HSBC Holdings plc (HSBA) Earnings Call Transcript & Summary

Question 3, how do you prefer the bank deploys excess capital? Okay, more organic growth. It seems like people have been listening to the kind of message that you enjoyed you've been putting out in recent months. I guess, look, turning to capital. Capital is a position of strength. -- cap generation is strong. You did 100 basis points in Q2. How should we think about your capital allocation hierarchy from here. And in particular, the sustainability of buybacks within that, particularly as growth -- the growth opportunity evolves from here.

So firstly, thank you for listening to our messages. We've been clear in our communication, our deployment of capital stack given the starting point, which is very healthy of 100 basis points per quarter starts with a 50% dividend payout ratio. So there is absolutely sacrosanct first priority. The next priority is to drive organic growth exactly as you've called out in terms of business growth. But beyond that, I just want to reiterate irrespective where the share price is, share buybacks will remain as the preferred distribution method for excess capital. So that, to me, is really clear. Now we have seen continuing strong growth in our organic businesses through this quarter. And let's see how the quarter ends. And we are putting our capital at work to get those good returns within our risk appetite because that's really important for the long-term sustainable growth for this organization. I do want to reiterate that we are now more hedged and, therefore, less interest rate sensitive. And one of the tools we use is HTC NS. And given what has happened to bond incomes recently this will have an impact of around mid-teens basis points on capital. So just to call it out. We are very comfortable with that because it's a timing factor. And given where we are on banking NII and how we have hedged, this will come back very quickly. But of course, these fluctuations do have some impact on the total quantum of share buybacks.

Happy to open the floor for any questions, please don't be shy if you have anything to ask. Okay, cool. We'll continue with a focus on the businesses. I mean turn to the businesses that you're growing -- you've highlighted strength on the trade side in the second quarter. Is there any kind of geographical sector to this growth? Or is it more broad-based?

So I think, firstly, given the specialization we have in trade, 5,000 trade specialists are continuing engagement with our customers since last year is really showing how our trade business is not only #1, but our market share is growing across the globe. But the key driver for growth is Asia, and that is the support we are giving to the major economies in Asia as their year-on-year export levels have grown. So just to quote a few numbers. China year-on-year export is up by 19%, Hong Kong is 39%; Korea is 51% and Taiwan is 45%. Also, given the macro environment, there is a much greater demand in terms of trade-based lending. And those trade loans are up 30% year-on-year, and they're up to $120 billion. This is both in terms of how customers are adjusting their own supply chains, but also a desire to have more sort of short-term lending as well and more commercially linked. As a result, the trading revenues that we have recorded have been up 13% year-on-year, and they were $0.8 billion in Q2. So for me, a business which is really a strong suit for HSBC. It's relatively a smaller part of the wholesale transaction banking fees, but this is a very important trend for us to reflect upon and to continue to maintain and invest so that we can not only stay in the #1 position as the world's trade bank but actually, even from that position, increase our market share.

Switching to the U.K. Your second home market often receives a lot less attention from investors than some of your Asian businesses. But actually, performance has been remarkably strong, particularly within the commercial and corporate banking lending line, it's a key driver of loan growth at the group level. You've got a new CEO, a divisional CEO in place and an investor update coming soon. I'm interested in how you think about the role of the U.K. within HSBC's broader growth agenda.

So U.K. is a very open market. And within that, we are the third largest bank in terms of revenue and deposit balances. Our sweet spot, again, is to be the #1 from a U.K. trade perspective. And that, along with our domestic presence gives us a very important role both to support the U.K. economy through the ring-fenced bank, but more broadly also to the non-ring-fenced banks. I'm going to look at the U.K. overall as a geography and the role we play in the trade agreements, which the U.K. government has signed where we are important on both sides of the agreements, whether it's with India, whether it's with China and so on. So that is very encouraging. But if I just look from a U.K. business, i.e., the ring-fenced bank perspective, you're right, the ROTE for that business is at 21%. We are very pleased that the revenues have grown by 5%. Lending U.K. has been absolutely stellar at a 7% growth. Deposits are at 4%. We haven't had to overpay for the deposits. Pricing is very competitive. So given all that, I'm very pleased with what's happened with that business. And our investment in this business, again, is prioritizing those areas of strength for us in terms of the SME business banking and trade and international business for the U.K. Now David Lindberg is our new CEO. He's looking at all of this as well as looking at from the retail bank. How we do more investment in technology, in customer journeys, and that will continue to drive further growth in the U.K. and he will be coming up with our U.K. CFO in November to again talk to investors more broadly on the U.K. business. So I don't want anybody to in any way, forget the U.K. It's just we've got 4 very strong businesses to talk about and from time to time, the growth rate and in those opportunities, they may vary across those businesses, and we run a very hard rule in terms of how we prioritize investments. But the good thing is they're all on a positive trajectory. So it does make choices hard sometimes, but it's a good way to progress.

I guess staying on the U.K., U.K. government is keen to improve the competitiveness of Financial Services. How important is the kind of regulatory and tax framework in determining HSPs willingness to invest and grow in the U.K?

Tax is always something for the government, the authorities to decide and it changes from time to time. We are a big major contributor to the taxes. Last year, we paid billion. If you could look at both U.K. corporation tax as well as the 3% surcharge and the banking levy. So we will continue to play our role in that. From a regulatory perspective, of course, different jurisdictions are on different trajectories with regard to how they're reviewing regulation. From my perspective, some of the dialogue we've had with regard to the FCC's desire to open the U.K. economy for growth. They have been a very important fruitful dialogues as well as some of the responses we've got on the changing on the ring-fenced bank rules to give greater flexibility. I think that's been highly appreciated. We have looked at the most recent, obviously, changes from a leverage perspective. And on leverage requirements at an operating entity level, it is beneficial for us. It gives us an ability to be more flexible in how we deploy our balance sheet and how we look at business strategy across those balance sheet. However, from a group perspective, these leverage requirements are not beneficial. They are marginally detrimental, and we continue the dialogue to work through and support the business in the U.K. Most importantly, we have identified key sectors in the U.K. economy, whether it's to do with infrastructure, whether it's to do with innovation, pharma, bio life sciences, and in those areas, we have this active dialogue with the government to say how we can lean in more and obviously, how we can support our customers through that process. And then the trade agreements is the other piece, which I mentioned. So more to do some of the requirements that have come in have been partially beneficial to us, and in some cases, not as much for some fair banks.

Hang Seng now taken full ownership of it. How is the integration progressing? And what opportunities does full ownership create that weren't previously available to you? And I guess if I can ask, is there any scope in your mind around exceeding some of the kind of value creation of that? .

So there's sort of bottom line on the value creation from Hang Seng as $900 million, that sort of not [indiscernible] billion, which you've called out before. But I'm going to just give you a bit of a context. Now Hang Seng Bank last year, fee tax pre ECL, sorry, was $3.4 billion profit. That is after an ECL chart after that is a leasing charge of $1 billion. In normal times, before China commercial real estate and Hong Kong commercial real estate issues, the ECL charge for Hang Seng Bank used to be $100 million to $400 million a year. So I do believe, as Hong Kong Commercial real estate has stabilized the opportunity for bottom line growth for Hang Seng will be quite considerable. That will be over and above the $900 I've mentioned. Very specifically in terms of how things have improved we have already seen that the new-to-bank customer flow in Q2 in Hang Seng has doubled. We are also now co-creating in terms of products as well as use of technology apps and customer journeys so that Hang Seng Bank can equally participate with the growth that's coming from the Chinese mainland and more broadly in the ecosystem from a wholesale perspective. Now if I sit back a bit, some of the things we have done, whether in terms of how we are looking at portfolios across both Hang Seng and HSBC, we have created that capacity within Hang Seng where the NPLs are lower. There is more room in the balance sheet to diversify lending beyond commercial real estate and because we were always looking at compliance and risk requirements at the same level of rigor and robustness for Hang Seng and HSBC there has been no negative surprise. The market everybody was asking us, it's just proven. It's this business as usual because we use the same yardstick on both. So given all that, I'm very positive that beyond the benefits, which are running well on track, both in terms of the cost synergies and the revenue synergies, the real points of reference in terms of where we are seeing actual growth today and the capacity we are creating for additional lending as well as flexibility of capital upstreaming, that is all very positive and actually is ahead of trajectory. We have done some of it, and there'll be more to do in very short order.

Yes. I guess, -- you kind of referenced -- there's been a number of high-profile credit events this year across the industry. Although actually, some of that appears to be somewhat idiosyncratic rather than something more systemic. How would you characterize the underlying credit environment today? And specifically, could you also comment on the fallout of the Middle East and I guess you referenced commercial real estate?

Thank you, Aman. Really good question because I really do believe not just for HSBC, but for the financial services sector overall and the industry credit will be something to be really closely monitored both for the rest of this year and next year. Now when I look at credit overall from an HSBC perspective, I'm going to unbundle it in sort of 3 areas. So the first area for me is to say our own guidance. Our guidance, there's been an uptick, as you know, but it's been driven by 2 factors: one, idiosyncratic fraud-related loss in the first quarter, but also with regard to the reserve we've built for the Middle East. We have done a lot of -- in terms of managing concentration risk, not just from a fraud and that particular private credit asset class, but also across various sectors. So I feel very comfortable in that space. And in terms of the Middle East, the actual losses we've seen directly related to the Middle East are really low so far, $34 million as we called out in the middle of the year, there's been no big surprises there. However, the $300 million reserve that we built given that the conflict continues, we will be more cautious in terms of the timing of the release of that reserve. Obviously, as the conflict persists, there are some broader macro things to consider because with higher inflation, higher interest rates, what we are seeing is that in pockets across the globe, U.K., Hong Kong and the rest, stage 3 losses, not [indiscernible] because it's typically at the lower end of the mid-market where we keep our exposure quite tight. They have increased, and that trend will continue. From a retail perspective, I feel very comfortable because we have derisked Mexico retail and the losses there are much lower, and it's more of a premium and book similarly for the rest of the world because our exposures are more at the premium affluent and we feel very comfortable and on credit cards, we are relatively a smaller player. But I do feel that as inflation high interest rate comes, that's something at an industry level we need to be very watchful off. Now very specifically, coming down to Hong Kong commercial real estate. What we are seeing is not really many, what I would call, new impairments. There is a bit of a time lag there on existing impairments. There's a slight uptick in terms of valuations. So you can build some of your total reserves and ECL as a consequence. But overall, what is very encouraging is that residential sector is really in a very good spot. There has been an 18% increase in valuations year-on-year if I compare August '25 with August '26. There is also a lot of what I would say, economic momentum in Hong Kong not just from Chinese mainland, but also in terms of Hong Kong as an international financial center and the support from financial services growth, new IPOs and so on. So we see retail activity has also picked up. And there has been 15 months consecutively of growth in retail spending. And that is really important because from a retail sales perspective, the overall quantum of retail sales is also up 9%, if I compare year-on-year July '25 with July '26. Now having said that, will there be pockets of retail exposure, where as I said, there could be some additional ECLs or impairments, yes, but very contained. The last is really talking about the office space. Now office space in core central areas, the demand has really picked up. We're seeing that both in terms of price valuations, but also rentals. And that's coming up a lot from financial services. And that segment of the office sector is normalizing. However, there remains what I would call areas in the office sector, which are beyond the core central area where due to excess in supply, there is still some pressure. So when we look at our guidance, we factor in this residual Hong Kong commercial real estate risk as part of that guidance. And I think that will continue for most of this year and through next year, but obviously, it's gradually reducing over time as it gets to BAU.

Perfect. Deposit competition. You've got an amazing deposit franchise is a key driver of your franchise value. But post competition is a theme that's coming up across the sector. What are you seeing across your footprint?

Well, if I look at really the deposit dynamics from a U.K. and Hong Kong perspective, we have a very strong position. I mean overall, in our $1.8 trillion of deposits, 70%, so $1.3 trillion are instant access demand deposits. And those really represent the operating accounts of our customers, and they are typically very sticky and high quality. So we haven't really had to pay more for our deposits. Having said that, we are very mindful of the competition. We have surplus customer deposits in every of our 4 businesses across all jurisdictions and geographies. . So from my perspective, it's an area to be mindful because there will be heavy competitive pressure, particularly where there are players who don't have a similar advantage as our deposit franchise. So we will manage it very, very carefully. But for now, we feel we have sufficient room in terms of the loan growth trajectory, which is sitting quite well, particularly in our home markets to continue. I just want to add one point. The growth we are seeing in our home markets is a continuing story, both for U.K. and Hong Kong. The reason it's not picked so much for Hong Kong is that in the past, and I've always called it out, we always had growth in lending at a gross level, but we saw a lot of early repayments, particularly in the unsecured portfolio, which was conglomerate based developers we had enough cash flow and derisking. Now that the market is stabilizing, we are not seeing that. So the growth in our lending is coming straight to the bottom line. And it's in line with what I thought and talked about probably about 5 or 6 quarters ago.

Perfect. Happy to try again if anyone's got any burning questions for Pam. Okay. Perfect. Well, look, we're exactly 2 minutes.

You can ask another question. Happy...

You know what, I will ask you questions I'd love to ask you about banking NII. As you're remiss that we'd have a 40-minute discussion and not talk about the dominant driver of revenues. But obviously, the curve has repriced higher. You upgraded your guidance greater than $46 billion. Just kind of interested in how we should think about that saying right now? .

So with the interest rate curves, clearly, from a banking NI overall and the growth you're seeing in lending, which is new and the growth on deposits, which is continuing that gives you both the volume and the margin impact. So that's all very positive. HIBOR is at 2.91% as of the close of day to day in Hong Kong. So that's all very positive. I do want to remind you of 2 things on banking NII. So firstly, given some of the sales we are doing of our noncore businesses in '27, '28, there will be more impact on banking NII. So there would be a headwind because of that. Secondly, we are now more hedged against interest rate sensitivity, which is a great thing from a medium to longer term. However, in the short term, as we've seen in the recent quarters and given that we have HTCS exposures as well, and the bond yield curves, they continue to be choppy the way they have been, there is a direct impact overall on our capital. So I think you need to look at all of these things in the round. Overall, yes, more positive than negative given where we are, but there are headwinds as well. And then last but not least, you have to always see that, yes, banking NII is important, but for the health and sustainable growth of our franchise fee and income really matter, and I'm so pleased everybody is recognizing that -- that's the area where we want to have that alpha growth as well as accelerated investment. So overall, well positioned for growth and I'm really pleased to given my own announcement that I'm able to say with great confidence that the trajectory for the organization on what we have built, both revenue and profitability terms is very strong, robust and sustainable.

Thank you so much. We're exactly on time. That's perfect. Thank you very much, everyone, for your attendance, and thank you very much Pam.

Thank you.