滙豐控股 (HSBC) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the investor and analyst conference call for HSBC Holdings plc's earnings release for 3Q 2015.

For your information, this conference is being recorded.

At this time, I will hand the call over to your host, Mr. Stuart Gulliver, Group Chief Executive.

Good morning, from London.

And welcome to our third-quarter results call for analysts and investors.

With me in the room is Iain Mackay, who's our Group Finance Director.

We've also got Douglas Flint, our Group Chairman, who's on the phone in Shanghai.

Let me start by pulling out a few key highlights.

Our third-quarter performance was resilient against a tough market backdrop.

Reported profit before tax for the third quarter was 32% higher than the third quarter of 2014, but adjusted profit before tax was lower by 14%.

The drop in adjusted profit before tax was mainly due to a 4% drop in revenue.

In particular, the stock market correction in Asia affected principal retail banking and wealth management.

Revenue was also lower in global banking and markets.

Despite slowing growth in the Mainland Chinese economy and market volatility in Asia, there has been no visible impact on our Asian credit quality in the quarter.

And we've included some facts and figures on our business in Mainland China in the appendix.

Operating expenses were up against the third quarter in 2014, as expected, although our cost-reduction programs have started to gain traction.

We continued to implement the strategic actions we set out at our investor update.

In particular, we reduced risk-weighted assets by a further $32 billion in the quarter, bringing the total reduction to $82 billion since the start of the year.

Iain will shortly give a detailed overview of our financial performance, and then I'll give a progress report on the actions from our investor update.

First, though, Douglas has a few comments on the Group headquarters review.

Thanks very much, Stuart.

As you know, in April, the Board asked management to start work to look at where the best place is for HSBC to be headquartered.

I should stress that although management is undertaking the review on behalf of the Board, it is, of course, the Board that will make the final decision.

The purpose of the review is to assess the best location for the holding company to maximize the present and future strategic opportunities of the Group, and long-term shareholder value.

This is, therefore, a decision based on long-term perspectives, rather than short-term factors.

A significant amount of work has already been carried out on this review since April, supported by a number of external advisors, but there's still a considerable amount left to do.

As our discussions have progressed, further information has been requested by the Board on topics that we presented, and on fresh areas of interest.

And while we set a target for completion at the end of 2015 at the time of our investor update, this is a self-imposed deadline that we will move if the Board requires further work to be performed.

An announcement will be made when the Board finally makes its decision, otherwise, a further update will be provided at the time of our full-year results announcement.

Stuart, back to you.

Thanks, Douglas.

Iain will now take everyone through the numbers.

Reported profit before tax for third quarter was $6.1 billion; up 32% on the third quarter of 2014.

The increase in reported profit before tax was mainly due to a net favorable movement in significant items.

Fines, settlements, and customer redress were down by $1.4 billion, and we benefited from favorable valuation movements in our own debt of [$926 million].

Adjusted profit before tax was $5.5 billion; down by $912 million, or 14%.

You'll recall that the adjusted measure excludes the period-on-period effects of foreign currency translation differences in significant items.

You'll find more detail in these adjustments in the appendix in the investor deck.

Looking at some key metrics for the first nine months of the year, the annualized reported return on average ordinary shareholders' equity was 10.7%.

The annualized reported return on average tangible equity was 12.1%.

And, on an adjusted basis, we had a negative jaws of 4.1%.

You'll notice that jaws has worsened since the first half of the year, when we had a jaws of negative 2.9%.

Whilst we're not changing our positive jaws target, and have a very sharp focus on cost management, it is clear we will not accomplish positive jaws for the full year.

The main driver of the deterioration in jaws is the fall in revenue in the third quarter.

While revenue fell in the quarter, we also slowed our costs growth.

Savings are beginning to flow to our cost run rate, but a great detail remains to be achieved.

More of this in a few minutes.

The next few slides look at the third quarter relative to last year's third quarter, then I'll summarize the nine-month performance.

Adjusted revenue was $657 million, or 4% lower than in the third quarter of 2014.

This was mainly due to lower revenue in both principal retail banking and wealth management, and global banking and markets.

Principal retail banking wealth management revenue was down, due mainly to a fall in wealth management income in Hong Kong.

This was caused by the stock market correction in Asia, which reduced asset valuations in our life insurance manufacturing business.

Overdraft fees in the UK fell again, due to repricing and the creation of a text message service to alert customers when they go overdrawn.

Global banking and markets revenue was also down.

This was due to the impact of challenging market conditions on rates, which was down by 22%; and credit, which was down by 51%.

Revenue also fell by 14% in foreign exchange, but this was relative to a particularly strong quarter last year.

By contrast, revenue rose across most other client-facing global banking and markets business lines, which included equities, where revenue was up 23%; and capital financing, which was up 9%.

On adjusted operating expenses, I'll update you on our third-quarter costs; then, I'll cover our progress against the cost target from our investor update.

In the third quarter, adjusted operating expense increased by $191 million compared to the third quarter of 2014.

This reflected higher change-the-bank costs, which came principally from increased spending and regulatory programs and compliance.

Run-the-bank costs remain broadly flat over the period.

Staff costs were higher, as a consequence of inflation in Latin America and Asia, although performance-related staff costs fell in global banking and markets, mainly reflecting lower revenue in the quarter.

The reduction in other costs largely affects the continuing run-off of the US CML portfolio.

As you know we set a target, at our investor update, to deliver our 2017 exit run-rate costs at the same level as 2014.

There were early signs of progress against this target in the third quarter.

The chart on the left-hand side of the page shows our 2014 operating expenses excluding Brazil and Turkey, and adjusted for the latest foreign exchanges rate.

This gives a baseline 2014 cost figure of $31.8 billion.

We included the bank levy in the 2017 target we used for investor update, but we've excluded it here as our third quarter cost figure does not include the bank levy.

This gives us a target figure of $30.2 billion, which is equivalent to a quarterly ex-levy run rate of $7.6 billion.

Looking at the middle chart on the right side of the slide, you'll see that our costs in third quarter of 2015 were $7.9 billion.

We need to continue making cost savings through 2016 and 2017 to offset both inflation and investment to fund business growth.

There is still a great deal to do.

The same chart also shows our quarterly cost trend.

We reduced our costs by $392 million relative to the second quarter.

There were a number of specific items in the second quarter which did not occur in 3Q 2015, including the Financial Services Compensation Scheme levy.

We started to see early impact of our cost reduction program in Q3.

To be clear, our cost management is focused on achieving positive jaws; in effect, informed by the revenues the (inaudible) [can earn].

Adjusted loan impairment charges were up $81 million, or 15%, compared to 3Q 2014.

This increase was mainly in North America, driven by lower releases in the US CML run-off portfolio.

LICs also increased in the Middle East and North Africa, notably, in the United Arab Emirates.

There were improvements in individually assessed charges in Latin America and Europe, notably, in Brazil and the UK.

Loan impairment charges in Asia were also slightly lower.

And, as Stuart said, we've not seen any significant deterioration in credit quality.

Turning to a nine-month comparison, adjusted profit before tax was $605 million lower than 2014.

Adjusted revenue was $675 million higher than the first nine months of 2014, with growth of 5% in global banking and markets; 3% in commercial banking; and 1% in principal retail banking and wealth management.

Operating expenses for the nine months were $1.4 billion, or 6% higher than 2014.

This reflected salary inflation in Latin America and Asia; investment to support growth in targeted areas; and increased spending on staff and infrastructure in regulatory programs and compliance.

Adjusted loan impairment charges were down by $58 million, or 3%.

The ratio of loan impairment charges to average gross loans and advances to customers remained stable at 20 basis points.

This number excludes Brazil.

Turning to capital, the Group's common equity Tier 1 ratio was 11.8% at the third quarter, against 11.6% at the half year.

This increase reflects continued capital generation of $1.9 billion from profits net of dividends and regulatory adjustments, together with the impact of risk-weighted assets initiatives.

At our investor update, we set a target to reduce the Group's risk-weighted assets by $290 billion by the end of 2017, roughly, one-half of which will come from resizing global banking and markets.

The chart in the top right of the page shows this target adjusted for foreign exchange rates, as of September 30.

This gives a baseline risk-weighted asset reduction target of $275 billion.

In the first half of the year, we reduced risk-weighted assets by $50 billion, $31 billion of which came from global banking and markets.

In the third quarter, we reduced risk-weighted assets by a further $32 billion.

This brings the total risk-weighted assets reduction so far to $82 billion, which is 30% of our target.

$19 billion of the reduction in Q3 came from global banking and markets.

This included some reductions in incremental risk charge [provisions], as well as lower credit conversion factors from use of more granular data.

A further $11 billion came from commercial banking.

This next slide shows our Group return metrics.

The annualized reported return on average ordinary shareholders' equity for the first nine months of the year was 10.7%.

And the annualized reported return on average tangible equity was 12.1%.

Both of these are significantly up on last year.

Also, for the first nine months of the year the annualized reported return on risk-weighted assets was 2.2%, compared to 1.9% in 2014.

Whilst it's early days, our program to reduce risk-weighted assets is progressing well.

We continue to work towards an adjusted return on risk-weighted assets of greater than 2.3% by 2017.

I'll now hand back to Stuart to provide an update on progress around our strategic actions.

This slide provides a summary of our main achievements to date.

The focus of management has been firmly fixed on implementing the nine business actions that we announced at our investor update, on June 9.

The main news in the third quarter was the reduction of a further $32 billion of risk-weighted assets.

Iain has already covered this is some details.

But I can also tell you that in the last few days we have agreed to sell a portfolio of real estate secured loans from the CML book in the United States, which we expect to reduce risk-weighted assets by more than $4 million.

We continue to work very hard to reduce our risk-weighted assets quickly and efficiently.

We're also making progress on costs.

We've removed around 100 software applications; achieved around $130 million of annualized procurement cost savings; and completed around one-third of our manual payments automation program.

We have also made good progress in increasing our digital capabilities, which saves money and provides a better customer experience.

There's much more to achieve on costs, but the trajectory is in the right direction, and the vast majority of our cost programs are now underway.

Taken together, we expect the cost programs that we've already started to deliver around 90% of our cost target, with further opportunities to be fleshed out in the next few weeks.

Obviously, this will be an incremental process, and some will take longer than others.

But now that we've mobilized these programs, we expect to see results in the coming quarters.

Turning to other areas, you'll know from the half year that we agreed to sell our Brazil business to Banco Bradesco.

And that deal remains on track.

There is no update on Turkey just yet, and I expect that to take a little longer.

Rebuilding NAFTA profitability is a work in progress, and will remain so until the end of 2017.

However, the initial signs are positive.

Revenue is up by 20% in United States compared to the third quarter of 2014.

And profits were up for the first nine months of the year in the United States by 85%, and in Mexico by 95%.

I continue to monitor Mexico and the United States personally, and speak frequently with country heads to make sure we maintain momentum.

Our international network has generated significant revenue growth in 2015.

We've grown revenue from transaction banking products by around 5% in 2015, with foreign exchange, in particular, growing by 10%.

The third quarter was tougher, but we still grew revenue in payments and cash management by 2%; and security services by 7%.

In global trade and receivables finance, we have gained market share in a number of product areas, and kept revenue relatively steady, which is in the face of a 40% fall in commodity prices, and declining trade volumes.

We have also grown business synergies from our universal banking model by 6%, and increased client revenue from our 20 priority trade corridors.

Good progress has been made in targeting growth in Asia.

In the Pearl River Delta, we continued to recruit staff to capture growth.

We're also announcing today that we signed an agreement, which is subject to regulatory approval, to establish a majority-owned joint venture securities company in Jinhai, Zhengzhou.

If approved, this will be the first majority foreign-owned securities company in Mainland China, and will potentially allow us to engage in the full spectrum of securities business in the country.

In ASEAN, revenue is up by 6% year on year.

We've extended our leadership position in RMB internationalization, and grown revenue from renminbi services by 8% year on year.

In September, we issue the first Panda bond by a foreign commercial bank in China's interbank bond market.

In October, we were among the first banks to connect the cross-border interbank payment system for cross-border RMB clearing.

And we were also the joint global coordinator and book runner for the RMB5 billion bond issued by the People's Bank of China in London.

This was PBOC's first offering outside China, and a significant milestone on the path towards the internationalization of the RMB.

Now, clearly, delivering on our strategic actions obviously remains our primary focus.

And we'll provide a further update on our progress at our full-year results, in February.

We'll now take questions.

The operator will explain the procedure, and introduce the first question.

Operator.

Thank you, Mr. Gulliver.

(Operator Instructions).

Raul Sinha, JPMorgan.

Just a couple of areas, please, if I may.

The first one is just to explore the weakness in the revenues and get a sense of how much of that is a step down versus just a weak quarter.

Would you expect any recovery in the wealth management business in the fourth quarter?

Related to that, clearly, last year in Q4, GBM had a really weak quarter.

Given that we are in November, I was wondering if you might be able to tell us whether you've seen a repeat of that weakness this year, as well.

So, that's my first question.

The second question is also slightly related.

I was wondering if you had seen any impact of your RWA initiatives on revenues.

I don't think there was any.

You talked about $400 million ongoing revenue impact, when do you expect to see that coming through on the revenue line, just the RWA initiatives on the revenue line?

Retail banking and wealth management had an extremely strong first half, and, in a way, has given back some of that extremely strong first half, as the Hong Kong/Shanghai Stock Connect took off and those equity markets rallied very strongly.

In a way, some of what we've seen in the third quarter, although it comes through the life insurance manufacturing reevaluation of the book, is effectively the same thing being reversed.

From an RBWM perspective, October, we've seen stabilization.

But we've obviously not seen a recovery back to the volume levels that you saw going through the Hong Kong and China market in the first half.

For global banking and markets, October has been a reasonable month, although probably erring towards the tougher side.

But you're right that the fourth quarter of last year was particularly weak for global banking and markets.

So far, there is not a sign of a repeat of that level of weakness in the October month.

Okay.

On RWA initiatives?

Yes, on RWAs, I think your read of it's exactly right, Raul.

So far, what we've seen is really in terms of the first half year we saw largely disposition of legacy [positions], which, as we talked back in June, would have de minimis impact in terms of revenues.

What we've seen coming through a lot in the third quarter is really improvement in terms of the measurement of risk-weighted assets in terms of improving the granularity recognition of collateral; reduction of [dispositions] with respect -- does have an impact in incremental risk charge through the markets business, for example.

Thus far, we have not seen a significant impact in revenues from risk-weighted asset actions that we're taking.

Now, obviously, the focus, as Stuart mentioned, is very much on maintaining momentum around overall risk-weighted asset reduction initiatives.

Quarter on quarter, we're going to see a little bit of a mix between dispositions of legacy assets; run down and close out of less profitable customer positions; improvements in the overall quality of granularity of data such as it relates to individual customer positions and how that's reflected through risk-weighted assets calculations.

And then, what is obviously more subject to -- really sits, in terms of final approval, in the hands of others, is any refinements to the models that we've got coming through from a regulatory perspective.

Okay.

great.

Thanks very much, guys.

Chintan Joshi, Nomura.

I've got two questions: one on RWAs, and one on trade finance.

If I can take the RWA first, you had a $5 billion increase from growth initiatives this quarter.

If that repeats next quarter, we're talking about $32 billion for the year.

That looks well below the run rate of the guidance.

Clearly, post the investor day, the market has deteriorated, macro has deteriorated.

I'm just wondering what kind of growth are you seeing?

Where should that $180 billion to $230 billion range be based down to?

And while we're talking about the RWAs, also, in GBM, if you could tell us, or generally across the Group, how much of the improvement has been from model changes versus actual run down of RWAs.

That's the one on RWAs.

Quickly, on trade finance, if you could just give us some color on trade finance volumes and margin trends across both GBM and CMB.

DBS, this morning, has reported quite challenged trends, so just wondering what you are seeing here.

Those are my two.

Okay, on RWAs, we talked about redeploying $180 billion to $230 billion.

And then, I think, at the last results update we said that we're more likely to be able redeploy $150 billion.

That remains the target.

We've got all of 2016 and 2017 to work towards.

What you wouldn't expect us to do is to be mechanically redeploying RWAs against a more challenged economic backdrop.

One of the concerns I'm sure that a number of people have is about LICs in Asia Pacific and a deteriorating economic environment; you, therefore, should take some comfort from the fact that the redeployment in this quarter has been quite modest.

But the $150 billion target doesn't change at all.

Iain, do you want to talk about model changes?

Yes, absolutely zero came through in terms of model changes in the third quarter.

As I mentioned a little bit earlier, Chintan, the vast majority of what was accomplished in the third quarter was really looking at individual positions on a customer-by-customer basis, and across different transaction types; and improving overall granularity of data, whether it was with respect to recognition of collateral and proper matching of collateral types across different categories of assets.

But there was nothing coming through in the third quarter in terms of model changes.

And, therefore, the changes in risk-weighted assets was a combination of running down customer positions and overall improvement of data quality by those same customer positions.

On trade finance, year-over-year nine months were absolutely flat in terms of revenues generated.

And in terms of the margins against that, they've remained largely stable over the course of the same period, Chintan.

As Stuart has mentioned, overall volumes we saw declining significantly, really, from 2013 through 2014.

But we've seen relative stability, both in terms of revenue generated and margins against that business over the course of this year so far.

Thank you.

Chira Barua, Sanford.

One question for Douglas on the domicile, if you're still on the call.

I just wanted to understand, it's a complicated move, totally appreciated, but what's taking longer than what you'd laid out at the beginning of the year?

That's question one.

The second one for Stuart.

Generally, on repricing across all your liquidity portfolios, given that, US rates, who knows whether it rises, doesn't rise in the next two or three years; same for sterling.

What is the repricing strategy across your excess liquidities that you have both in the consumer book, as well as your wholesale book?

And where are the areas that we should see that repricing go up?

I'm not sure anything's taking any longer.

We said in April -- sorry, in June, that we would hope to get an announcement by the end of the year.

We're still, obviously, halfway through that, so we've got another six, eight weeks to go before we get to the end of the year.

If we haven't made a decision then, because we're still analyzing information, or the Board wants more, we'll take whatever more time that is necessary.

I don't think we've slipped.

And, indeed, I don't think that the scale of the challenge or the work is different from what we envisaged back in April, and then confirmed in June, in relation to the areas that we're talking about.

We're taking this very seriously and doing the appropriate amount of work.

And it's underway, and we're halfway through.

Stuart?

Chira, going back to your question on liquidity, what you -- what we have seen within the European environment, particularly looking at negative interest rates, in the interbank space we have implemented charging for operating deposits sitting with us in the interbank space.

And that's been in place now for the better part of the last six months.

Broadly speaking across the portfolio, we're breaking down the overall level of our deposit franchise by type, as you would imagine; and then, understanding the underlying nature of the operating deposits that sit with us, both for corporates, but also within the financial institution space.

Our principal focus presently is within the financial institution space, and where we see habitually low, and, in certain instances, negative, interest rates, is ensuring that we either encourage those deposits to move elsewhere in -- well, namely, out of HSBC, or charge for those deposits.

In the euro area, it is clear that, that is already being done within the financial institution space.

We've not done that in the corporate space at this point in time.

And we're looking more widely across the business in terms of where similar practices should be adopted.

So, it's an ongoing dynamic review of deposits, in general; and, where appropriate, either, frankly, encouraging deposits to go elsewhere, or pricing such that there is a charge back to customers for us holding those deposits.

Just one thing I'd just add is that the mix of our book is different than some of our North American competitors.

In terms of volume changes, which you might look to see in future quarters, they're not going to be as pronounced as certain of the North American banks, because we have a larger corporate and smaller financial institution mix on our balance sheet than some of the North American banks do.

That's -- I appreciate.

Just a follow on, on the asset side, is there any big book that you're looking at in terms of repricing?

In the environment where you have hardly any loan growth right now, across the world, are they any --

Part of the whole RWA exercise is underpinned by a target return on risk-weighted assets.

Across global banking and markets, and CMB, and RBWM, all of the teams are hugely focused on any new business being written at returns on risk-weighted assets that hit those targets, and reviewing back books, to ensure that actually the fresh business lifts us to a overall return on risk-weighted assets that hits the numbers.

In CMB and global banking and markets, there's a ton of work that's going on, as part of the RWA exercise, to do just that.

Perfect.

Thank you.

What we don't have is a specific book of business which is at miserable returns, which creates a portfolio exit-type of opportunity.

It's kind of a very granular exercise that needs to take place client by client.

And, of course, part of that $400 million that we said we would lose in revenue from GBM reflects exiting low-return clients, because that's how you're freeing up the risk-weighted assets to redeploy them into higher return.

Perfect.

Thank you.

David Lock, Deutsche Bank.

Just a couple from me: the first one on the cost-to-income ratio, and the cost jaws, going forward.

Clearly, the outlook for revenue's changed since when you gave the investor update at June, and the cost jaws for this year won't be achieved.

But just looking further ahead, if the revenue environment stays weak into next year, is there more you think you can do on the cost side to offset that, beyond the things you've already outlined?

And then the second question, if I look on page 8 of your release it says that capital financing recorded gains from hedging activities.

I was looking in the data pack, and I couldn't quite see where those were, so just wonder if you could quantify those, and whether we should expect those to repeat.

Thank you.

As I mentioned a little bit earlier, David, the actions as it relates to costs within the firm is informed by an objective of post of jaws.

That is going to be informed by the revenue-generating capacity of the firm.

Should -- at this point, we've identified 90% of the $4.5 billion to $5 billion worth of saves that we've targeted, which, clearly, at June, when we talked about this through the investor update, was informed by a particular revenue outlook.

The fact that we've identified 90% is now executing against that, that is now good.

There's clearly more to be done in the space.

However, if the revenue environment is such that more is required to be done in that particular regard then that's what's going to inform the overall cost position of the firm: is the propensity to generate revenues is not necessarily a fixed dollar target that we established back on June 9.

But presently, our -- we're three or four months into this work.

We've clearly got a fairly challenging revenue environment in front of us, but we're very focused on, a, executing against the cost actions we've already identified; and b, ensuring that we've got operating flexibility within the firm to respond to revenue environment in which we're operating.

And then, if you take the capital financing question, that relates to basically hedging of credit risk.

We don't disclose who the names are that we've obvious taken credit default swap protection against, but it's a regular activity that we obviously do, and you'd expect us to do.

In fact, the gains from that particular hedging appear in the US, so they appear in global banking and markets in the United States.

Thank you.

Thanks very much.

Alastair Ryan, Bank of America.

Two, please.

One, the margin stopped going down.

Just is that a lead indicator it might start going up, or do you have to wait for rates to start moving to get that going?

And Hong Kong volumes quite weak in the quarter, uncharacteristically, and coincident with the slowdown that's going on there: is that coincident, or representative?

Thank you.

On net interest margin, Alastair, I would come back to Stuart's comments of a couple of minutes ago.

A significant part of the work that we're doing in terms of return on risk-weighted assets and risk-weighted asset repositioning is in terms of pricing against client business.

A significant part of that work is reduction of unprofitable positions, with a view to releasing the capital to redeploy it into repriced and more profitable business for the firm overall.

The interest rate environment we're operating in, although across different jurisdictions policy rates change from change to change, outside the major block of the Europe, I'd say the major blocks of euro, sterling and dollar, and that gives us some opportunity.

Broadly speaking, the revenue environment is fairly challenging for us.

An uplift in rates would clearly be beneficial.

We can't sit around and wait for that and, therefore, a significant part of the work in terms of risk-weighted assets and return on risk-weighted assets is the redeployment of some of that capital into better price books of business.

If you take Hong Kong, Alastair, in the nine months of 2015 the profit before tax in Hong Kong is actually up 6%.

And actually, it's higher in all of the global businesses.

Just volumes, Stuart.

Sorry, not -- the profits are good, but the volumes.

The fall in RBWM revenues, basically, -- so let's do the RBWM first, and then I'll talk about the broader sectors.

The fall in RBWM revenue from the second quarter's mainly due to the particularly strong equity market performance and high stock market turnover in the second quarter.

Clearly, the market was weaker in the third quarter, and investor sentiment has been weaker, and that's how you see that kind of drop.

In wealth management products and so on, yes, absolutely, demand has softened in the third quarter versus the second quarter.

However, if you look at against the prior year, there's still good growth in net interest income from loan growth.

And actually, net fee income was, in the third quarter, in line with each of the quarters of 2014.

What's generally the case, though, is Hong Kong GDP is flowing, and has been some impact from Mainland China on Hong Kong.

Retail sales are sluggish in Hong Kong.

A lot of retailers are using discounts to maintain volume.

The growth in tourist arrivals has continued to slow.

And, obviously, since we're all aware of the fact that world trade has slowed up, and Hong Kong's a massive port, that clearly has some impact.

But, as you've seen, we've actually maintained our trade, trade receivables and finance revenue.

We've grown our market share, which has offset the fall in volumes that's taken place there.

So, to be honest with you, I think it's a mixed picture.

I don't think you can say with any clarity, at this moment in time, that the volumes lead to future drops in PBT, but there's definitely a mixed picture there.

Thank you.

Rohith Chandra-Rajan, Barclays.

A couple from me as well, please.

The first one was just on the RWA reduction.

If I look at the analysis of the reductions in the quarter, about one-half came from exposure reductions, and the other one-half from model refinements and process improvements.

And, Iain, you mentioned that there's been no model changes put through to date.

I'm just wondering how we should think about those main elements of RWA reduction over the coming quarters?

It's been fairly stable, actually, in terms of progress in the three quarters to date, so just wondering how we should think about that, going forward.

And then secondly, just in terms of the income recognition for BoCom, looking at the carrying value versus market value.

if there's any risk to that going forward, or how you perceive that.

Thank you.

On BoCom, first of all, at the half year we had headroom of about $1.5 billion between value in use and the carrying value.

That has declined by about 50%, principally because the carrying value has increased as we continue to recognize our share of earnings through equity-accounting methodology in the book.

So, that's down to about $700 million, $800 million worth of headroom.

I think the value-in-use model, obviously, is a discount in cash flow model which is susceptible to growth rates, loss rates, discount rates, and such things as we'd apply to BoCom.

To the extent that, that remains reasonably stable or declines, and while we continue to accrue carrying -- accrue our earnings, our share of earnings in the carrying value, then, clearly, headroom is likely to diminish.

One of the reasons that we continue to provide disclosure round this is that it continues to be a risk to the reported earnings of the Group on a go-forward basis.

It's assessed on an ongoing basis, and we'll continue to provide regular updates of that through the quarterly numbers.

As it relates to overall risk-weighted assets, again, we've got a target out there of $290 billion reduction by the end of 2017; on an FX-adjusted basis that's $275 billion.

We're going to see progress which will not be entirely linear.

In the first -- in the second quarter, we saw some significant reductions coming through the incremental risk charge.

And that was as a function of reducing some of the positions as it related to the calculation of incremental risk.

Another factor that I talked about was just improving the overall alignment of collateral values to individual customer positions, and overall improvement of granularity of data quality in terms of recognizing by individual positions, for example, residual maturities, as opposed to maturity at time of origination.

Each of those things have an impact on the credit conversion factors that are reflected within our models.

So, though there are no model changes in terms of regulatory changes within those models approved by regulators, we obviously continue to, on a position-by-position basis, improve the overall quality, granularity, and alignment of the data.

And that has helped us realize some of the improvements in risk-weighted assets in this quarter.

But I think what you're going to see is not an entirely linear progression against this.

When it comes to disposing of positions, that's informed by market conditions; it's informed by readiness of some of the counterparties that we're working with.

And Stuart mentioned a little bit earlier how just yesterday we signed a transaction for the disposition of approximately another $2 billion worth of unpaid principal balances through the CML portfolio, which will release a little bit more than $4 billion worth of risk-weighted assets.

But these are the kinds of transactions that we're working on, on an ongoing basis.

Unfortunately, we can't assure absolute linearity in terms of progress against the target, but there's a very significant pipeline of items we're working on here, and confident of hitting the target.

What I'd also just say is please don't look for it to be linear; but also, because it won't be linear, don't assume that we've just picked up the low-hanging fruit and that from here on in it gets harder.

We'll deliver the $290 billion, $275 billion FX-adjusted (inaudible) by the end of 2017.

Thanks very much.

Michael Helsby, Merrill Lynch.

Just two questions from me, please.

Firstly, thanks, you gave us the numbers in costs for Brazil and Turkey in the third quarter.

Can you just give us the revenue and bad debt number as well, please?

And then, secondly, I just want to come back to costs.

Iain, obviously, you are flexing the costs, depending on the revenue outlook.

But you hit your $7.9 billion of costs ex-Brazil and Turkey in Q3 and, clearly, that's not that far away from what you're targeting in 2017.

There's been quite a lot in the press about what we'd probably call remedial cost savings in the third quarter.

Based on your revenue outlook as you exit Q3, is that $7.9 billion a good baseline for what we should expect in Q4, and then, again, annualizing into 2016?

Or should we be expecting a lower run rate from the $7.9 billion?

Thank you.

Thanks, Michael.

One of the things that, hopefully, we continue to try and be very, very clear about is the fact that the exit run rate is recognition of the fact that we need to continue to invest in this business to ensure the growth of it; as well as recognizing that across many of the markets in which we operate is we've got significant inflationary pressures.

Therefore, although we're sitting on that run rate of $7.9 billion ex-Brazil and Turkey at the end of the third quarter, we've still got a great deal of work to do in terms of taking costs out of this business and improving the overall operating flexibility and leverage of the business in what is clearly a difficult revenue environment.

The cost program's going to be informed both by the targets that we've already set, positive jaws, and, therefore, the revenue that the business can generate.

And again, we've got, as we mentioned back in June, a continued investment program against the global standards, and the wider regulatory compliance program.

Again, we don't expect progress to be absolutely linear in this regard.

But what we absolutely do focus on, and intend to accomplish, is a progressive reduction in the overall run rate of the operating expenses on an adjusted basis.

So, I can't say more than that.

Obviously, in the fourth quarter, Michael, we've got the bank levy that always shows up to kind of stuff up the run rate, but that's something that we spike out very clearly for you to take a look at.

But, look, our focus is on moving the run rate and the costs down over each succeeding quarter.

In terms of Brazil, let's see, overall PBT for the -- sorry, the variance on the quarter, we were PBT, this is on a year-to-date basis, $142 million better than the year to date in 3Q 2014.

That's improved by a $90 million uplift in income, broadly across net interest income, fee income, and trading income.

Loan impairment charges improved to the tune of some $53 million.

And costs were pretty much flat in Brazil half over half.

On Turkey, the numbers don't really matter.

Okay.

Have you got the absolute numbers, sorry, Iain, for the revenue in Brazil and Turkey, combined?

Not to hand, Michael.

No, okay.

We'll get them out.

Thank you.

Cheers.

Manus Costello, Autonomous.

I have a couple of questions, please.

I wanted to follow up, first of all, on the BoCom point that you made.

Iain, I know the capital treatment is somewhat different in terms of the way you accrue profit into capital.

But if you are forced to derecognize BoCom profits, it will have a material impact on your payout ratio for next year; or, indeed, this year, if it comes through this year.

I just wondered how you would think about that, going forward.

Would you disregard it, focus on a different version of the payout ratio?

Or would you just have to question the progressive dividend policy in the light of that?

Yes, Manus, honestly, I don't think it's got any -- it, clearly, mathematically would impact, because our overall reported profits would be down.

But in terms of impact on capital, it is absolutely de minimis.

It's actually slightly dilutive to the overall returns of the business.

The dividends that we receive run to a few hundred million, so it's not particularly significant from an overall cash flow perspective for the Group.

And de-recognition is not exactly the right term, but the change in the accounting treatment we do not think for a second would adversely impact dividend flow.

It would have no impact on cash.

And actually, it will have no impact on capital, because we don't believe that the regulatory treatment of BoCom will change.

So, what we're talking about is an accounting change.

If you assess the payout ratio from an accounting perspective, yes, the payout ratio would go up; however, from a capital impact perspective, it has no bearing whatsoever.

So you're comfortable, in other words, running with a high headline payout ratio if you think it's not --?

If that's the contributing factor, yes.

My second question relates to your slide on China.

Thank you for including this additional detail, slide 15.

You talk about $96 billion of Chinese exposure: can you confirm -- I'm not sure whether that includes the cross-border exposure from Hong Kong?

I don't think it does.

It doesn't, Manus.

What we've included here is, as the slide says, the overall [eight bap] view in the bottom left-hand corner of that, which is that which sits in the [eight bap] balance sheet.

And then, we've included that which sits on the China balance sheet.

There is a further sum.

In total, our Group exposures to China on a by country-of-exposure basis is about just over $140 billion in total at the end of third quarter.

And what we've shown here is a breakdown of that which sits within the Chinese balance sheet, the legal [entity] balance sheet, and that which sits within the wider Asian exposures, which clearly represents the majority of our exposures to the Chinese market.

And does that -- in the way that you manage that cross-border, that -- did you say $140 billion was the number at the end of Q3?

Just over, yes.

Is that any different to the way you manage this $96 billion, the delta between those two?

Or do you manage it all in the same basis?

It's the same people that are managing it.

Yes.

Right.

Okay.

Thank you.

Stephen Andrews, UBS.

A couple of questions from me, please.

Firstly, just back on the Asian retail business, I think everyone was expecting GBM to be weak, and a certain amount of weakness in Asian retail, but it is quite a bit weaker than what we were looking for.

From what you were saying earlier on, it does sound like there were some one-off mark-to-market impacts in the insurance and life business.

Can you just quantify those for us?

From the numbers, it looks like it could be a couple of hundred million, maybe $200 million, $300 million, so it could be material.

So it may not repeat as we go into Q4.

Yes, the impact coming through retail bank, wealth management, the insurance businesses in the third quarter is -- which is the flow through of the valuation through to those policies that we've got with customers where there's discretionary participation features, about [$214 million] of impact in the quarter.

Okay.

And we shouldn't expect that to repeat, that should just pop back to zero --?

Well, it is a function of the valuation of the stock market.

So, to the extent that we've got stability in the stock market, then I think it would be fair to assume it doesn't repeat.

If you were to see a significant uptick, we'd get some lift from it; if you saw a significant downtick you'd get another adjustment to that.

It is very much related to the performance of the equity market.

Okay, that's clear.

Thank you.

The second question I've got, just a point of clarity, really.

In the adjustments this time we've got this $165 million cost to achieve has popped in related to your restructuring.

And then, on your slide 5 you've also got your change-the-bank, the $952 million, in the core costs, if you like.

Can you just, I imagine that $165 million is probably going to get a lot bigger as we go into next year on a quarterly basis, give a bit more clarity on what's going into the $165 million, and what's going into the $952 million?

So when we are looking at underlying, we seem to be going back to underlying-underlying again.

Should --

No, we're not.

Give me conviction that we can get -- that, that $165 million really should be coming out.

Okay, to be clear, the basis of presentation here is the adjusted versus the reported.

And there is extensive detail provided on the -- what the reconciliation between the two in the appendix in the presentation.

If you've got any -- if you want to build a bit more detail in that, absolutely happy to take you through that detail.

In terms of the cost to achieve, perhaps the closest approximation, I'll give it to you in accounting terms, is restructuring charges.

To the extent that we do reductions in force, for example, takes to the extent that we do elimination of some of the programs.

So, one of the examples that Stuart used earlier was the elimination of certain software applications, which we're doing through our operations team.

And the extent to which there's any software that's been capitalized sitting in our balance sheet, a write-off of that, for example, would fall within the costs to achieve.

To the extent that we terminate leases in any of our facilities around the world as we resize the footprint for the Group, that would fall within the cost to achieve.

What sits within -- what we have done across the cost base is to show what is run-the-bank.

So, basically, showing up; switching on the lights each day; people showing up to work and running the place day-in, day-out, that's run-the-bank.

And we've, obviously, split that in terms of front office and back office.

In terms of change-the-bank, it is the ongoing investment and improvement in the operating capability, whether it's expenditures to update operating systems through the regulatory compliance space; through financial reporting space; through the credit management space; through customer service space.

So the change-the-bank is just the ongoing, if you like, ever-greening that we do of the organization and normal investment that we would make to improve the operating efficiency of the Bank.

The change -- the cost to achieve could more appropriately be described as restructuring charges.

And what you would normally see falling into the cost to achieve are restructuring charge-type expenses.

Okay, thanks.

So, similar to the [$117 million] of restructuring and other costs, we could just lump those two together?

Sorry, what are you lumping together?

Well, on your slide 16 you've got the cost to achieve and then restructuring and other related costs?

Yes, that's correct.

That's correct, yes.

And is it those two together that were the $4 billion cost to achieve in total, is that fair to say, over -- that you laid out at the strategy [day]?

No, the cost to achieve that we set out were $4 billion, $4.5 billion against the cost -- our overall cost reductions of $4.5 billion to $5 billion.

That's the cost to achieve, that's what we will report.

Okay, great.

Thanks.

I'll come back offline, if I've got other questions.

Okay.

Ronit Ghose, Citigroup.

I just wanted to look back to asset quality.

Obviously, your LIC charges this quarter were generally low, with exception of the UAE.

Is there any color you can give us on balance sheet asset quality trends; or any numbers, for that matter, in terms of, particularly in Asia, what you are seeing in Q3 versus Q2, either in numbers, or qualitatively, please?

On the Middle East, is this a couple of businesses in the UAE in the mortgage book?

Or do you think there is more to come in the general region in your MENA portfolio for higher LICs ahead?

In terms of MENA specifically, we've got an adjustment to the overall provisioning level for the mortgage book where there is, at an industry level, some issues with respect to perfecting collateral with respect to those mortgages.

What we've actually done is provide for that portfolio as if it was an unsecured personal lending portfolio.

Our view -- whilst, at the same time, clearly doing the work to try and improve the overall quality of documentation and perfect collateral.

So we had what, we believe, a one-time adjustment to reflect that.

And then, we had a couple of individually assessed credits within the United Arab Emirates, which are not particularly related to any individual sector.

I think it would be fair to say, when you look at overall exposure to commodities, and specifically oil and gas, there is a heightened level of monitoring coming through the risk teams, looking at the impact of lower prices -- at the lower oil price over an extended period of time.

And although we're not seeing credit costs coming through to any significant degree in that sector presently, then, clearly, Middle East and North Africa, with their concentration of oil-producing countries, is something that we would look a little bit closely at, and keep a very close eye on.

But these were really just two individually assessed credits that were subject to adjustment at the third quarter.

Thanks for that.

Could you just comment a little bit further, just switching to Asia, any color you can give us on balance sheet trends?

Is it possible to give us the numbers in future, the 90-day overdue, or any kind of balance sheet impairment number?

I think the information that we provide in terms of loan impairment charges trended out over an extended period of time, I think, provides a reasonably good illumination of what's emerging in terms of credit quality.

Clearly, from disclosures that we provided at the half year and the full year, it breaks down the overall allowance against the loan book across the different geographies.

And that disclosure will clearly be there at the fourth quarter, again.

The overall asset quality across the portfolio, with the exception of the Middle East and North Africa that we just talked about, is remaining very stable.

You saw loan impairment charges in Asia trend down very slightly in the third quarter.

North America ticked up just a little bit.

And that was more a reflection of the fact that we had releases against the CML portfolio in the same quarter last year versus smaller provisions in terms of that particular book of business this year.

We've seen overall credit quality in Europe and the UK remain very stable to improving slightly.

Certainly, in Latin America we saw some improvements in credit quality.

Again, that's largely reflected that the third quarter of last year was slightly heavier from a provisioning perspective, particularly in the commercial banking space, when we looked at the home builders in Mexico.

I think, when you look across overall asset quality by the main regions in which we operate in, the quality remains very stable.

There is in this environment, as you'd expect, a heightened scrutiny and review of assets.

But when we look across that which we move on to watch and worry lists, again, what we're moving on to watch and worry lists within the quarter has remained fairly stable.

Thanks for that, Iain, it's really clear.

I should say, compared to five or six years ago, your disclosure is very helpful, and it's actually much easier to track your bank than it used to be, so this is not meant as a criticism.

But I think in the next year or two you're going to get so many more questions on the asset quality side; I think you could just preempt them by giving us more balance sheet disclosure quarterly.

But it is a lot better than in the past.

So, thank you for your comments today.

Appreciate it.

Thank you.

Martin Leitgeb, Goldman Sachs.

Just one follow up on asset quality, to start with.

I was just wondering whether you could comment on asset quality trends, as you have seen them, within your commodity book over the quarter.

Then, and more broadly, on the UK ring-fence, with the consolidation paper out, I was just wondering whether your views or cost estimates with regards to setting up a UK ring-fence have changed?

Thank you.

On UK ring-fence firstly, no, no change.

We set out an estimate of between $1 billion and $2 billion.

That remains the expected range to implement the ring-fence bank.

The consultation document that came out a couple of weeks ago has not changed that at all.

The reason for the width in that range is, frankly, just given the complexity from an operational perspective, particularly when focused on separation of technology between the ring-fence and the non-ring-fenced ban; and then, the impact in terms of sort code alignment between the ring-fence and the non-ring-fence bank.

But, no, overall, that program continues to progress well.

If you're asking, Martin, in terms of the concerns we had about whether it made sense for us to own the ring-fenced bank, I think the recent speech that Andrew Bailey gave at Mansion House has dealt with our concerns very satisfactorily, where he indicated that the ring-fenced bank strategy, risk appetite, CEO, and indeed dividend, would all be available to be controlled.

The dividend, obviously, subject to PRA satisfaction about the amount of capital that the ring-fenced bank had been holding, would then be available to dividend back up to its parent.

The strategy and risk appetite of the ring-fenced bank would be able to be controlled by its parent, and the CEO of the ring-fenced bank would be able to report to both its Board, but also its parent.

Those concerns that we had about whether we would effectively be an asset manager of the ring-fenced bank, i.e., just an equity owner, have been dealt with completely satisfactorily by the remarks made by Andrew Bailey.

Going back to your commodities question, the exposure to commodities within the Group has remained very, very stable over the course of the last couple of quarters.

We've had one or two additions to the watch worry list, but even those we're very close to the customers; we're reasonably confident about the overall quality of that book.

And when we look at the Group's overall exposure to commodities, it's a very, very small proportion over the overall balance sheet.

But again, it's an area which, as I think everybody would rightly expect, gets heightened scrutiny and monitoring from our risk teams around the world.

Great.

Many thanks.

Chris Manners, Morgan Stanley.

I had a quick question for you on capital, if I may.

Good capital build in the quarter, another 20 basis points, taking it to 11.8%; that means you really are almost knocking on the door of your 12% to 13% range.

Just maybe you could share with us where in that range you would like to be.

And if you -- I suppose, the growth opportunities maybe aren't quite as good as we'd hoped in June, and, basically, if there's opportunity for capital management if you get above that 12%.

Or are you going to be building to 13% on the basis that we think that [sometimes] with the trading book and operational risk and the high hurdle and the stress test, and all that sort of stuff, might put you towards the top end of the range?

Because it just looks like you're almost there.

I'm just trying to work out where we would want to sit in that range.

Thanks.

Really, no change in terms of guidance versus the last time we spoke on this, Chris.

No particular urge to be at the top end of the range, but certainly we'd like to be above the bottom end of the range.

And, I think, many of you have commented, accurately, that on a pro forma basis the disposal of the Brazilian business would take us into the bottom end of that range.

Based on this quarter's close out, it would put us round about 12.2% to 12.3%.

And frankly, sitting somewhere around the middle of that range, we think, given some of the prevailing uncertainty within the regulatory space, is the right place to be for the moment; to the degree that, that uncertainty, hopefully, clarifies over the coming months, and we would expect to hear a little bit more about the fundamental view of the trading book by the end of this year.

However, the time of its implementation and what that implementation would be, I think, still remains very unclear.

And equally unclear is the situation in operational risk, which we've seen move back a little bit over the course of the last few weeks.

And, obviously, our view -- or revision to the standardized approach, we also see being at 2018, and beyond.

And certainly, the outcomes of it being very, very uncertain at this point in time.

So, notwithstanding the fact that the teams have done a great deal of work modelling out what the different consultations and QISs have alluded to in terms of providing a meaningful insight as to what the implementation would mean for the Group, it's too early to say so.

Got you.

So if we built the 12.5% pro forma, and then we don't get the growth opportunity that we were hoping for from the Pearl River Delta and ASEAN, etc., then what do you do; i.e., you would -- because you would either continue to build capital above the midpoint of your range or give it back?

I was just thinking about how that works.

So it looks like that trajectory that you're on is to actually build through 12.5%.

I think we'll cross that bridge when we come to it, shall we?

I think what we've laid out today, Chris, is that we remain committed to the realizing $290 billion worth of saves from risk-weighted assets; as Stuart mentioned, committed to redeploying $150 billion plus of the capital associated with those risk-weighted assets into higher returning businesses between now and the end of 2017; very focused on managing down the overall cost position of the Group in creating greater operational flexibility in that regard.

And if that all adds up to higher capital precision then, I think, we will address that through distributions to shareholders as and when regulation provides clarity; and, obviously, subject to approval from the PRA.

And the way we have constructed this is to get an ROE of 10% with a CET1 between 12% and 13%.

And you'll have seen, in this quarter, that we had a return on equity of 10.7%, and an ROTE of over 12%.

So, between 12% and 13%, or right up to 13%, we're still trying to run the business so we've got an ROE of 10%, if we're sitting with a CET1 of 13%.

As Iain says, of course, the -- it depends on what the regulatory environment is; it depends on our opportunity to redeploy.

And if the regulatory environment is as it is and there isn't an opportunity to redeploy then we will return it.

Super.

Okay.

Yes, no, that makes perfect sense.

Thank you.

This is our last question, operator.

So, time for one last one, please.

Chintan Joshi, Nomura.

Just quickly, on slide 6, going back to the costs, you've shown us $30.2 billion rebased cost in 2014.

And if I look at the current run rate, you're running at $31.8 billion.

That's a 5% increase.

I'm just trying to split this into cost inflation and other items, like regulation, that you call out from time to time.

I just want to get a sense what is underlying wage inflation here.

Underlying wage inflation, Chintan?

Hopefully, it's coming down due to the kind of environment we are in, but still it looks like 5% increase.

Just wondering what wage inflation there would be.

Yes, for the nine months, overall inflation that we factored in was about -- well, not factored in, calculated, was about $500 million on a nine month-over-nine month.

And the significant majority of that is coming through wages.

Okay.

Thank you.

Okay, thank you very much.

That brings the call to an end.

Thanks, everybody, for joining the call.

Thank you.

Thank you, ladies and gentlemen.

That concludes the call for HSBC Holdings plc earnings release for 3Q 2015.

You may now disconnect.