HSBC : Interim Results 2023 Presentation to Investors and Analysts - Transcript

Transcript

Interim Results Announcement

H1 2023

1 August 2023, 7.30am BST

RICHARD O'CONNOR, GLOBAL HEAD OF INVESTOR RELATIONS: Good afternoon to those joining us in Hong Kong and good morning to those in London and elsewhere. Noel and Georges will present on strategy and the results and we will allow plenty of time for questions from the telephone lines and the live audience here in Hong Kong. With that, over to Noel, who'll host the conference.

NOEL QUINN, GROUP CHIEF EXECUTIVE: Thank you, Richard, and good afternoon to everyone here in the room in Hong Kong. Thank you for joining us and great to see you again. And good morning to everyone watching from London and elsewhere. Before Georges takes you through the second-quarter numbers, I'll start with a summary of the first-half performance and progress.

First, I show this slide every quarter. It's critical, in that it summarises our strategy, and our strategy remains unchanged. It is summarised by the four pillars at the bottom of the slide. Let me take you through the latest outcomes of that strategy. We had a good first six months. I'm pleased with the broad-based profit and revenue generated by our global businesses and geographies. I'm also pleased by our strong capital generation and returns.

We delivered an annualised return on tangible equity of 22.4% including the two material notable items reported in the first quarter, or 18.5% if you exclude those notable items, and we've announced a second interim dividend of 10 cents per share and a second share buy-back of up to $2 billion. Today, we're also upgrading our guidance. Now we expect to achieve a return on tangible equity in the mid-teens for 2023 and 2024.

Prior to 2023 we were very focused on transforming the business. Now, while still continuing to improve operational efficiency, we are very focused on driving growth, diversifying revenue and creating incremental value. We have a plan built around six areas. I will take you through some of these over the next few slides, starting with our international connectivity.

We grew wholesale cross-border client business in the first half by around 50%, with growth across all regions driven by higher rates. Our international proposition in Wealth and Personal Banking continues to gain traction. We now have 6.3 million international WPB customers, and that is up 500,000 or 8% over the last 12 months. That's significant because these international customers generate around two and a half times the average customer revenue. Finally, we drove strong revenue growth in transaction banking, which was up 63%.

There were good performances in Foreign Exchange and in Global Payments Solutions. Trade was slightly down year on year in line with global trade volumes, but trade balances stabilised in the second quarter, particularly in Asia, and HSBC was named best bank for trade finance by Euromoney for the second year in a row as well as best bank in Asia.

The next slide sets out our latest progress on another area of focus, the redeployment of capital from less strategic or low-connectivity businesses into higher-growth international opportunities. I'm pleased that we agreed new terms for the sale of our French retail banking operations in the quarter. The deal is subject to regulatory approval, and we now have a lot of work to do to complete migration in early 2024. The sale of our banking operations in Canada remains on track to complete in early 2024, with a special dividend of 21 cents per share planned thereafter. We completed the disposal of our Greek business last weekend and we

have announced the disposal of our Russian operations. We are changing the nature of our business in Oman, and we will wind down our WPB operations in New Zealand.

Crucially, this is allowing us to target growth opportunities, some of which are set out on the right-hand side. The first is the continued development of our wealth business across the whole of Asia. Our digitally enabled wealth and insurance business in mainland China now has 1,400 wealth planners and is driving good new business growth. We launched Global Private Banking in India last month.

In June, we launched HSBC Innovation Banking, a strengthened, globally connected proposition on the back of our purchase of SVB UK. We will nurture the specialism we acquired, back it with HSBC's balance sheet strength and global network, and build further innovation banking businesses in the US, here in Hong Kong and Israel. The process is already well under way and will enable us to support our clients in the technology and life sciences sectors to achieve their global ambitions.

Finally, we've announced today that we are also increasing our shareholding in Tradeshift and have agreed to launch a jointly owned business in early 2024 to provide embedded financing solutions within their trade ecosystem. We believe this will help us to grow our client base in Commercial Banking, giving us a new avenue for growth outside of traditional relationship banking.

The next slide looks at how we are diversifying revenue by growing fee income and collaboration. As I've said, our wealth strategy continues to gather momentum, especially in Asia. Net new invested assets were down in the rest of the world due to lower third-party asset management liquidity products, mainly in the US, but they were up in Asia by 21% to $27 billion. Over the last 12 months, we took in a total of $75 billion of net new invested assets and grew our invested assets by 8% globally. This all underlines the growth potential of our wealth business. Fee income in Commercial Banking was up 6% in the first half and collaboration revenues between our global businesses were up 5%. Collaboration revenue is particularly important in a relatively low-growth economic environment because we can drive growth from within the organisation.

The next slide focuses on the tight cost discipline we've maintained and how it enables us to invest in the bank of the future. We remain committed to disciplined cost management and have continued to use cost savings to increase investment in digitisation. We increased spending on technology by 12.8% in the first half, and this spending now accounts for 23% of our target base operating expenses. This investment has translated into faster services, reduced friction and more competitive products, all of which will improve the customer experience and our operational efficiency.

We've made good progress increasing digital penetration amongst personal and business customers while increasing our product release frequency. Investing in technology is also enhancing our capabilities. We now have a range of test-and-learn use cases for generative AI across HSBC and are in the process of scaling up a small number of those. Last month we became the first bank to join BT and Toshiba's quantum-secured metro network. This uses quantum technology for secure transmission of data, which should mitigate the risk of future cyber-threats, and we are pleased to be working with the Hong Kong Monetary Authority on two pilots to test the Hong Kong dollar in a new payments ecosystem and to trial tokenised deposits.

My last slide shows how we have continued to build on our position as an enabler of the net zero transition. In the first half, we provided and facilitated $45 billion of sustainable finance and investments, as we continued to work closely with our clients on their transition plans. This consisted of capital markets financing and on balance sheet lending to clients and included a number of key deals in Asia and the Middle East. We were recently named Best Bank for Sustainable Finance in Asia by Euromoney for the sixth consecutive year.

I'll now hand over to Georges to take you through the Q2 numbers.

GEORGES ELHEDERY, GROUP CHIEF FINANCIAL OFFICER: Thank you, Noel, and a warm welcome to everyone in the room with us today. It is great to be back in Hong Kong to deliver

our interim results. And for those of you watching today from London and across the globe, a very good morning and thank you for joining us.

We've announced a good set of second quarter results. Reported profits before tax were at $8.8 billion, up 89% on last year's second quarter. Revenue was up 38% at $16.7 billion. This was driven by, first, NII of $9.3 billion, which was up $2.5 billion or 38% year on year, and, second, non-NII of $7.4 billion, which was up $2.1 billion or 39% year on year.

We booked expected credit losses of $0.9 billion in the quarter. Despite the inflationary environment, cost growth in the quarter was restricted to 1% compared to last year's second quarter, including $0.2 billion of severance costs. These severance costs were expected, and we're on track to meet our 2023 cost target to limit cost growth to around 3% on our target cost basis.

Compared to the first quarter, lending and deposits were both down 1% due to subdued loan demand, deposit outflows in Global Banking and Markets in Europe and the reclassification of our portfolio in Oman to held-for-sale.

Our CET1 ratio remains strong at 14.7%. As Noel said, we announced a second interim dividend of 10 cents per share and a second share buy-back of up to $2 billion, which we intend to complete in around three months. TNAV per share was down 24 cents, due primarily to the final interim dividend for 2022 and the first interim dividend for 2023.

The next slide shows another strong quarterly revenue performance with overall growth of 38% compared to the second quarter of 2022. Three further points on this: as Noel mentioned, revenue was up in all three global businesses; wealth was up 19% due to higher rates and a strong insurance performance mainly here in Hong Kong; and, three, across Commercial Banking and Global Banking and Markets, Global Payments Solutions reported revenues of around $4.2 billion, an increase of 115% on the second quarter of 2022.

On the next slide, reported net interest income was $9.3 billion, up $0.3 billion or 4% on the first quarter. We've introduced Banking NII as a new disclosure this quarter. It is derived by adjusting reported NII for the centrally allocated cost of funding trading activities and the NII generated by the insurance business. At $11.6 billion, banking NII was up $1.3 billion on the first quarter and up $4.5 billion on last year's second quarter. The $2.4 billion centrally allocated cost of funding trading activities within Global Banking and Markets in the second quarter included a $0.4 billion year-to-date impact of methodology changes. As a reminder, the related income associated with these funding costs is reported within non-NII.

The net interest margin was 172 basis points, up three basis points on the first quarter of 2023 and up 43 basis points of the second quarter of 2022. We continue our structural hedging activity. Our NII sensitivity is $2.6 billion for a 100 basis point drop in rates against a previous year-end sensitivity of $4 billion. At this point, we are adjusting our NII guidance. We now expect NII of at least $35 billion in 2023. Within this, we expect the centrally allocated cost of funding trading activities within Global Banking and Markets to be in excess of $7 billion with associated income reported in non-NII.

We continue to reiterate that we expect to see higher pass-through rates and continued migration to time deposits, and we remain cautious on loan growth over the next six to 12 months, but we do expect it to start picking up some time in 2024. I know that many of you will have questions about Banking NII in particular, which I'll be very happy to address as we move into Q&A later.

Moving on, non-NII of $7.4 billion was down on the first quarter, which benefited from $3.7 billion of notable items and FX translation. However, it was up $2.1 billion or 39% on the second quarter of 2022. A couple of things to mention here: one, there was a strong wealth performance, up $0.3 billion or 19% on the second quarter of last year, $0.2 billion of which came from increased life insurance income primarily in Hong Kong; and, two, Markets and Securities Services was down due to lower client activity and the methodology change that I just mentioned earlier. Fees were up $0.1 billion on the second quarter of 2022 due to higher Personal Banking and Commercial Banking fees.

Turning now to credit, our second quarter ECL charge was $0.9 billion, which was $0.5 billion up on the second quarter of last year. It includes $0.3 billion for our mainland China commercial real estate exposure booked in Hong Kong and a $0.3 billion charge for the UK. To remind you, this is a more normalised level of charge that we expect for this year and is a sign that our main credit indicators are holding up.

On the basis of what we have seen so far in 2023 and ongoing macroeconomic headwinds, we continue to expect a 2023 ECL charge of around 40 basis points on average gross customer lending, including held-for-sale balances.

The next slide is our six-monthly update on our mainland China commercial real estate portfolio. As before, our principal area of focus remains the portfolio booked in Hong Kong. At the full year, our exposure was $9.4 billion. It now stands at $8.1 billion due primarily to repayments. The proportion of sub-standard and credit-impaired exposures is around 65% of the portfolio, marginally up from the full year. Of the $5.2 billion of exposures that we rated as sub-standard or credit-impaired, $1.1 billion is secured with minimal ECL due to the security held. Against the remaining $4.1 billion, we have increased our provisions from $1.7 billion at the full year to $1.9 billion today. Within this, our coverage ratio against the unsecured credit impaired exposures has increased from around 55% to nearly 70%.

At the end of 2022, we calculated a plausible downside scenario of $1 billion on this portfolio. As you can see, we have now crystallised some of that downside into the P&L. We remain comfortable with our coverage level.

On slide 17, despite the inflationary environment, cost growth was restricted to 1% on a constant currency basis versus the second quarter last year. As you can see, a large share of this growth was technology-related. There was also a higher performance-related pay accrual and the expected severance costs, which were part offset by a write-back of software and lease impairments.

We remain committed to limiting cost growth to around 3% in 2023 on our cost target basis. On this target basis, second-quarter costs were up 6% year on year, of which around half was the $0.2 billion of expected severance costs.

As a reminder, our cost target basis excludes notable items from constant currency operating expenses. It also excludes the impact of re-translating hyperinflationary economies at constant currency and, finally, it excludes the acquired cost base and additional investments in HSBC Innovation Banking, which are expected to result in incremental growth of around 1% above our targeted basis. The full cost target basis reconciliation will be on slide 26 of this deck.

Our CET1 ratio was 14.7%, which was stable on the previous quarter. Profit generation was offset by the dividend accrual of $6.9 billion during the first half and the share buy-back of $2 billion that has now completed.

In summary, this was another good quarter. There were good profit and net interest income performances. Credit remains resilient. We are on track to limit cost growth in 2023 to 3% on our cost target basis. We now expect NII of at least $35 billion in 2023 and, as Noel said, we now expect a mid-teens return on tangible equity in 2023 and in 2024, excluding the upcoming sale of Canada.

Finally, we are returning capital to shareholders by way of increased dividends and share buy-backs, and with that I'll ask the chair to open it up for questions, Richard, please. Thank you.

MANUS COSTELLO, AUTONOMOUS: Hi, thanks very much for taking my question. I wanted to ask about NII, please - a couple of questions. Firstly, I noted that the NIM was flat in Asia, in HBAP, quarter on quarter. Could you give us a bit more colour around that and what you would expect in Q3? I appreciate the trading book costs have been somewhat allocated there, but I would still have thought that you might see some benefit from higher HIBOR in HBAP. So please elucidate that performance a little bit more.

And then, secondly, you also talked about increasing hedging and the structural hedge in order to reduce your downside risk on NII. Can you go into a bit more detail about what you've done

and how we should think about that in terms of potential benefits going forward into 2024 and beyond? Thank you very much.

GEORGES ELHEDERY: Thanks, Manus. So on NIM/NII, NIM in Asia was flat because most of the uplift from rates has translated into an uplift into the non-NII component of the trading book funding, about $0.3 billion uplift in that space. We've introduced Banking NII. In due course, we will enhance our disclosure in this space to introduce Banking NII sensitivity and Banking NIM, which would be reflecting such an uplift.

With regards your second question, Manus, the hedging activity - so if you look at our NII sensitivity, downwards 100 basis points, it has reduced from $4 billion to $2.6 billion. About a third of that reduction is due to our structural hedging activity and another third of that reduction will be a fact of the change of composition of our balance sheet, and then the last third is numerous other factors including modelling enhancements. If you now look at our structural hedging activity, which we've conducted over the last 12 months, the overall impact on the reduction of banking NII sensitivity is to the tune of $1 billion.

NOEL QUINN: Thank you, Georges, do you just want to explain why there's been more of a move into the non-NII trading book, what the underlying cause of that is?

GEORGES ELHEDERY: Sure, so, due to the somewhat subdued loan growth in Asia, the management of Asia has taken the decision to allocate more funding towards supporting some of the trading activities. So overall funding of our trading books globally, which was heavily used also in Asia, moved from about $108 billion or circa 6% of our deposit base to around $130 billion or about 8% or 9% of our deposit base. That additional lending or that additional transition from funds has moved NII into non-NII income. It is still rates-sensitive and it does benefit from the improved level of rates, particularly in dollars, where it's coming from.

AMAN RAKKAR, BARCLAYS: Good morning, Noel, good morning, Georges; good morning, Richard. I had two questions, please. So, again, on net interest income, at face value your 'greater than $35 billion' NII guide does imply a step-off in the run rate of net interest income in Q3 and Q4. I suspect you'd point us to the 'greater than $35 billion', suggesting that there's some conservatism that's baked in there, but can you talk to what the pressures are or indeed actually even the sources of support on the net interest income run rate from here through to year-end?

I think one thing the market would love is some sense of whether this level of net interest income is sustainable beyond this year, so anything you can give us there. I know, relatedly, that the UK has been very strong as well, so any kind of colour you can give us on the moving parts there and the sustainability of net interest income in the UK would be great.

The second question was around distributions, specifically around your dividend. You're reiterating your 50% payout ratio guidance this year. This year and potentially next year does look like it's going to be quite strong earnings. I guess if I take consensus, looking for an underlying EPS of around 120 cents, which implies an ordinary dividend of 60 cents, that number feels big. It's big versus the 51 cents you used to do; it's big versus what you did last year.

And I guess the question is how comfortable are you with paying a big ordinary dividend now which might then become quite difficult to sustain in the future, as rates come off and earnings taper? Are you bothered that you do 60 cents this year and you do some number that's lower than that next year or thereafter? Thank you very much.

NOEL QUINN: Georges, do you want to take the NII one first and clarify our position on that? Then we'll come to distributions.

GEORGES ELHEDERY: Sure. Thank you, Aman. In turn addressing your points, first, as you did say, we're emphasising this as a floor. We're emphasising this as a guidance of greater than $35 billion. We're revising this floor because we're gaining more comfort halfway into the year and with the outcomes of H1. We want to remain cautious, and you may find our guidance to be cautious given the difficulty to forecast some of the challenges I'll talk about in a second.