and sharpen our focus on core markets and businesses. In 2025, we announced 11 business exits and 4 of these have been completed to date. These actions reduce organizational complexity, improve capital efficiency and support a more stable earnings profile. In addition, we have taken actions to realize approximately $1.2 billion of annualized simplification savings in 2025, which is ahead of our original time line. Of this, $0.6 billion were realized in P&L this year. The delivery of this plan and our ongoing discipline has allowed us to guide for 1% cost growth in 2026 on a target basis. Next, moving on to the second area, the strength of our balance sheet, asset quality, funding, capital and liquidity. The power of our franchise and our deep customer relationships drove 5% growth in deposits during the year. This includes held-for-sale balances and this equivalent to $78 billion increase. Growth was broad-based, but notably strong in Hong Kong, where we see ongoing capital and wealth inflows. Across our 2 home markets, our deposits continue to skew significantly more towards current and savings accounts than we see across the broader market. Our loan book grew by 2% as increases in 3 of our 4 businesses, the U.K., CIB and IWPB were partially offset by ongoing customer repayments and muted demand in Hong Kong. Our cost of risk for the year was around 39 basis points, aligned with our guidance of around 40. As we look out into 2026, our expectation is for around 40 basis points again. Stage 3 balances were 2.5% of customer loans, up marginally on the 2.4% level last year. The overall grading of our loan book continued to improve with 77% rated strong or good, up 1 percentage point on last year. Turning to capital. Our CET1 ratio was 14.9%. This is at an elevated level due to our strong organic capital generation and retained capital in the fourth quarter to support the Hang Seng prioritization. This transaction completed on the 26th of January with a $13.7 billion purchase price. The removal of the $3.8 billion minority capital inefficiency takes us to around $10 billion of common equity Tier 1 consumption. This lowered our CET1 ratio by 110 basis points in January this year post the balance sheet date. A slide in the appendix sets out the capital impacts in more detail. We expect to remain capital generative, and we'll continue to manage our CET1 ratio in the operating range of 14% to 14.5%. The midpoint of this range gives over 300 basis points of headroom above our MDA hurdle requirements. Our MREL ratio was 32.9%, which is 4.5 percentage points above our requirement, equivalent to around $40 billion of available capital. Now touching a little on regulation. The implementation of Basel 3.1 in the U.K. will take place on the 1st of January 2027. We have well established programs in place to support this change, and the reform is expected to be modestly beneficial. We do not expect this to alter our capital target operating range or our issuance plans, and our focus at this stage is on model alignment, data preparation and ensuring a smooth transition. Also in the U.K., the Financial Policy Committee published their review of bank capital requirements in December last year. We believe the review of the framework and the intended alignment with other jurisdictions is a positive step. This review is a welcome catalyst to improve the framework to support growth and competitiveness and should proceed with ambition and pace. We are committed to continue our engagement with the Bank of England and U.K. government on this topic. Moving on to liquidity. The group's large and well-diversified deposit base provides strong levels of liquidity. The total HQLA on hand is now $0.9 trillion, covering around half at total $1.8 trillion customer deposit base. Our group LCR is 137%, but this is a conservative methodology, which excludes $160 billion of HQLA. Our underlying entity LCRs are extremely healthy with the lowest at 148% and the rest generally considerably higher. Our loan-to-deposit ratio continued to reduce and is now at 55%, representing a $0.8 trillion customer surplus. Our structural hedge is $593 billion, which increased by $64 billion in 2025. The average life remains at 3.1 years. During the year, we expect to redeploy $110 billion of structural hedge assets, currently yielding 2.7%. The structural hedge remains a tailwind for banking NII. And whilst increases in the hedge are behind us -- sorry, large increases in the hedge are behind us, we continue to look for opportunities to add to the hedge as always, dependent on market conditions. Now on to the third and final part, the forward-looking dimension. That is targets, guidance, issuance plan, but also growth and innovation. Our franchise strength that I outlined earlier, together with the strong execution of our strategic plans has meant that today, we announced improved targets and guidance. Revenue growth is expected to be rising towards 5% by 2028, excluding notable items. We are targeting a return on tangible equity at 17% or better each year to 2028, also excluding notable items. And for 2026, our guidance for banking NII is at least $45 billion, reflecting expectations of deposit growth and the contribution of the structural hedge. Alongside these financial targets and guidance, we continue to invest and develop for the future, particularly in our digital asset capabilities and use of artificial intelligence. This will support new revenue opportunities, promote market innovation and drive internal operational efficiency. In digital assets, our activity remains client-driven and focused on custody, tokenization and market infrastructure. We are delivering innovative solutions across bonds, gold and tokenized deposits for both institutional and retail clients across geographies. We are pleased that our HSBC Orion digital bond platform recently secured the U.K. government's Digital Gilt mandate, while our HSBC Gold tokens in Hong Kong, now with a gold gifting feature demonstrate our commitment to practical innovation. We remain closely engaged with emerging developments, including the Hong Kong stablecoin and in the U.K., the GB tokenized deposits' live pilot, ensuring we continue to lead responsibly as the digital asset landscape evolves. These activities incur limited balance sheet usage and are all conducted with an established risk appetite framework. In artificial intelligence, our investments are directed at empowering colleagues, delivering end-to-end process reengineering and enhancing our customer experience. Finally, on to issuance. We are pleased with the engagement and support from our investors across multiple currencies in 2025. For '26, we expect to issue approximately $20 billion of Holdco Senior, $1 billion of Tier 2, and $4 billion of AT1. We will once again have minimal needs for OpCo funding this year given our strong funding position. Across all asset classes, we will continue to look for opportunities to diversify the currency of our issuance to fit with our footprint and franchise. As with recent years, this will include significant issuance in U.S. dollar, but we will also continue to look for opportunities in sterling, euro, Singapore dollars, Australian dollars and others. We also continued our focus on legacy securities management in 2025 with the tender of some of our New York law instruments that no longer have value as regulatory capital or MREL. Where appropriate and proportionate to do so and where the economics make sense, we will manage this step further over time. In summary, with the strong performance in 2025, we're moving at pace to continue to deliver a simpler, more agile and growing HSBC. We are on track to deliver against our simplification savings target. We continue to progress with our exit of nonstrategic activities, and we are confident in our ability to continue execution with discipline and precision. On that note, let's open this call up for Q&A. Faizan?

[Operator Instructions] While we wait for the questions to line up, we can start with a presubmitted question. Greg?

Thanks, Faizan. Yes. So we've had a pre-submitted question in Fais. So the question is, could you give us an update on your plans around currency of the various different splits of issuance, you've outlined in the issuance plan, please?

Okay. Thanks, Greg. So really, it's very similar to what I've said in the past on these calls. Generally, you'll see much of our issuance issued through the U.S. dollar markets given that's the largest liquidity pool. In '25, we did about 68% of our MREL issuance in dollars. Although as I said in my prepared remarks, we did have some other currencies as well. What I'd say is that generally, this year, you probably expect -- should probably expect us to do between 2/3 and 3/4 of our senior holdco in U.S. dollars. For AT1, we do have a preference for U.S. dollars given that's our functional currency. And where we do other currencies, it would be, frankly, where we could downstream it to legal entities that have a functional currency in that alternative currency. So yes, look, largely U.S. dollars, but we are open to looking at euro, Aussie, Sing, sterling, yen and maybe a few other currencies as well.

Our first question on Zoom comes from Lee Street of Citi.

I have 3, please. Firstly, you mentioned the FPC review as a positive step. I guess, in a bit more detail, what mean practically do you actually expect to change as a consequence of the review? Secondly, you mentioned tokenized deposits. Just when do you expect to have that as a broad offering for your client base? Is that this year's business, next year's, timing on that would be helpful. And a technical one on bonds. You obviously continue to include par call windows, refinancing windows within your subordinated instruments. Obviously, other banks are now ceasing to include those. What are your thoughts around that, please? That would be my 3 questions.

Thanks, Lee. Good to hear from you. So I'll probably take your questions in order. So I guess, first of all, on the FPC review, I think perhaps I'll start by providing a little bit of context for people that are perhaps not familiar with this. So at the back end of 2025 -- December 2025, the FPC Financial Policy Committee in the U.K. published their initial findings of the capital review. We welcomed that -- those findings. And we think this is an important process. And as I said in my prepared remarks, it's one we want to move forward at pace and with ambition because for us, it provides a real and genuine opportunity to make, I guess, thoughtful amendments to the framework. What the FPC have said, and I think you will know this, Lee, but just for everyone else's benefit, is they've said that they would like firms and other interested parties to submit written feedback by the beginning of April. And they've highlighted 4 core areas. From memory, that's, first of all, usability of buffers. The second was leverage ratio and the leverage ratio framework. The third was looking at the interaction within the capital regime of different aspects and different requirements. And the fourth was really indexation of thresholds, proportionality, complexity, et cetera. So those are the 4 core areas that have been highlighted for feedback. I guess to your question, it's a little bit early to predict what will come out of that review process. But I'd certainly say there are a few things that will be positive for us from our perspective and that we would like to see happen. So the leverage ratio is one of those things. We think there, there are several angles that could be considered. And as I think many of us will know, this is something that the U.S. have looked at in terms of changes to the eSLR framework. So that's one thing. Second thing, buffers and usability of buffers. Obviously, the FPC announced a change in their benchmark guidance moving that to between 13% and 14%, which in itself is positive. But buffer usability is really the catalyst that helps firms from our perspective, use that and change ratios. Perhaps the third thing I'd call out on this one is ring-fencing. We think that this is an area that should also be looked at and would provide meaningful opportunity for -- there is meaningful opportunity for adaptation there. The ring-fencing regime was obviously developed a few years ago and the whole framework is in terms of capital and the Basel rules have evolved since that was first established. So that's what probably I'd call out on the FPC review. I think the second question was on tokenized deposits. And what I would say in that regard is that we have spent a lot of time ourselves developing our capability for tokenized deposits. I would say we're a leader in that space and certainly within the technology aspect of that. And as I mentioned in the prepared remarks, we have spent some time developing our HSBC Orion platform, and we were very pleased for that to be selected for the U.K. -- to have the U.K. Gilt mandate as part of the pilot. We're also actively engaged in the GBTD pilot exercise among U.K. banks. But I think your point was probably very specifically about kind of expanding our tokenized deposit offering to clients. And what we've done in that regard is, we started in Hong Kong, and we have onboarded clients in Hong Kong on our tokenized deposit offering. And since that initial launch, we have expanded to other jurisdictions, including the U.K., Singapore and Luxembourg. And that's not the extent of our ambition. We want to go beyond that. So it's clearly an area of focus. So that's probably what I would call out in terms of tokenized deposits. And then if I caught correctly, your final question was on the 6-month par call window. Look, as you've probably seen, we issued a call notice a few weeks ago, which was actually the first AT1 that came up for us with that 6-month par call window within it. And we chose to call that really at the start of the window. We -- the way we think about this, I would say, is that we continue to see benefits in having securities issued with this call window as it gives flexibility when we're in stressed markets to ensure we can call or to maximize the probability of calling it. But we're not in itself trying to derive value from the call window. And generally, we would look to exercise early on. What we do here is that we do not leave the refinancing of our AT1s right to the last minute. We will look multiyears ahead certainly months ahead, and we will ensure that there's no refinancing risk. So keeping an AT1 through the call window, we're effectively incurring a carry cost. So it's quite often to our disadvantage to do that. But the 6-month call window for us does create the opportunity, as I say, in a stressed market to maximize our opportunity to call. It's one of the things, we don't think there's a clear market consensus that's formed here. And I know that some parties have chosen to remove that. Others retain it as well. We'll keep track of that evolvement or how that evolves over time. And at the moment, there's no cost for us in the primaries to having that call window in. If a cost were to arise, then we would maybe reconsider as well. Hopefully, that addresses your questions, and I haven't missed anything.

Next question comes from Dan David of Autonomous.

Hopefully you can hear me. Congrats on the [indiscernible] I've got 3 questions. The first one is on the CET1. So thanks for providing some guidance on the pro forma impact of Hang Seng. Just interested in the -- how long it will take to come back into your CET1 range and what actions you're taking. If you could just refresh us on that, that would be great. Second one is on MREL. The requirement has gone up. quite a bit 60 basis points, which equates to about $5 billion, which is quite large. Could you give us some detail on what's driven the increase in the requirement? And do you expect this to -- the, I guess, half yearly volatility to continue? And then the third one is a bit broader on, I guess, Hong Kong CRE and the ECL charges. So I think the ECL charges look pretty small in Q4 on Slide 16. But I think on the call earlier, you said there were some macro-related upgrades, which offset the underlying charges. Could you maybe provide some guidance on or break out the pieces that are moving there, the kind of the underlying from the macro-related upgrades? And maybe give us some background on what drives the timing of that macro reflection or change in your view to kind of push through into the models?

Thanks, Dan. That's very clear. What I propose to do is split that up actually. So perhaps I'll take question one on CET1, perhaps I'll ask Greg whether he can make some comments on the MREL requirements. And I'll ask Alastair to take question 3 on Hong Kong CRE. So I guess on CET1, yes, look, we closed the year at 14.9%. So that's our group CET1 ratio. And we -- that was a 40 basis points increase on the quarter. That's above our target operating level, which, just to remind everyone, is 14% to 14.5%. But we built that capital up in expectation of the Hang Seng privatization going through. And as you will have seen, Dan and as you kind of quoted in your question, that's now gone through -- and that effectively recognizes 110 basis points drop in the CET1. So that takes us just marginally below our target operating level. It's my expectation that we will recover back into the operating range fairly quickly. And I don't -- as we've said a few times, we are -- and continue to be incredibly capital generative. So I'm not going to give you a time line for that, but I don't think you should expect us to take too long to get back into the range. In terms of share buybacks, what we said at the beginning when we announced the transaction which was around October 9, was that we were suspending share buybacks for up to 3 quarters. Now we're not changing our guidance or messaging on that point. Generally, share buybacks are something we consider each quarter as we go. And they are one of the tools that we have at our disposal in terms of capital deployment. Clearly, we look at other things as well. We will look at inorganic growth -- sorry, organic growth opportunities and inorganic growth opportunities and then share buybacks probably comes a little bit after that. So no clear guidance that I can give you today on when we will resume share buybacks. But there's nothing that we see at the moment that would change that would require us to change what we said previously. So that's CET1. Perhaps as Alastair is sitting next to me here in Hong Kong, perhaps I'll ask him to do the Hong Kong CRE, and then I'll come over to Greg for MREL.

Yes. thanks, Fais. So Slide 36 in the fixed income deck, you can see that there's actually very modest deterioration in the book in the second half of the year in Hong Kong CRE. The major feature of the percentage move was actually the best borrowers repaying. So the top of the stack, the strongest loans went down because borrowers deleveraging. So that was a theme across the market. We'd like to be lending more in Hong Kong in general, but the demand isn't there. There was one Stage 3 loan of materiality in the fourth quarter. There have been one in the third quarter. I mean we -- parts of the market here is still stressed in particular parts of the office market and particular pockets of retail, but we haven't seen the broad-based deterioration that people were worried about, I think, for some of the banks. In terms of the revised economic assumptions, we run that regularly. We update that in our quarterly reports. The key features in Hong Kong in the recent past have been things like better retail sales, stronger tourism arrivals, increased property transactions, better GDP growth, and rising prices in certainly residential property. So a number of positive signs in the market. It just happened that those numbers -- the single name and the revisions were broadly comparable in the quarter. I guess back in Fais's slides on Slide 33, there's some disclosure on Hang Seng Bank, where I think the market was asking more questions. The first half had a number of significant moves into Stage 3 at Hang Seng. That hadn't happened in the second half of the previous year, and it didn't follow through in the second half of this year. So I'd say we felt the second half on the book was very much as we'd expected. We are calling out in the group's 40 basis points guidance for this year, there remain risks of further moves into Stage 3 or deterioration in other ways, certainly in pockets of the Hong Kong market. But overall, the market conditions have been improving of late, which is the driver of revisions to economic assumptions.

Thanks Alastair. All right, Greg, over to you.

Thanks, Fais. So on the MREL, I think firstly, it's just important to note, of course, that our buffer above our minimum remains very significant at around $40 billion or around 4 percentage points of RWAs. But yes, as you can imagine, given we are, I think, quite unique in the way that our MREL requirements are made up in that you take the component parts of all of our group, so all the various different resolution entities and add that together, there are some complexities in there. And primarily, the one that I think is driving the increase that you saw in the second half was that some of the entities that make up the whole are leverage constrained rather than RWA constrained. So there has been some growth in leverage assets, and that has driven that increase, albeit still, as I say, leaving us with a decent buffer.