Okay. Great. I think we'll kick off with the session. Thank you, everyone, for joining us here on the European track of the Barclays Global Financial Services Conference here in New York. I'm Aman Rakkar. I didn't introduce myself in the last session. I'm Aman Rakkar. I'm head of U.K. bank's equity research at Barclays. I'm delighted to be joined this morning by Ewen Stevenson, Chief Financial Officer of HSBC. Again, you'll be familiar with Ewen. Ewen joined HSBC as CFO in 2019, having held a number of high-profile roles, most notably, almost recently, CFO of NatWest Group. Ewen, thank you very much for joining us here today and taking our questions. It's great to have you here.
So we'll kick off again with a broader question. There's a fairly varied growth dynamic across your footprint, to say the least, with the prospective slowdowns in some of the West, the ongoing fallout of COVID restrictions impacting the Asian market. How would you describe current activity? And to what extent are customers open for business?
Yes, that's a pretty broad question. I mean looking around the world, I mean, here in the U.S., it's not a big business for us, but yes, it definitely feels like the U.S. economy is back in business. Canada is going fine. Mexico, we're seeing good growth. Europe, U.K., I think we're definitely expecting things to slow down. I know we'll talk about that later. Middle East is booming at the moment on the back of high energy prices. Yes, we're seeing a lot of activity there at the moment. Southeast Asia is going very, very well. We saw Southeast Asia sort of snap out of COVID through 2 or 3 quarters ago. India going very, very well for us at the moment. And Hong Kong, China still a bit slow. But as you project forward, Hong Kong, China are probably one of the few parts of the world that are likely to have a better 2023, I think, than 2022.
Similar related topic is around asset quality. It's a key concern for investors confirmed by some of the responses in the prior session. In particular, the scope for loan losses of this economic outlook potentially deteriorates in some of the markets that you operate in. You've taken charges against things like commercial real estate in China, but underlying conditions also remain pretty benign. What's your assessment? What areas are you most closely watching? And how do you think about cost of risk beyond this year?
Yes. We've said, generally, we expect cost of risk to be 30 or 40 basis points through the cycle. We obviously spiked well above that a couple of years ago at the onset of COVID. We were 21 basis points in the first half. We said we expect to be approaching 30 for the full year. So mathematically, we're expecting credit costs to go up in the second half. I think apart from China commercial real estate, one particular portfolio we've got there, the offshore book, which is about $12 billion. I would say that's the only portfolio we've got globally. And in context, the loan portfolio is over a $1 trillion. So it's just 1% of our total exposure. But I would say we're still seeing exceptionally low stage 3 losses. There's no dramatic signs of deterioration anywhere globally.
The -- so I think in the second half, what you'll see is forward economic guidance adjusting down both in terms of a deterioration in the central economic cases, particularly in places like the U.K., together probably with higher preponderance of probabilities being put on downside cases.
So if you look at 2Q, I think depending on where you were in the world, we had a 30% to 50% probability of a recessionary event next year. I would say I think since then, things have definitely deteriorated in the U.K. and Europe. But as I said, overall -- and I think overall, I think the message probably you're hearing from us and others is this will be a slightly unusual recessionary event for the banks.
If you think about the onset of COVID, what we saw we've mainly got an affluent retail focus on the retail side. Those customers saved a lot of money during COVID. They couldn't spend it. So what you saw with us is a very sharp increase in liquidity from deposit balances. So a lot of the retail customers at the moment are sitting on a lot of excess cash. So if things get tougher, we think they can draw down into those cash reserves.
Yes. And then I think in the corporate sector, the corporate sector has been largely deleveraging for the last 2.5 years during COVID. We've seen corporate loan growth well below nominal GDP growth. Yes, that's an exceptionally unusual thing that we've seen going on for 2.5 years. So corporate balance sheets tend to be in pretty good shape.
The only part of the world that we've really seen a significant snapback and investment in the commercial sector has been Southeast Asia. So we're coming out of this COVID period and about to head into a slowdown. So yes, there will be some long-term implications for that, that we all need to think about because in some parts of the world, we'll have been seeing corporates under investing in for 4 years by the time we come out the other side in '24.
So everyone in the room -- and Ewen, we've got some audience response survey questions. If you can see a remote sitting next to you, we'll line up some questions on the screen, and then you can respond. I think we'll pepper them throughout the conversation.
If we could kick off with the first 2 ARS questions, that would be great. Question one, what would cause you to become more positive on HSBC shares? One, positive revenue surprises; two, greater cost savings; three, better asset quality; four, stronger capital dividends; five, deescalation and geopolitical tensions. So really emphatic response. I don't know if you...
It's interesting, actually, because I think the external view is different to the internal view. I mean we've really struggled to point to anything that is impacting the business in a very tangible sense from what you all describe as geopolitical tensions. So at the fundamental operating position of the bank, yes, it's close to having 0 impact on a day-to-day basis with our customers. So I understand the point. I understand the impact on our cost of capital. But at a sort of micro customer level, it's not a relevant part of our business.
I guess touching upon this theme, then Ping An, a notable shareholder have been pretty vocal, pretty prominent in their desire to see a change in the group structure. Interested if there's any update on where that conversation is.
Yes. So look, we're talking to Ping An. We're obviously very respectful of their position. They're our largest shareholder. Yes, where we have agreement is the bank has been underperforming. The bank hasn't achieved cost of capital return since 2013. Yes, that's plainly unacceptable. We think we've got a plan that comfortably gets us back there from next year onwards.
On the structural alternatives, I think we have a clear difference of view. We think any of the alternatives being sort of muted in the media, yes, suffer from being costly to implement -- very complex to implement. It would take us 3 to 5 years of, yes, very hard work to put any of those structures in place. And during that time, we would have to effectively shift a finite number of change resources of changing other parts of the bank to concentrate on putting in place a structure. And then once you put the structure in place, we think that there are significant dis-synergies on an ongoing basis. So there's none of these structural alternatives that we see are in the best interest of shareholders. Yes, we -- that was the reason we came out quite publicly as part of our second quarter results with the additional disclosure we put out on this. We've said the same thing to Ping An privately as well.
Yes. Can we do question 2 on the ARS? What do you expect to be the biggest influence HSBC's revenues in the coming 12 months? One, loan growth; two, pricing; three, policy rates; four, fees and commissions? I think we can guess this one probably.
I fundamentally agree with that. I mean if you look in terms of the NII guidance, we've given -- we said we expect to be at net interest income of at least $37 billion next year. That's more than $10 billion of additional revenue to what we were achieving in 2021. Yes, we are one of the most rate-sensitive banks in the world, partly that structural. In Hong Kong, it's a very short-dated book. You can't hedge that even on the commercial side. Yes, the trade book is very short-dated as well. And we're also structurally under-hedged as well at the moment, which again is something we're looking to address. But certainly, when rates are rising, we see massive a benefit from that.
Yes. I guess that brings us neatly on to the income outlook. And clearly, it's much better. You noted the $37 billion NII guide next year. I guess the interesting point is that the interest rate environment is so fast moving that it's probably actually -- rate expectations have step higher even since that Q2 guide was struck. I think in the U.S. probably by about 50 bps, but in the U.K. by about 150 basis points in terms of what people are looking for base rate. And I mean is that presumably that's positive?
Yes. When you sort of around the -- U.S. rates, I think, when we said it went down and back up again. So I'm not there hasn't been a massive shift in the U.S. I think in U.S. dollar rates. In Hong Kong, I think we're probably now getting to a point of optimized net interest margin because I think any further policy rate rises here, we've got this mortgage cap that operates in Hong Kong. So if we would shift up the prime lending rate, we'd have to move the prime savings rate because we've got an excess of Hong Kong dollar deposits over lending. That would be a mild net negative to us in Hong Kong.
And in the U.K., where the rates -- long rates settle at 300 to 400 basis points, I think that last 100 basis points will get some benefit. But deposit feeders would pretty high at that point. And we've also had sterling weakness since 2Q results, which probably mitigates some of that anyway. So yes, net-net, I think we're still comfortable with the $37 billion guidance. But I would sort of just -- as interest rates continue to go up, obviously, the deposit feeders are going to start approaching 100% at some point. So you're not going to see the sort of benefit that you might expect otherwise.
You alluded to the Hong Kong rate insensitivity. I was wondering if I could just press you for a bit more color on that. I guess HIBOR is up pretty handsomely in Q3, 160 basis points Q-on-Q, I think about 100 basis points higher since you presented results. Is -- can we expect this to be in the entail wind in Q3 that curtails thereafter? I mean if you could give a bit more color on when that kind of capping out happens. And I guess a related point is, is there anything that you can do to counter at the effect of this kind of negative rate sensitivity if we -- if and when we do get there?
In -- yes. So I think you would see a very material step up in NIM in Hong Kong during Q3 and into Q4. I think at that point, it properly begins to top out. But I think you'll see a very sharp uplift this quarter, and there'll be some roll forward into next quarter as well.
Yes, in terms of what we can do about it, I think it requires a fundamental change in how mortgages are priced in Hong Kong, which is a sort of competitive dynamic. Yes, at the moment, we effectively give customers a free option to choose best off pricing. And at these rates, we're not getting paid for that optionality.
But yes, what is required to fundamentally change that sensitivity going forward is a different approach to how the market currently prices mortgages in Hong Kong.
Okay. Yes. I guess the other point that kind of came out of Q2 was the funding dynamic in Hong Kong and the extent to which there might be a shift in the deposit mix. You've benefited from essentially 0 interest or very low interest, current account and savings. I think historically, we do see the proportion of term deposits increase in Hong Kong in rates and rising. Is that an additional dynamic that you think is set away?
Yes. No. Look, undoubtedly, you'll start. And we're already starting to see a shift out of current accounts into term deposits. I think if you look at previous cycles for the sector that has got towards about half of the sector, I think for us, it's been less than that. But we don't see any reason why that should be different this time around.
Yes, Hong Kong depositors tend to be more rate-sensitive and rate cases than you would see, for example, in our other big retail business in the U.K.
Just a final one on the kind of rates picture. You alluded to the idea that deposit betas can be expected to rise from here. I mean given your excess deposit position, given your very low loan-to-deposit ratio, why would you pass on anything?
Yes. I think that's pretty provocative. The -- look, there's also a regulatory political overlay to this, too, right? So I don't think it's a great place for banks to be seen to be effectively benefiting, getting windfall returns from depositors in the current cycle. But yes, we will respond competitively.
You're right, we are sitting on a lot of excess liquidity. So I think you'll probably see that play out more, I would suggest, in the commercial sector where we can choose to exit customer relationships if we choose not to compete for marginal deposits.
I think on the retail sector, there's probably less of that sensitivity. I mean if you look at our -- we are the market leader in Hong Kong. So we tend to lead on where we set the prime savings rate.
In the U.K., our biggest deposit product is the online -- the immediate access savings account. I think in there, we have been slightly more proactive than some of our U.K. peers in raising rates. But yes, I think in the U.K., in particular, there is a lot of political and regulatory sensitivity around whether or not the banks are going to pass on a meaningful amount of the benefit coming through rate rises.
Yes. And if we could shift back to the ARS, we'll take the next couple of questions. Please do respond by your remote. How do you think about HSBC's cost development versus expectations? One, likely to beat expectations due -- thanks to cost savings; two, likely to meet expectations; three, likely to miss expectations due to cost inflation; four, not sure but we'd like to see more cost savings.
Interesting. I have a similar set of responses we got in the last session.
Yes. So we think we've been doing a pretty good job on costs over the last few years. Yes, we've committed to keep costs broadly flat this year, which means since 2019, over the last 4 years, we'll have kept costs flat in nominal terms for 4 years in a row. We think very few banks have managed to do that.
We started out this year with an aspiration to keep costs within a 0% to 2% growth rate next year. I think given inflationary pressures, we're now targeting 2%. Yes, we've probably got underlying cost growth in the business of about 6% or 7% at the moment when we look out to 2013, which means we need to be probably taking out of the business, what is it, 4 or 5 percentage points of cost. Yes, we've identified, I guess, yes, at least probably 3% of that at the moment.
So yes, I would say we're about $500 million short at the moment of meeting our cost target for next year. That's not unusual for this time of the year. I think a lot of it to, yes, a lot of it depends in what the CEO's commitment, right? And he has been pretty clear internally that he intends to hit that 2% cost target. So as long as he wakes up every day feeling that, and I feel like I'm in a good place.
But yes, we are seeing pretty broad cost inflation, not just in our own wage bill. Half of our cost base is fixed pay. Yes, we are thinking that we will have to materially step that up again in '23 relative to '22. But all of our suppliers at the moment are trying to where they can squeeze through very immaterial price increases on us. So the only way to take that out, I think, is, one, be pretty brutal internally on costs. I would argue very strongly given where the share price at the moment is that we're not getting paid for growth. And therefore, yes, Noel and I have a bias to focus on cost control over revenue growth. And secondly, you need very smart investment in technology to drive a step change in productivity in the front office and sort of mass automation in the bag. Yes. But you need to be thinking -- I think every bank needs to be thinking about how do they drive 2% to 3% productivity improvement every year.
Thanks, Ewen. If we can go to the next ARS question. How do you see HSBC positioned on capital and dividends? One, upside risk from better earnings; two, upside risk from falling requirements; three, downside risk from weaker earnings; four, downside risks from rising regulatory requirements? Please do respond using the remote. Okay. It's actually an interesting spread of answers there.
Yes. I'm a bit surprised. I guess I would have been very strongly on, one, depending on, I guess, what's in the expectations currently. But the -- yes, we've said that we're going to get to a 12%-plus return on tangible equity next year. We said we're going to pay out half of that by way of dividends next year and the year after. Yes, if you just mathematically run those numbers, you get to a very material dividend per share uplift to where we were on the $0.25 that we paid out last year over -- by the time you get into '23. So yes, we think a core plank of the equity story is very, very healthy dividends per share from next year onwards, yes, broadly getting us back to where we were in pre-COVID, which was $0.51 a share.
And then on top of that, I think if you look at our capital position at the moment, we're below our sort of target 14%-plus. We expect to be back there during the first half of next year. And then again, when you get to the second half of next year, we become very capital-generative on top of that 50% payout ratio.
I mean on that point, the buyback was something that you put on hold as you try to rebuild your capital ratio back towards target. What are your current expectations for when you might be able to resume that?
I would say, realistically, it's more likely to be the second half of next year. Fundamentally, our approach on distributions is to view dividends as the primary basis of returning capital to shareholders and that we use buybacks to soak up surplus capital. By the time we get to the second half of next year, as I say, we should be generating very healthy amounts of surplus capital. And then it comes a question of growth organic, inorganic debate versus buybacks. But I think second half of next year, it's likely we would be back thinking about buybacks again.
I guess on a similarly related theme, given the evolving operating environment, given asset markets are shifting some of the valuations on some of the companies out there are in flux, in terms of your appetite for inorganic or M&A, is that shifting at all?
Yes, I wouldn't say it's shifting. It -- yes. I mean, firstly, we're going about it very cautiously. And look, I'm acutely aware that about 20 years ago, we did a bunch of things that probably didn't create too much value for shareholders. We went through a phase in the last decade where I think we sold about 100 businesses and bought about 2. So we didn't have any of that traditional inorganic acquisition capability in the organization. So we've had to effectively rebuild that. We've gone out and hired in the last year or so a new Head of Corporate Development. He's Will McLean. He's an investment banker who worked for Citi and Morgan Stanley for 20-odd years in Asia. And he is sort of slowly rebuilding capability for us to go out and be able to buy things.
Having said that, if you look at what we've been doing, it's all relatively small in the context of us in the order of up to about $0.5 billion. So we bought a small insurance company in Singapore. We bought a small asset management in India. We bought out our life partner and securities partner in China. We're talking to our partners, an Indian insurance company to try and increase our shareholding there at the moment. But I would say the predominance of it is wealth-related, and the geographic focus is Asia. And if you add it all up, you probably don't get to more than a couple of billion dollars.
So I don't think we're actively looking at anything large at the moment. And I think it would take a lot for us to do that given the sort of underlying organic growth that we can see coming through the business.
Yes. So we do have the ability to take questions from the floor if anyone in the audience does have any questions for you. And I think we've got microphones that we can pass around. We've got one here. Let's start [indiscernible] and then we'll come here. Yes.
I wonder if you could address a bit more of the regulatory capital situation. As you look ahead, would you expect your target to be broadly stable? Or are there some threats within the different areas you operate in that would tend to be raising the target on you over the next year or 2?
Yes. So our target core Tier 1 ratio at the moment is 14% to 14.5%. I think if anything, my aspiration is to try and operate at a slightly better target range than that. Yes, my aspiration is to be able to manage the bank to being around 14% over the medium term.
Yes. Basel III reform is actually a net slight benefit to us on introduction. By the time you get out to output floors in sort of 6, 7 years' time, yes, that may be different. But in the very near term, it's a net benefit to us.
Yes, the big issue with us at the moment is, I think, yes, historically, because we didn't fail in the financial crisis, we under-invested in stress testing capabilities in the organization. We under-invested in recovery and resolution capabilities. Yes, we've been putting a lot of investment into those areas over the last 3 or 4 years, reducing the picture troughs stress of the organization, improving the recovery capacity of the organization. And you couple all of that with a much better organic performance, a 12% return, I think all of that should allow us to operate the bank at a slightly lower capital ratio in the future. So it's actually the reverse, I think, of what you've said.
Great. I think we had a question here as well.
And so my question is, how do you analyze the contrasting message between Hang Seng Bank share price and HSBC share price? So your primary Asian engine of growth is not doing as well as it's done historically. Yet, the overall view on the group as measured by the HSBC share prices is much more optimistic. Is that a...
Yes. I mean the big -- I mean Hong Kong has been going through a tough 3 or 4 years. They started in 2019 with the protest, and that rolled straight into COVID. All the Hong Kong banks are very sensitive to HIBOR, and HIBOR went to 0. Yes, if you looked at our overall Hong Kong business collectively, returns got crushed over the last couple of years. But we think by the time we get back to next year, yes, our Hong Kong franchise on a combined basis, without talking about Hang Seng, should be back to comfortable mid- to high teens sort of returns. So I think it's just -- yes, you've had a crushing combination of low HIBOR and very tough COVID restrictions going on in Hong Kong. Yes, both those things -- yes, interest rates have already turned around, and COVID restrictions, I think, are being rapidly rolled back in Hong Kong.
There's been a definite policy shift, I think, in terms of the government to prioritize reopening the international border and making that more traveler-friendly relative to the Mainland China border, which could still take some time, I think, to fully reopen. But I was down in Hong Kong a few weeks ago, it feels very much like activity levels are beginning to pick up, and I've got 3 more trips planned there this year. So if you look at the way that we're beginning to operate as a sign of Hong Kong, we're getting back to normal in terms of our operating business there.
So yes, with Hang Seng, I think you should see its returns comfortably recover as for the same dynamics that's going on in our HSBC business.
I guess on a related topic, Wealth Management is one area that has been particularly impacted by restrictions in Hong Kong and China. You laid out your double-digit revenue growth aspirations around 18 months ago. The environment is probably different from what you're expecting when you cast that. How are you thinking about the outlook of Wealth Management?
Yes. I mean if you sort of distinguish between secular and secular, there's obviously, at the moment, markets weak in Hong Kong that's obviously having an impact on investor appetite to trade and invest. But if you look structurally, I think -- we think there's a sort of 10% compound growth opportunity in Asia wealth probably for the next decade. So yes, in the near term, it's having an impact. But structurally, I think we're massive balls with the Asia wealth opportunity.
And I do think, structurally, when you think about the competitive dynamics, too, we've got some competitors like Credit Suisse that are obviously much weaker than we might have anticipated when we set up our plan, too. So structurally, we feel very well set up.
Okay. Great. I'm going to do the last 2 ARS questions, if we can. What are you most concerned about HSBC in the current macro environment? One, weaker revenue; two, cost inflation; three, deteriorating asset quality; four, capital; five, none of the above, expect HSBC to be resilient?
Apart from geopolitics factor.
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Yes. I would keep that in -- I mean a 30 basis point impairment charge for us is about $3 billion. So yes, say we were wrong on that, and it was 40 basis points, and it was an extra $1 billion. Yes, if you think about the interest rate sensitivity that we have and the fact that we expect to put an additional $10 billion of top line revenues, yes, we're far more sensitive, I think. Yes, you would have to see a lot, I think, before, yes, deteriorating asset quality really undermine the equity story that we're sort of talking about at the moment.
Is there -- I'm interested, is there a level of interest rate that you start to worry about the impact on asset quality? And are we anywhere close to it?
Yes. I think that we're sort of in a 2% to 3% range, we're quite comfortable. I think if you sort of get into the 3s up to 4, you begin to worry. And above 4, yes. So I think, yes, all of that points to -- yes, it's playing close attention at the moment to the U.K. Yes, we don't have a big business in Continental Europe. So that's less of an issue for us. But yes, I mean, if all of the markets that we're paying sort of close future attention to would be the U.K. at the moment.
We did the last ARS question. Where do you see the biggest opportunity for HSBC to grow revenue aside from rates? one, Wealth Management; two, Global Banking and Markets; three, loan growth; four, inorganic?
Yes, I would agree with that. We need markets, obviously, to stabilize to get that opportunity. We're not yet seeing that come through Hong Kong. So I still think wealth revenues will be a bit subdued in the second half. But certainly, once you get into 2023, as I talked about earlier, we see a significant opportunity in Asia wealth for a long period of time.
Can I ask another on return on tangible equity? You've upgraded your guidance to greater than 12% next year as you're benefiting from a higher interest rate environment. Interested in your view as the sustainability of this ROE profile. Is this a cyclical high as provisions normalized? Or actually do you think you can build on from here?
Yes. I mean if you look at the last time, yes, we had normalized interest rate environment in 2019. The group achieved returns of 8.4% that yet. So yes, Noel and I, I think, would argue that, yes, all of the sort of deep restructuring and repositioning we've been doing over the last few years has probably added about 400 basis points of sustainable return improvement to the business.
Yes, I do think when we get into sort of 24%, 25% if interest rates were to soften a bit, I still think we'll be able to drive positive operating jaws, putting interest rate moves to one side. So yes, we don't view 12% plus is just a '23 target. We view it as how we would like to operate the business going forward.
I do think structurally, people shouldn't get ahead of themselves and assume that there's sort of a massive leg up from that. But I would say if we could operate the bank in a sort of 12% to 14% return range, we would be very happy with that.
Okay. Great. I think we are just about on time. So without further ado, I think I'll draw the session to a close. I want to thank everybody in the room for having joined us and extend a special thanks to Ewen for joining us here today. Thank you very much.
Thanks, Aman.
