HSBC : FY 2022 Equity Analysts Meeting - Transcript

Transcript

Post-Results Equity Analyst Call

2022 Results

24 February 2023, 9.00am GMT

RICHARD O'CONNOR, GLOBAL HEAD OF INVESTOR RELATIONS: Good morning, good afternoon everyone. This is the normal HSBC follow-on analyst meeting. I'm delighted to see our friends in Hong Kong; we'll make sure that our Hong Kong analysts get to ask some questions. We don't have a pre-prepared script. It's very much your meeting to ask questions and anything we didn't answer well on Tuesday.

We should start with a thank you - this will be a difficult first half for all of us - we've got IFRS 17 and the change to legal entities, so I understand this will be a model rebuild. I think at the end of it we will get a better construct in terms of how the business is managed by the legal entity, and how we manage non-interest income and the drivers of that. NII has been a big subject and will remain so, but non-NII, I think we need to do a better job of helping you model those drivers, and where we're doing well, where we're doing less well. That's work in progress, so I appreciate your help with that over the next few months. With that I'll hand over to Georges.

GEORGES ELHEDERY, GROUP CHIEF FINANCIAL OFFICER: Thank you very much, everyone, for joining. I want to say a welcome after two months in the job. In 18 years at HSBC I've ran a number of businesses, so I'm quite familiar with this place, but obviously new to this function. I'm also joined this morning by a number of people, obviously by the IR function with Richard and his team. Carlo's joining me, group treasurer. Kathleen should be on the phone, who's Head of Finance. Very shortly we'll be joined by our Global Financial Controller, Jon Bingham.

RICHARD O'CONNOR: You've got Mark Phin and the IR team in Hong Kong who will help direct the questions from Hong Kong.

GEORGES ELHEDERY: And we have Ming, our CFO for Asia.

RICHARD O'CONNOR: Who can tell us what HIBOR's doing. Perfect, so with that we'll go straight into questions.

TOM RAYNER, NUMIS: Could I have two, please? Richard, you started with disclosure, so on disclosure I'm wondering what your thought process was about doing away with adjusted disclosure. I think in some ways that might make things more difficult to interpret - issues with consensus and what's in and what's not, etc. I'm just interested in that and whether you've had any thoughts on other potential changes like moving to a banking NIM rather than having trading revenue and expenses messing things up, and whether or not the use of pro-forma figures might be quite useful when you've got big accounting changes coming or big disposals like Canada - just giving us pro forma today - that would be very helpful. That's just some thoughts on disclosure.

RICHARD O'CONNOR: Let's deal with that first, Tom. Georges, if you do high level and I'll deal with the specifics on that?

GEORGES ELHEDERY: First, we're not fully removing adjusted, because at this stage we decided to retain the constant currency adjustment. Currencies have been quite volatile, and we thought let's take it sequentially and not create more uncertainty due to the constant currency adjustment. This one we are retaining.

First, we're moving away from the CTA programme. Second, we wanted really to convey the strong sense that we're managing every line item in our income statement and our costs. We didn't want any impression that things may just slip below the line and we're not necessarily as focused and as purposeful as managing them as the ones we're managing above the line. That's the main intent.

We will still call out notable items if there are notable items, we just raised the threshold to $250 million from the current $150 million significant item threshold, but obviously if there are notable items we will call them out and we will make sure you can see the underlying business performance from these notable items, but we're not going to have two sets of numbers going forward apart from the FX adjusted.

On your second point about banking NIM, it's actually our intention to transition to banking NIM, and it's our intention to do so progressively by allowing all of you to understand how we're computing it and have a parameter for some period of time. Essentially, the main difference between the banking NIM and the current accounting NIM is the funding of the trading book. In our accounts you'll still have an accounting NII, and the rest of it will fall in the non-NII, but at least you'll be able to quantify it because we'll be giving a banking NIM.

Equally, a banking NIM will effectively neutralise the effect of the funding of the trading book, because the income would be generated - it will just sit on a different line - NII or non-NII - depending on whether it's the trading book paying for the funding of it, or if it's the banking book or treasury book paying for the funding of it. We neutralise, if you want, some of that uncertainty.

On your third point about pro forma, we did put in the appendix of the presentation a pro forma for Canada. The main things to call out - the first is it's about $60 billion of deposits and $60 billion of assets which will drop off the balance sheet. It will add about four to five additional basis points to the ECL coverage ratio on the residual book.

The other element that you need to be mindful of Canada is that the earnings of Canada for this year will be due to the lockbox structure we did on the sale of Canada. The earnings of Canada will be recognised as earnings and will be deducted from the purchase price, so therefore for all intents and purposes the earnings after tax are not ours. By the sheer fact of being deducted from the sale price, effectively the buyer already owns the earnings, and that started from 30 June 2022.

The last thing I want to share about Canada is that there will be an additional 130 or 140 basis points on the CET1 ratio. That is coming from the gain on sale of pro forma $5 billion, roughly $5.7 billion minus the earnings of Canada that will accrue over the year, and from the release of the RWAs of Canada. Of that CET1 ratio, we intend to pay the special dividend, conditional to successful completion of the transaction and the right approvals, including board and regulatory. We'll pay the 21 cents as the first priority, and then the additional capital surplus will support any share buyback programme we have running at that stage and will support any business requirements or regulatory requirements we have at that stage.

RICHARD O'CONNOR: The only thing I'll add before your second question, Tom, is clearly you saw the disclosures. You may have missed it. The insurance net interest income will go to non-net-interest income. There'll be a residual about $400 million of net interest income in the insurance line, but we'll split that out for you when we do the NII walk, but we are moving to a banking NIM as quickly as we can, Q1, Q2, because I think it's better for you and you get a better understand of that. Bear with us and we'll get there.

TOM RAYNER: Thanks for that. The second question was on costs, and you mentioned you're moving away from the whole concept of CTA, etc. Restructuring costs in 2022 all in were about $2.9 billion, and all we know about, which might be comparable, is the $300 million this year for severance. The $1 billion of flowthrough cost saves is helping you keep that cost growth number down to 3%; it seems to me very hard that you're going to be able to generate the same sort of flowthrough cost savings into 2024 unless you are going to make significant other investments in cost initiatives, etc. I'm just wondering if you could comment on that, because the guidance is clear for cost growth in 2023, but it looks like into 2024 there's some upward pressure on that number.

GEORGES ELHEDERY: Thanks for that question. The transformation we've gone through the CTA programme over the last three years we don't expect to continue with the same pace. I want to give you some numbers. Through that transformation we reduced our operations cost in the bank by approximately 20% and increased our technology spend by approximately 20%. That takes our technology cost from 16% of our total cost in 2019, taking it up to 20% by 2022. That sheer size of transformation we don't expect to repeat, so we're comfortable with the technology cost at 20% of total costs. This is why, when we're saying benefits flowing through, it's really following massive adjustments which we're not looking to replicate with that same magnitude.

The $300 million severance will allow us to continue to do that, so again, we're using severance, mostly for management and senior management layers. If we wanted to adjust costs in our general population, this is much more easily done through natural attrition. We have anywhere between 6% to 10% natural attrition, depending on years, and that's the right mechanism to use to adjust costs. We earmarked that amount mostly for senior management layers and roles that we want to still tackle, but you probably won't expect the same size shifts that we've seen before.

Therefore, if I want to sum it, while we have not given guidance for 2024 - and we think it's a bit premature, we just need to see also how inflation is going to pan out this year - we're absolutely committed to the cost discipline that we have committed to for 2023.

OMAR KEENAN, CREDIT SUISSE: Could you help us or talk through with us the changes in the interest rate sensitivity over the last six months of the year? I know there was an NII stabilisation programme, which should make the NII more resilient going into future years, but if you could help us with what structural hedges look like now in terms of duration, and just explain the rate sensitivity so we can make sure we're sequentially modelling things right?

GEORGES ELHEDERY: The NII sensitivity dropped for our 100 basis points downside for rates, annualised from about $6 billion to $4 billion. I just want to remind you first the assumptions under the sensitivity. The first one is a static balance sheet, so we just assumed the balance sheet, as is, no migrations, no additional or reduction of deposits, etc. The second assumption is a flat 50% passthrough rate, which we know is not necessarily real life, but it gives you a guide.

Of that $2 billion reduction, circa two-thirds is coming from the fact that we're at higher rates than we were in Q2, and therefore you do have less of the negative convexity when you're compressed around zero. Further out from zero, the less sensitivity you have. That's about two-thirds of the reduction, and one-third of the reduction is the additional structural hedges which Carlo and the treasury team have been putting in place. We've always had structured hedges, but obviously when rates are close to zero for a period of time you're not necessarily inclined to extend your maturities at those rates, so you just wait it out. Where rates are today allow us to extend it and allow us to expand the volume. This is the journey we're on, and it'll take us easily through mid-2023, probably longer, to be in a position where we're partly mitigated.

I just want to clarify: we will always have rate sensitivity and short-term rate sensitivity. We're not intending and we cannot hedge all of it, and there are reasons for that. Some reasons are we need to maintain some of our exposure to short-term rates. That's a risk management reason. Other reasons are that you don't always have the instruments to hedge, and this is particularly true in Hong Kong, where you don't have enough long-term HIBOR or Hong Kong dollar related instruments to hedge with, so you're de facto constrained by the market capacity. Number three, we also want to make sure that any of these hedges is done in an as capital efficient way as possible. There's no point creating a hedge but creating capital volatility, so NII stability versus capital volatility. We need to manage that trade-off in a way that keeps us comfortable. You'll always see exposure, we're just trying to reduce it.

RICHARD O'CONNOR: Carlo, anything to add to that?

CARLO PELLERANI, GROUP TREASURER: The only things I would add is, first, your question about maturity. Broadly speaking, those are on average five-year transactions, so they are five years to start and they will roll down. Just to stress what Georges was saying - this is not a trading position - the objective here is stabilisation, so the idea is to smooth the

income to the downside and avoid giving it up on the upside. Obviously this is an art. It's impossible to pick the right time in the cycle. We have started at this point in the cycle, adding, as Georges is saying, we are in part on the way there. We will continue to review.

PERLIE MONG, KBW: Just a couple questions on Hong Kong. If I look at your fee income in Hong Kong minus the manufacturing market impact it looks like we're about 10% below 2019. Is that fair? From the sounds of it on the call earlier in the week it sounds quite constructive, it's picking up again, etc. Can we expect a catch up this year or are we structurally different, or is there any reason why we're structurally different?

RICHARD O'CONNOR: Let's get Ming to take that, Ming in Hong Kong. Fee income down 10% since 2019. What are the prospects going forward?

MING LAU, CHIEF FINANCIAL OFFICER, ASIA-PACIFIC: I would say for the drop in fee income in Hong Kong, a big part of it was the reductions in Asia Wealth fee income, particularly on the Asia wealth distribution side of the business, which naturally, if you look at it, has been impacted by two particular dynamics. One would be the drop in equity prices, both in Hong Kong and markets globally through 2022. Secondly, in Hong Kong the Hong Kong stock exchange turnover fell, which naturally would have impacted your brokerage revenues. In terms of seeing a recovery of the fee income for Hong Kong particularly, I would point to those two factors.

I think we've seen a good start so far in 2023. There's been just broadly over a 10% pickup in Hong Kong stock exchange turnover thus far through the early part of the first quarter. So look, it's positive at this point, so a bit cautiously optimistic, but I would say you would have to continue to see recovery of the equity markets and continuing pickup of the stock exchange turnover to see a pickup in Asia Wealth revenues.

I think, beyond that, trade financing activity clearly was impacted in the second half of 2022, so one would have to see a recovery in the trade financing activities to see a pickup in the transaction finance fees overall.

PERLIE MONG: That's very helpful, thank you. The Hong Kong budget was out yesterday and the key thing there - and has been for a while - is the Greater Bay Area and the integration of Hong Kong into the Greater Bay Area. And certainly, your colleagues in Hong Kong have repeatedly highlighted the excitement around this opportunity. Can you just give a sense of the potential you're seeing there? What sort of market share gain are you targeting in the next few years, etc?

MING LAU: Thanks. Yes, look, again, I would say cautiously optimistic. I think that GBA opportunity is potentially significant for us, but, as we've noted in the past, it's early days. I think you do need to continue to see some of the policies continue to evolve to see freer flows of capital, etc, and investments between Hong Kong and the GBA. So I think the bigger impact for us at this point through the first half of this year would be the borders reopening and the impact that that has in terms of the number of visitors coming back into Hong Kong. And I think, through the first part of the year, and particularly January, we've seen the number of visitors just numbering below half a million, which is a good pickup from the Covid days, but still only about 10% of the levels we used to see in terms of levels of visitors coming into Hong Kong.

RICHARD O'CONNOR: And we'll talk more, Perlie, about the GBA opportunity in the seminar in May.

RAUL SINHA, JP MORGAN: The first one is just to follow up on what was said on the call around NII and the fact that consensus shouldn't move. You weren't looking to move consensus. Can I just clarify that that comment was pre-IFRS 17 impact? Because it looks to me like, based on slide 40, that there's going to be a negative impact from IFRS 17 on NII.

GEORGES ELHEDERY: That's absolutely correct, Raul. So this is guidance on an IFRS 4 basis. We will give you a restatement of this guidance under IFRS 17 with the Q1 results. We're first waiting on 9 March for the key changes from IFRS 17, so you have all the dynamics. Broadly speaking and just paraphrasing what Richard mentioned earlier, about $2.2 billion of the current IFRS 4 NII will flip like-for-like into non-NII, due to IFRS 17, and then there will be a number of additions and variations on the earnings statement that, net/net, will take out about

two-thirds of the insurance PBT of broadly speaking, $1 billion. About two-thirds of it will disappear from the year's earnings and then will start accruing over the following years, and that's through additional changes in the cost line and the non-NII element. But pure NII, at this stage, is c.$2.2 billion, which will drop from that.

RAUL SINHA: Thank you. That's really helpful. And then, second question, just a little bit more broader, Georges, in terms of what you're trying to do in terms of reducing the downside sensitivity to rates as the rate cycle probably peaks out, but you're saying you can't completely hedge the downside risk. When you think about the medium term, there's a risk that rates would fall from here and that would put pressure on the profitability of the bank, because of the NII disappearing. How do you think you can manage or mitigate that in terms of some of the levers? It doesn't seem to me like cost could be an absolute lever from here, so do you think that growth in the other areas of the bank will pick up sufficiently to offset that?

GEORGES ELHEDERY: Look, it's a legitimate question. If you look at a lot of the investments we're doing - in the non-NII and specifically in the fee income line, if you want, and the investments we're putting in Wealth. And if you assume both our own investments plus the market outlook improving from where we are, there is, cautiously speaking, potential for substantial growth in this space. If you look at the growth in our fee income, say, in trade finance, despite all the challenges we faced and global supply chains, we continued to see a resilient mid-single-digit CAGR in this space. So there is a clear focus on our net fee income growth with a lot of investments in this space. So that is one area.

And the other area is we are now considering bringing forward our share buyback programme, and the capital generation we will have over the next couple of years, based on the current outlook, will allow us to have substantial share buyback capabilities, which should allow us to manage, if you want, the available share pool for distribution of dividends. So there'll be a number of factors which will help us mitigate.

This being said, if rates go to zero, it's a challenge, but we think rates at zero is an aberration and we don't think any normalisation - if we think, today, rates have peaked - we don't genuinely think a normalisation will take us back to zero. That will be an aberration, if you want, there.

RICHARD O'CONNOR: Carlo, anything to add to that?

CARLO PELLERANI: Yes, I would just say that, of course, there are already actions that the Group has taken thus far. We think that the Group, at similar rates to the past, is returning about 3% ROE higher than it was at similar rates, thanks to the actions taken thus far. Stabilisation will help temporarily. Again, stabilisation is not trying to trade, so it will fizzle out over time. But hopefully, if there is a temporary downturn, it could help sustain, and then the additional actions that Georges has mentioned.

JOE DICKERSON, JEFFERIES: Just two things from me. So this 130-140 basis points benefit from Canada, you've said the first priority is the 21 cent special dividend. I've got a couple other questions. It sounds like you've given - buybacks and then investment in the business is the other two items, but what I'm getting, if I'm reading between the lines here, we should not assume that it's fully distributed via buybacks and dividends. Is that fair? And on that, is the acceleration of the buyback in H1 simply related to the fact that you had very strong capital generation in Q4? Presumably you'll have it again in Q1. Are you, effectively, pre-funding any of this, or is that separate to what you might get from Canada?

And then, on the Group structure, Noel has explained the fungibility of Mexico with the rest of the business. What about the fungibility of the Australia operations with the rest of the business? Is that ever a business you'd take a look at strategically, or is it fungible enough to retain?

GEORGES ELHEDERY: Firstly the 130-140 basis points; the 21 cent special dividend is the first priority use. We haven't given additional indication on the other uses, because we're probably still a year early now. We will give you more clarity as we come close to closure, but closure is still expected towards the end of this year.