HSBC : 1Q 2023 Presentation to Investors and Analysts - Transcript

Transcript

Q1 Results

Analyst and Investor Call

2 May 2023, 7.30am BST

RICHARD O'CONNOR, GLOBAL HEAD OF INVESTOR RELATIONS: Good morning, good afternoon, everyone. Before I hand over to Noel, I want to give a quick reminder of the reporting changes that have taken effect this quarter.

Numbers in the presentation today are on an IFRS 17 basis, and thank you to all those who attended the teach-in in March. Our focus is now on reported numbers, but we will call out and specify notable items. Our global businesses are still the primary basis of our reporting, but we have moved to legal entity rather geographic regions as our secondary reporting line. Consensus hasn't yet fully caught up with all these changes, but now we've made them, we believe they will give you more clarity, transparency, and ultimately benefit your modelling going forward. Noel, over to you.

NOEL QUINN, GROUP CHIEF EXECUTIVE: Thanks, Richard, and good morning in London, good afternoon in Hong Kong. Thank you for joining our first-quarter results call. Georges is going to lead the presentation, but I'd like to make some opening comments.

We've announced a strong set of Q1 results. We delivered a strong profit performance, which was spread across all our major geographies. All three global businesses performed well, and cost discipline remained tight. In the first quarter, excluding the gain on SVB UK and the part reversal of the impairment on the potential sale of our French retail bank, we delivered an annualised return on tangible equity of 19.3%, so our strategy is working.

I'm also confident about the future, for two main reasons. First, we have built a good platform for growth. We have a strong balance sheet, broad-based geographic profit generation, a good combination of net interest income and non-net interest income, and a tight grip on costs. This growth potential was evident in the inflow of net new invested assets of $22 billion in the quarter, with a cumulative $93 billion over the last 12 months, which shows that our Wealth strategy is continuing to gain traction, and you have my commitment that we will continue to drive strong performance for the rest of the year, while maintaining cost discipline and investing in growth.

The second reason I'm confident is the diversity and connectivity of our geographical footprint, where we have access to markets that are exhibiting good growth and return potential. I've seen first-hand the strong economic recoveries underway in Hong Kong and mainland China. I've also visited the Middle East recently, where I saw a strong economy that is well-placed to continue to grow. And the UK economy is also showing good resilience, and our HSBC UK business is performing well.

Investing in growth is critical and we saw an opportunity to do that by acquiring SVB UK. For 158 years, HSBC has banked the entrepreneurs who have created today's industrial base. With the SVB UK acquisition, we have access to more of the entrepreneurs in the technology and life sciences sectors who will create the businesses of tomorrow. We believe they're a natural fit for HSBC and that we're well and uniquely placed to take them global. You will have seen the recent hires that we've taken on in the US in that regard, and we're going to continue to invest to grow this part of the business on a global basis.

We announced that the sale of our French retail bank has become less certain, due to significant interest-rate rises in France and the related fair value accounting treatment impacting the capital position of the purchase. We still believe it's right to sell the business, but

we also have to keep our shareholders' interests in mind when negotiating revised terms. We are working with the buyer to try and find a solution, but the uncertainty on deal terms and timing has led us to reverse the impairment.

Finally, we made two important announcements today. The first was the resumption of quarterly dividends, with an interim dividend of 10 cents per share, which is the same level as the last time we paid a first quarterly dividend before Covid. The second was that good, continued capital generation enabled us to announce a share buyback of up to $2 billion.

Our AGM on Friday will be an important milestone. As you know, resolutions have been tabled by shareholders on the strategy and structure of the bank, as well as to fix the dividend. The board has recommended that shareholders vote against resolutions 17 and 18. I believe our first-quarter results reinforce our recommendations and demonstrate that our current strategy is the fastest and safest way to improve returns.

I'll now hand over to Georges to take you through the numbers.

GEORGES ELHEDERY, GROUP CHIEF FINANCIAL OFFICER: Thank you, Noel, and a warm welcome to all of you. Thank you for being with us on this call today. Let me begin with the first- quarter highlights. Profit before tax was $12.9 billion, up $9 billion on the first quarter of 2022 on a constant currency basis. This was driven by an $8.6 billion increase in revenue, which includes $2.1 billion from the part-reversal of the impairment relating to the potential sale of our retail banking operations in France, and a $1.5 billion provisional gain on the acquisition of SVB UK.

Credit performance was benign, with expected credit losses of $0.4 billion.

Costs were up 2% in the first quarter against our 2023 target of limiting cost growth to circa 3% on a constant currency basis and excluding notable items and hyperinflation.

Our annualised return on tangible equity was 27.4%, or 19.3% excluding the gain on SVB UK and the part-reversal of the impairment on the potential sale of our French retail bank.

And as Noel said, we're providing strong capital returns in the form of the first quarterly dividend since 2019 of 10 cents per share, and a share buyback of up to $2 billion, which we expect to start after the AGM and complete in around three months.

Going into more detail, net interest income of $9 billion was up $2.9 billion or 47% on the first quarter of 2022, and was stable on the fourth quarter on an IFRS 17 basis. Non-net interest income of $11.2 billion was up $5.7 billion, which includes $3.6 billion of notable items in the first quarter and was driven by strong performances in Markets and Securities Services, and in Wealth. Lending balances increased by $32 billion in the quarter on a constant currency basis. This was made up of $25 billion from the reclassification of balances associated with our retail banking operations in France, and $7.3 billion from SVB UK.

Deposits also increased in the quarter due to the same factors. If we excluded these items, lending and deposits were both stable. The tax charge of $1.9 billion included a credit of $0.4 billion. The CET1 ratio was 14.7%, which was an increase of 50 basis points on the fourth quarter and included the 30-basis-point gain relating to the part-reversal of the France impairment and the SVB UK acquisition.

As Noel said, all of our global businesses performed well. This slide gives you the evidence for that. Wealth and Personal Banking had a strong quarter, with revenues up 82%. Within this, Wealth was up 13%, driven by the economic resurgence in Asia and increasing traction from the investment we've made in digitisation and in people. Personal Banking also had another good quarter, up 64%, benefiting from our strong deposit franchise.

Across both Commercial Banking and Global Banking and Markets, Global Payments Services had revenues of $4 billion, which was an increase of 176% on the first quarter of 2022. Global Banking and Markets also performed well overall. Markets and Securities Services revenue in particular were up 12%, with a strong performance in foreign exchange.

Reported net interest income was $9 billion, which included $1.4 billion of interest expense due to the funding costs booked in Corporate Centre to fund the trading books. This was offset by $1.4 billion of non-net interest income reported in Corporate Centre. On a reported basis, the net interest margin was up by 50 basis points on the first quarter of last year and up by one basis point on the fourth quarter.

For the avoidance of doubt, our net interest income guidance is unchanged from our 2022 full-year results. On an IFRS 17 basis, we expect to achieve net interest income of at least $34 billion in 2023. This is equivalent to at least $36 billion of net interest income on an IFRS 4 basis, which was what we told you in February. Our current view is that the things we told you about net interest income at our 2022 full-year results remain unchanged.

Non-net interest income of $11.2 billion was up substantially by $5.7 billion, which was a combination of, one, $3.6 billion of notable items in the first quarter, two, a Global Banking and Markets trading income increase of $0.4 billion, three, a $1.3 billion increase in Corporate Centre income for funding Global Banking and Markets trading activity, and, four, other income, which grew by $0.2 billion and included higher Wealth revenues.

Fees were broadly stable compared to the first quarter of 2022, with a good payments fee performance partially offset by lower Wealth fees. However, net new invested assets in the quarter were $22 billion, and $93 for the last 12 months, which bodes well for future growth. I called out the global business revenue highlights earlier, and there is a detailed non-net income interest breakdown on slide 17.

Our credit performance in the quarter was benign, with a $0.4 billion charge for expected credit losses, which was $0.2 billion lower than the first quarter last year. This reflected a favourable shift in the probability weightings of our economic downside scenarios, as well as low stage 3 losses. China CRE was also benign, with a small charge relating to technical adjustments to two customers. We saw no China CRE defaults in the quarter for the first time since the fourth quarter of 2021, though there were also limited repayments. We are encouraged by the first quarter, but there are still downside risks, so our 2023 guidance remains unchanged, at a charge of around 40 basis points of average gross customer lending, including held-for-sale balances. We will review this at our interim results.

On a constant currency basis and excluding notable items, costs were up 2% in the first quarter, once we also exclude the impact of retranslating prior-year costs in hyperinflationary economies at constant currency. As you can see, most of this spend was on technology. We remain committed to limiting cost growth to approximately 3% in 2023 on that basis.

As I shared at the year-end, one of my top priorities is cost discipline. Equally, I also shared that another of my top priorities is to support our businesses to deliver growth and returns. The acquisition of SVB UK was an opportunity to do that. This is expected to result in incremental cost growth of circa 1% to Group operating expenses, the majority of which is the acquired cost base of SVB UK, together with some additional investment in the UK and other geographies. This will be in addition to our 2023 target of limiting cost growth to circa 3%.

Finally, at year-end, we also flagged $300 million of expected severance costs this year. A large portion of these severance costs are now expected to be incurred in the second quarter, with the cost benefits starting to come through in the second half of this year.

Moving on, we usually include information on customer deposits in the appendix, but we have moved it up to the presentation this time, because we appreciate the current interest. Overall, customer deposits are stable year on year and quarter on quarter. Of the $1.6 trillion of deposits we hold, half are invested in high-quality liquid assets, which gives you a sense of our strong liquidity position. This is a historic feature of the way that HSBC manages its balance sheet, and it has not changed.

Around 40% of our high-quality liquid assets are held in cash or cash equivalents. And there are only $1.4 billion of unrealised losses in our held-to-collect portfolio, which is down from around $1.9 billion at the end of 2022.

Three main points on capital. One, our CET1 ratio is 14.7%, up 50 basis points on the previous quarter, 25 basis points of which was from the reclassification of our French retail business

from held-for-sale. Pending the outcome of negotiations for our French retail bank, there would be a commensurate reduction to CET1 in the event that the deal closes.

Two, as you know, our business in Canada remains classified as held-for-sale, and we now expect the transaction to complete in the first quarter of 2024, as we work with the purchaser to ensure a smooth transition. We continue to expect to pay the potential special dividend of 21 cents per share in the first half of 2024. And as previously indicated, we expect almost all excess capital from the Canada transaction accruing into CET1 to be returned to shareholders, primarily through a rolling series of share buybacks in 2024 and 2025 that would be incremental to any existing buyback programme at that time.

Three, share buybacks remain an active part of our capital management plans. We will update you on our assumptions for share buybacks in 2023 and beyond at our interim results.

So in summary, this was a strong quarter. There was a strong profit performance. Net interest income was stable. Strict cost discipline was maintained, which I told you would remain a key focus area for myself and the management team. Our credit performance was benign amid a more positive economic outlook. We are starting to see the impact of strong economic rebounds in Hong Kong and mainland China, and our Wealth strategy is gaining traction. And I am pleased there were strong capital returns, a quarterly dividend of 10 cents per share, and a share buyback of up to $2 billion, which we expect to start after the AGM and complete in around three months.

As Noel said, we are clearly on track to meet our returns target for 2023 onwards, and this upward trajectory will give us substantial distribution capacity, including, of course, the potential proceeds from the Canada transaction.

With that, operator, can we please open it up for questions? Thank you.

JOSEPH DICKERSON, JEFFERIES: Good morning, gentlemen. Congrats on a good set of numbers in what wasn't the easiest environment in Q1. Just a quick question on the buyback. You've been very precise in discussing that you would expect to complete the buyback over three months. Is this something now we can expect to be a regular quarterly event, given the strong capital generation, not to mention Canada completing early next year, or is it going to be slightly more erratic?

GEORGES ELHEDERY: Thank you, Joe. So first, we are hoping to achieve $2 billion in the next three months. In the past, we've managed to achieve between $1 billion and $1.5 billion in a quarter. We have five months to complete this programme. We are hoping to complete it in three months. Going forward, we're certainly considering a rolling series of buybacks in 2023, 2024, 2025, and those will be supported by organic capital generation as well as the Canada sale proceeds in 2024. And Joe, it remains our intention to return excess capital, including the Canada proceeds, if the conditions justify it.

RAUL SINHA, JP MORGAN: Good morning, gents. Thanks very much for taking my questions. Maybe just to follow up on that capital return question, firstly, and then I've got another one on asset quality.

When we look at your headline capital ratio, it's very strong and quite a significant tick-up over the last couple of quarters in particular. I guess there are a few adjusting items in there. Should we exclude the French disposal, let's say, reversal from the headline ratio? I guess, if we exclude the share buyback, we get back in your range towards the lower end. So I guess the question is how much RWA growth you anticipate the business to require over the next 12 months. Linking to your loan growth outlook as well, I'm just wondering if you could give us some colour on RWA growth expectations there, and that, hopefully, gives us a good idea of how much buybacks we can expect.

The second one, again related to how much capital you might be able to generate in the remaining part of the year, your guidance on asset quality still implies quite a significant tick-up in provisions, given your very strong performance in Q1. So I guess the question really is, are you guiding us to something specific in terms of the 40-basis-point provision charge, or is that just an element of conservatism built into your guidance there? Thank you.

GEORGES ELHEDERY: Thank you, Raul. So on your first question, Raul, I think it is prudent to adjust for the French part-reversal of the impairment insofar that capital is concerned. As indicated, if we do reach a transaction, there is a likelihood of a commensurate capital reduction taking place. And I will just remind you, our capital target operating range is 14% to 14.5%, and we expect this to be reviewed slightly lower in the medium to long term. And as we do our capital return projections or our share buyback projections, we look at our medium-term capital outlook and cautiously compare it to that range, and this is what's giving us now the flexibility to announce the share buyback and to consider additional buybacks going forward.

As regards RWA growth, in line with loan growth, it has been subdued in the first quarter. It may remain subdued for another quarter. We may see some pick-up, particularly with the Hong Kong and mainland China bounce-back, but again, for this year, we have not given guidance on loan growth, recognising some of the economic conditions. We do remain committed to mid-single-digit growth in loans for the medium term, which is what you can factor in for RWA growth commensurately, and equally for our share buyback.

If I move on to your next question with regard to asset quality, I would lean towards your latter comment, Raul, that we are baking in some conservatism, or we think at this stage the full-year guidance, which we have retained unchanged from February, is now leaning towards conservative. I just want to highlight some tailwinds. Certainly, the situation in the UK - the possibility that we may dodge a recession - is a tailwind. Equally, the recovery in Hong Kong and mainland China following the opening up of the borders and resumption of activities and trade is a tailwind at the same time. And China real estate has shown some positive signs, both from the economic standpoint as well as from the policy measures.

But at the same time, we wanted to remain cautious. There are a number of refinancings taking place in Q3 in the China commercial real estate portfolio, which we would like to stay cautious on, and we continue to watch some of the UK SME space - in particular those heavily reliant on discretionary consumer spend - before we revisit the guidance. We intend to revisit this guidance at H1.

NOEL QUINN: Just one additional comment from me. You'll notice on the capital walk that we've accrued dividends at 50% of the profit generation in Q1. And if you do the maths on that, the accrual on dividend is higher than the 10 cents that you've got in the Q1 declared interim dividend. So we're accruing dividend distribution at a higher rate than the payment of the 10 cents, so that's just factored into our CET1 ratio as well.

MANUS COSTELLO, AUTONOMOUS: Good morning. Thanks for taking the questions. A couple, please. On that slide you were talking about, Noel, about the RWA, I noticed that the risk-weighted assets from Silicon Valley were just short of $10 billion, which seems quite high relative to the loans that you've taken on. I wondered if you could share with us what the nature of those assets is and give us some indication about asset quality within the Silicon Valley Bank acquisition from what you've seen so far.

Secondly, with a thought to the structure of the group, you've obviously showed some willingness to make some acquisitions recently and indeed to do some disposables where possible. I just wondered if there will be any interest in further moves. In particular I'm wondering if there will be anything around some of your businesses such as insurance manufacturing, which you might think about being non-core to the group going forward.

NOEL QUINN: Thanks, Manus. Just on the asset quality of SVB, everything that we've seen since we bought the business reinforces the view that we had that weekend when we did due diligence. The book was a good quality book. We've seen no nasty surprises. We did do a bit of mark to market on acquisition accounting, but that was evident to us when we did due diligence that weekend. Georges can give you a little bit more detail on that, but fundamentally the asset quality of the SVB book is as we expected it.

The team have done a good job in building that business over the past 14 years. They've got good client relations, a good quality book, and good business development potential. On the back of that we decided to invest in putting more people on the ground in some of the key markets around the world that have strong technology and life science centres, to take that business model not just to the UK but to take it globally. We're investing in that as well. No nasty surprises on that.