HSBC : Annual Results 2022 Presentation to Investors and Analysts - Transcript

Transcript

Investor & Analyst Call

Annual Results

21 February 2023, 08.30am GMT

NOEL QUINN, GROUP CHIEF EXECUTIVE: Good morning to everyone in the room in London today. Great to see you all again. And good afternoon to those watching from Hong Kong and around the world. Before Georges takes you through the Q4 numbers, I'll start with a summary of our strategic progress.

When we started our transformation three years ago, we also revisited our core purpose and values. Opening up a world of opportunity is the reason HSBC exists. We are making it a reality for our customers. Our results today are evidence of that, and I'm pleased that our performance also demonstrates that our people are living and breathing our values, particularly the fourth value, which is 'get it done'. I will demonstrate during the discussion today that we have achieved a lot over the last three years and that we are committed to doing even more.

I want to start by telling you the three elements I'm going to cover in the presentation today. Transformation was the first phase of our strategy execution. Three years ago, fair criticism of HSBC was that unprofitable or subscale businesses and clients were dragging down good profitability from our international proposition and from the profits generated in Hong Kong and the UK. I'm pleased to say we've addressed this. Our international connectivity is now underpinned by good, broad-based profit generation around the world.

Delivery in 2022 is all about the good set of results we've just announced. I will come to the detail later, but I'm pleased adjusted profits before tax were up 17%. We're firmly on track to achieve our returns target for 2023 onwards, and we expect to have substantial distribution capacity for higher dividends, more buybacks and, potentially, a special dividend in early 2024.

But there's also so much more we can achieve. So the final element of the presentation is growth and returns. It's all about how we will further improve performance going forward. As we've transformed, we've built a strong platform for the future that will enable us to meet our customers' needs, and I expect wealth, payments and FX, fee income, technology investment and climate finance to provide new value creation opportunities in the years to come.

So taking these three messages in turn, starting with transformation, three years ago we set out to tackle a series of fundamental problems - loss-making businesses, unprofitable products and clients, inefficient capital, and costs. Our transformation journey had six components, which I will run through in more detail on the following slides.

Our international connectivity remains our biggest differentiator, and we've grown and protected many of our market-leading international businesses during the three years, but we've done that while repositioning unprofitable and non-strategic businesses, particularly in the US and Europe. That's resulted in a client proposition that is now built on international connectivity underpinned by our broad base of geographic profit penetration.

All of this has been supported by strong cost discipline, which has enabled us to drive a step change in our technology investment. We've also removed the dilutive scrip dividend and introduced a new sustainable dividend policy, which is delivering attractive ongoing returns for shareholders and enabling us to invest in the business. Crucially, we've created a strong platform for improved growth and returns, with new opportunities for value creation. Our focus now is to capitalise on these opportunities.

Taking each of these in turn, in terms of international connectivity, our greatest strength remains our ability to connect the world's major trading and investment blocs. We are the world's number one trade bank, top three for FX, and a leading payments company. Last year, we processed more than $600 trillion of payments globally. International is also core to our value proposition. Around 45% of our wholesale client business is done cross-border. In Wealth and Personal Banking, we now have six million international customers, which is up 7% on last year. This is significant, because our international customers generate around twice the average revenue as our domestic customers.

Our international connectivity has also translated into higher revenue and market share. Since 2019, we've grown Global Payment Solutions revenue by 6% CAGR, Trade revenue by 5% CAGR, and revenue from Global Foreign Exchange has increased by 12% CAGR. Overall, Transaction Banking revenue was up by 7% CAGR over the last three years.

We also see an opportunity to create even more value by continuing to grow these product lines over the coming years. The next slide drills down into how we reshaped our portfolio. Across the group, we reduced risk-weighted assets by a cumulative $128 billion, well in excess of our target of $110 billion. We made key strategic decisions to sell our US mass-market retail bank, our retail banking operations in France, and our banking business in Canada. We've also announced exits from Russia and Greece, with other potential smaller exits being considered. We've reallocated more of our capital to Asia - and by Asia, I mean the whole of Asia. We want to build strong wealth businesses in mainland China, India and Singapore, alongside strong business we already have in Hong Kong.

We accelerated this process through bolt-on acquisitions and investments in the last 12 months. We've completed the integration of AXA Singapore and L&T Investment Management in India. And in mainland China, as well as continuing the organic buildout of Pinnacle, we had seven main licence approvals since 2020. These enabled us to take full ownership of HSBC Life China and increase our majority stake in HSBC Shanghai to 90%.

As I said earlier, we now have an international connectivity underpinned by good, broad-based profit generation, as this slide demonstrates. This is the single biggest change compared to three years ago. I won't go through all the numbers on this slide, but I will mention a few. The total amount of adjusted profit contributed by Asia excluding Hong Kong and mainland China was more than $4 billion in 2022 - an increase of 23% compared to 2019. Mainland China excluding associate income from BoCom contributed around $1 billion of profit last year in a challenging year, and India contributed a further $900 million of adjusted profit.

Outside Asia, the Middle East generated $1.8 billion of adjusted profits last year. HSBC UK delivered $5 billion of adjusted profits. And we've got leaner, more profitable businesses in continental Europe and the US. Continental Europe generated adjusted profits of over $2 billion, and the US adjusted profits of over $1 billion. Both of those businesses were close to loss-making, or loss-making, three years ago.

Mexico is another high-returning business. It delivered a return on tangible equality of 18%, and worthy of note is that 60% of new-to-bank retail customers last year were acquired through corporate client relationships by the provision of employee banking services and payroll services, demonstrating the value of our connected model in the country.

The next slide focuses on the tight cost discipline we've demonstrated and we will maintain. The reduction of our global corporate real estate, our branch network and operations headcount have all delivered material savings, and we expect to achieve further efficiencies in the years to come, but the most important point on this slide is that we've used these cost savings to increase investment in technology. 18% out in operations costs, 18% in in technology investment. This is spending in the right place to build the business of the future, and it has enabled us to fundamentally change the way we operate.

Our formal three-year cost reduction programme has now ended, but we still expect more than $1 billion of cost saves to flow through into 2023 from that programme. There will be no easing up at all in our cost discipline, but I think it's right that we will also continue to identify opportunities to create efficiencies going forward that will deliver sustainable cost savings in future years, with any associated costs from those programmes reported through the cost line, not treated below the line as significant items.

Whilst we have transformed, we have also invested in areas that we expect to deliver strong growth and returns in the future. A strong balance sheet has always been a defining characteristic of HSBC, and we've continued to grow the deposit book and assets over the past three years. This is benefiting our performance now that rates have increased.

Developing our Wealth business has also been a strategic priority. Our investments over the past three years are gaining traction, reflected in revenues of over $9 billion in 2022, excluding market impacts, which is a 9% CAGR compared to 2020. It's also reflected by increased insurance market share in Hong Kong.

The next slide sets out the impact of the step change we made in technology investment. The faster services, reduced friction and more competitive products that this investment has enabled has been critical to improving the customer experience. With our digital propositions, our aim is to build once, deploy globally. Our upgraded mobile banking app is available in 24 markets and has around 13 million active customers. HSBC Kinetic, our award-winning business banking app in the UK, now has around 53,000 new-to-bank customers. And as well as Global Wallet and Global Money, we have rolled out our new digital trade finance platform in Hong Kong and the UK, so that our market-leading businesses are well positioned for the next 10 years. In addition, we are launching new products like HSBC Orion, which is our proprietary tokenisation bond issuance platform using blockchain. The first public bond was priced on it last month.

Turning now to delivery in 2022, I'm pleased with our '22 performance. As you know from Q3, the reported numbers include a $2.4 billion impairment for the planned disposal of our French retail business. Adjusted revenue was up 18% on the back of a strong net interest income performance, and adjusted profits were up 17%. We delivered a good cost outcome in a high inflation environment by containing adjusted cost growth to around 1%. Expected credit losses were a $3.6 billion charge. The dividend was 32 cents per share. The CET1 ratio was 14.2%. And we achieved a reported RoTE of 9.9%, or 11.6% once you strip out significant items, so we're firmly on track to deliver returns of 12% plus from 2023 onwards.

I'm now going to quickly run through our four strategic pillars, starting with 'Focus on our strengths'. Our market-leading Commercial Banking franchise had a very good year. Adjusted revenue was up almost 30% on last year. There was further good growth in Trade, and Global Payment Solutions benefited from higher interest rates. It was encouraging to see fee income grow by 8%, and there was strong adjusted revenue growth across all regions.

In Wealth and Personal Banking, revenue was up 16% overall. Personal Banking had a particularly strong year, and lending balances were up 3%, despite subdued economic conditions in Hong Kong. Wealth was also up, excluding market impacts. One of the best signs that our Wealth strategy is gaining traction is net new invested assets of $80 billion in 2022 - an increase of 25% compared to 2021. This is highly promising for future revenue generation. There was also continued growth in the value of new business in our Asia insurance franchise, despite adverse market conditions. Again, there was strong revenue growth in all geographies.

Global Banking and Markets also performed very well in 2022. Markets and Securities Services was up 14%, due mainly to rate rises and a standout Foreign Exchange performance. Banking was up 17%, also mainly due to higher rates. In a challenging year for investment banking globally, this good performance underlines the resilience of our model. Collaboration revenues from cross-selling Global Banking and Markets products to customers in Commercial Banking and Wealth and Personal Banking were up 6%. There was strong growth in client business booked in the east but originated in Europe and the Americas, up around 30% on the previous year. This again underlines geographic diversification of our revenues, and that our greatest strength is connecting the world's major economic blocs.

The next slide is on 'Digitise at scale', our second pillar. It illustrates the outcomes of our increasing investment in technology. Within retail and wholesale, penetration levels increased materially. More than 75% of Commercial Banking customers are now digitally active, and almost half of retail customers are now mobile active. We also believe we can grow these numbers further.

The next slide covers 'Energise for growth' and how we're changing the culture of HSBC. Taking out unnecessary layers of management has helped increase our speed and agility. In our last staff survey, the number of colleagues who say that work processes allow them to work efficiently were six percentage points above the sector benchmark. Confidence within the organisation has also increased. 77% of our colleagues told us that they are confident about our future which is seven percentage points above the sector benchmark and an increase of three percentage points since 2021. We made further progress against our diversity commitments, with increases in representation of female leaders and black heritage leaders. 36% of our key leadership roles are now located in Asia, and, if I reflect on the leadership of our Asian business five years ago versus today, I see much more Asian heritage talent and a strong pipeline of talent coming through that we continue to develop. At the same time, we know we have more to do in all these areas.

The next slide looks at our final pillar and the leading role that we play in the 'Transition to net zero'. The amount of sustainable financing and investment provided and facilitated in 2022 was up slightly despite the market for green, social, sustainable and sustainability-linked bonds being substantially down. The cumulative total amount since the start of 2020 is now $211 billion. We've set new targets for on balance sheet-financed emissions for six high-emitting sectors. We recognise that methodologies and data for measuring emissions will continue to evolve, and our own disclosures will therefore continue to evolve as well. We continue to reduce emissions across our own operations and supply chain, which were down more than 58% since 2019.

Finally, my third message is about growth and returns. We are firmly on track to deliver returns of at least 12% in 2023, but there's also so much more we can achieve, and we can deliver higher growth and returns as we move out of transformation and into value creation. We plan to grow our core businesses, which are built on our international connectivity and the strong broad-based growth we have now spanning every region. The investment we've made in new sources of value creation, wealth, payments and FX, fee income, technology and sustainability will all increase and diversify our revenue, and we won't be relinquishing our grip on costs because it enables us to spend in areas that create value.

Our improved profitability and sustainable dividend policy will give us a substantial distribution capacity, with a 50% dividend pay-out ratio established for 2023 and 2024, a return to quarterly dividends from Q1, the consideration of buybacks brought forward to the Q1 results and, on top of this, the consideration of a special dividend of 21 cents to be paid in early 2024 subject to the completion of the Canada transaction and necessary approvals. So our current strategy remains the best way to improve returns for our shareholders, and now I'll hand over to Georges.

GEORGES ELHEDERY, GROUP CHIEF FINANCIAL OFFICER: Thank you, Noel. Hello, everyone. Thank you for joining in person and via webcast today. I am glad to see many familiar faces, and I'm looking forward to meeting those of you I haven't had the opportunity to meet yet. Before I get into the Q4 numbers and given this is the first time I'm in front of you in this job, I'd like to share a few thoughts about my approach. You may know I've already spent 18 years with this firm running various businesses, including as CEO of the Middle East and most recently co-CEO of Global Banking and Markets, but what you may not know is that I spent most of this time creating efficiencies to achieve the purpose of investing in growth.

So indeed I oversaw the sale of non-strategic businesses in the Middle East, and this allowed us to focus our investments into Saudi Arabia and the United Arab Emirates, and when I led GB&M with Greg I drove the rationalisation of our product lines and booking structure to focus on areas where we had competitive advantage and could best serve our clients. So, as a result, I materially reduced RWAs and costs and repurposed those saves to invest in technology for the future of the business. I believe, therefore, that growth cannot be achieved without a clear focus on our strengths. Therefore, purposeful transformation and elimination of areas of marginal impact are paramount. Equally and as importantly, clinical delivery and keeping a tight grip on spending are key to unlocking the potential to invest.

So, as I approach this next phase, I want to emphasise my three focus areas: so, one, continuing to support our business to deliver growth and return, which is underpinned by continuing to improve customer service and attracting and retaining talent; number two is continuing to generate the further efficiencies required to support the investment I just spoke

about; and number three, therefore the guiding principle that supports all of this, will be absolute cost and capital discipline.

I'll turn now to the Q4 numbers. Reported profits before tax were at $5.2 billion, up 95% on last year's fourth quarter. Adjusted profits before tax were at $6.8 billion, up 92%. Adjusted revenues were up 38%, driven mainly by net interest income growth of 53% and higher non-net interest income. We booked an expected credit loss charge of $1.4 billion in the quarter, and then adjusted costs were up 2% due to higher technology spend and higher performance-related pay. Compared to the previous quarter, lending and deposits were both down, but this was largely due to our banking operations in Canada being reclassified as held for sale. So, if you excluded this, lending was down 2% mainly due to subdued conditions in Hong Kong, and deposits were up.

For the full year, the dividend is at 32 cents per share with a second interim dividend of 23 cents per share. Also after strong capital generation and lower currency-adjusted RWAs our CET1 ratio was at 14.2%, an increase of 80 basis points on the third quarter. Our effective tax rate for 2022 was at 5%. This includes credit from the recognition of deferred tax assets related primarily in the UK as well as other deferred tax assets and uncertain tax position reassessments. If you excluded these credits, then the effective tax rate for 2022 was 19.2%, and we expect our normalised effective tax rate for 2023 to be around 20%.

This slide now shows another strong adjusted revenue performance, with overall growth of 38% compared to the fourth quarter of 2021, driven mostly by recent rate levels. There was strong growth in all businesses, as Noel indicated. Wealth and Personal Banking revenue was up 45%, Commercial Banking up 51% and Global Banking and Markets up 16%. Net fee income was down 11%. This was mainly due to, number one, lower wealth distribution revenue driven by lower equities turnover in Hong Kong in general and mutual fund sales, and this is reflecting soft equity markets in general; and, two, lower capital markets and advisory activity, which also impacted Global Banking and Markets.

On this slide, you can see that reported net interest income was at $9.6 billion, up 41% on last year's fourth quarter. The net interest margin was at 174 basis points, up 17 basis points on the third quarter of 2022 and up 55 basis points on the fourth quarter 2021. We continue to guide to a full-year 2023 net interest income of at least $36 billion on an IFRS 4 basis.

Let me unpack this a little bit. Our guidance, therefore, is unchanged to what we indicated at quarter three. We do view this as a conservative guidance, given current FX rate tailwinds and the strong fourth quarter performance, so this is why we're emphasising on 'at least $36 billion'. This is very important. There are a number of factors that we need to be aware of which is driving us to be conservative in our approach. The first one is the potential lag effect of customer migration to time deposits; the second one is the competitive pressures we may be facing in deposit pricing; and the third one is obviously the impact of foreign exchange and the future rates outlook. We do note consensus and we're not seeking to change it. We will be updating you on this NII performance throughout the year - I think at the Q1 results - when we will also incorporate the impact of IFRS 17 in our guidance.

We retain a cautious outlook on loan growth in the short term but continue to expect mid single-digit percentage annual loan growth in the medium-to-long term. Historically, our earnings have been very sensitive to short-term interest rate movements, and we have started to address this lately with additional structural hedging positions given the current rate levels. I will certainly update you later in the year on the progress towards this net interest income stabilisation or mitigation.

Turning to credit, our fourth quarter ECL charge was $1.4 billion, which includes $0.6 billion for our mainland China corporate real estate exposure. If you excluded this portfolio, the ECL charge was $0.8 billion or around 30 basis points of loans with limited signs of credit deterioration. So our main indicators therefore are still holding up. Given the macroeconomic headwinds, we expect an ECL charge of around 40 basis points for the full year 2022. Our ECL charge as a percentage of average loans includes loan balances held for sale from the planned sales of Canada and France retail. Therefore, when you exclude them, you need to add another four to five basis points on top of that number.