滙豐控股 (HSBC) 2016 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the analyst and investor conference call for HSBC Holdings PLC's earnings release for third quarter 2016.

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.

Thanks very much.

So good afternoon from Hong Kong, morning in London, and welcome to the 2016 HSBC third quarter results call.

Iain's with me here today in Hong Kong.

Adjusted profit before tax was $5.6 billion, up 7% on last year's third quarter, with increases in all four global businesses and four out of the five regions.

Reported profit before tax of $843 million included the impact of the disposal of our operations in Brazil, changes in the fair value of our own debt and cost to achieve.

Our global universal banking model generated higher adjusted revenue than the same period last year and our cost reduction programs continue to reduce our operating expenses.

This produced positive jaws of 5.6% for the third quarter and positive jaws of 1.5% for the first nine months of this year.

Our global banking and markets business had strong adjusted revenue growth in the quarter, with market share gains in debt capital markets globally and rates in credit in Europe.

We also achieved one of our highest rankings in market shares for global cross-border M&A.

In principal retail banking wealth and wealth management, performance was good, mainly due to the impact of stock market movements on our insurance business in Asia.

Commercial banking revenue remained stable as higher balances in global liquidity and cash management helped to mitigate the impact of lower revenue from trade finance.

And we also increased market share in a number of key markets in international product areas, including trade finance both in Hong Kong and in Singapore.

Our loan impairment charges were lower than the second quarter, but higher than last year's third quarter, due to increased charges in retail banking and wealth management in Mexico and small specific increases in Hong Kong and mainland China.

Following the change in the regulatory treatment of our investment in Bank of Communications, our Common Equity Tier 1 capital ratio increased to 13.9%.

This is another action forming part of our ongoing capital management of the Group that reinforces our ability to support the dividend, to invest in the business and, over the medium term, to contemplate share buybacks as appropriate.

It also provides us with a significant capacity to manage the continuing uncertain regulatory environment.

Including the impact of the Brazil disposal, we generated a further $57 billion of risk-weighted asset savings in the third quarter, which takes us more than 80% of the way towards our RWA reduction target.

And finally, we completed 59% of our $2.5 billion equity buyback as at October 31.

We expect to finish the program by the end of 2016 or early in the first quarter of 2017, depending on market trading volumes in the fourth quarter.

Iain will now take you through the numbers.

Thanks, Stuart.

Good morning, good afternoon.

Looking quickly at some key metrics for the year-to-date, the reported return on average on the shareholder equity was 4.4%.

The reported return on average tangible was 5.3%, and on an adjusted basis we had positive jaws of 1.5%.

The movement in jaws was due to a 4% reduction in adjusted operating expenses, which exceeded a 2% fall in adjusted revenue in the first nine months of the year.

Slide 4 takes us from reported to adjusted.

For the purpose of comparison throughout the presentation, the adjusted numbers exclude the operating results of our Brazil business from all periods.

Reported profit before tax of $843 million for the third quarter included a $1.7 billion loss on the disposal of Brazil, a $1.4 billion adverse fair value movement on our own credit spread, compared with a $1.1 billion favorable movement in the third quarter of last year.

$1 billion of cost to achieve related largely to technology upgrades and optimization programs, and $456 million related to UK customer redress, of which $439 million related to payment protection insurance.

Allowing for significant items, results on an adjusted profit before of $5.6 -- $5.6 billion.

You'll find more details on these adjustments in the appendix.

The remainder of the presentation focuses on the adjusted numbers.

The next few slides will provide a rundown of our performance in the third quarter.

Adjusted profit before tax was $351 million higher than the third quarter of 2015, due to increased revenue and reduced costs.

And as Stuart said, profits were up in all four of our global businesses and in every region, except North America.

The decrease in other included additional interest payable on our debt and intra-Group adjustments, which are largely offset within the global businesses.

Slide 6 analyses revenue which was up 2% in the third quarter, but down 2% for the year to date.

In principal retail banking and wealth management, revenue was $396 million, or 9% higher than the third quarter of 2015.

This was mainly due to a $309 million increase in wealth management revenue, arising from much improved market conditions in insurance manufacturing in Asia when compared to last year.

Current account and savings revenues also increased by $76 million, primarily due to higher deposit balances and wider spreads in Hong Kong, Mexico and Argentina.

We also grew lending volumes in Hong Kong, the UK and Mexico.

Commercial banking revenue was broadly unchanged, in spite of the continuing slowdown in global trade, as higher balances in global liquidity and cash management helped reduce the impact of lower revenue from trade finance.

Commercial banking revenue for the year-to-date was 2% higher than the same period in 2015.

Client-facing global banking and markets and balance sheet management revenue was up by $395 million, or 10%.

This was driven by increases in market share and improved client flows in our fixed income businesses.

Revenue also rose in principal investments from higher gains on disposal.

Slide 7 covers loan impairment charges, which were $132 million higher than the third quarter of 2015, but $207 million lower than this year's second quarter.

This reduction was mainly in global banking and markets in the United States, as the second quarter included a significant specific charge in a mining-related exposure.

There's a detailed overview of our oil and gas, metals and mining, UK lending and Mainland China exposures in the appendix.

Adjusted operating expenses were $266 million, or 4% lower than the third quarter of 2015 and broadly unchanged from the second quarter of 2016.

Operating expenses for the first nine months were $889 million or 4% lower than the same period last year.

We achieved this reduction whilst also absorbing inflation, and continuing to invest in regulatory programs and compliance.

We delivered $649 million of cost savings in the third quarter, which was $178 million more than we delivered in the second.

On a run rate basis, we've now achieved more than $2.8 billion of cost savings and we're on track to achieve the top end of our cost savings target.

The right-hand side of slide 9 gives you a sense of where these savings are being achieved.

Slide 10 breaks down adjusted profit for the year to date by global business and geography.

Adjusted profit before tax was down 6% with the same point last year, due to lower revenue and higher loan impairment charges but it was largely offset by good progress in costs.

The effectiveness of our cost reduction programs means that we've achieved positive jaws of 1.5% for the nine months, in spite of the tough revenue environment.

Turning to capital, the Group's Common Equity Tier 1 ratio was 13.9% on September 30, compared with 12.1% at the end of the second quarter.

This increase reflected the disposal of the Brazil business, completed on July 1 this year, profit generation in the quarter, and the impact of a change in the regulatory capital treatment of our 19% investment in BoCom.

It also includes the full impact of our buyback program.

The BoCom treatment change from proportional consolidation to a deduction from capital, subject to regulatory thresholds.

This resulted in a $121 billion decrease in net reported risk-weighted assets related to the BoCom investment and a threshold deduction from capital of $5.6 billion.

This raises our reported Common Equity Tier 1 ratio by 104 basis points.

Total risk-weighted assets reduced by $178 billion in the third quarter.

We generated a further $57 billion of risk-weighted asset reductions in the third quarter, bringing total reductions for the year so far to $105 billion, excluding the impact of the change in the BoCom treatment.

$40 billion of reductions came from the sale of Brazil, $7 billion from global banks and markets, $3 billion from our CML runoff portfolios, and $7 billion from commercial banking.

The total reduction since the start of 2015 now stands at $229 billion, around 45% of which came from global banking and markets.

This takes us more than 80% of the way towards our target.

Slide 13 shows Group return metrics.

The return on average ordinary shareholders' equity was 4.4% and the return on tangible shareholders' equity was 5.3%.

Both of these are significantly down compared to the prior year, primarily reflecting the adverse movement in significant items of $7.5 billion.

Excluding significant items and the bank levy, return on equity would stand at 8.3% and return on tangible equity at 8.8%.

I'll now hand back to Stuart.

Thanks.

Slide 14 shows the progress we've made in implementing our actions so far this year.

As you've already heard, our risk-weighted asset reduction, the cost-savings programs continue to make good progress in the third quarter and we remain confident of hitting both targets.

Mexico also had a good quarter.

Adjusted profits more than doubled compared to last year's third quarter, driven by higher lending and deposit balance across our retail and wholesale businesses, and increased synergy revenue.

And we also captured significant market share in personal loans and mortgages.

The continuing low interest rate environment means that the principal US business won't achieve the target we set out at our 2015 investor update.

However, good progress has been made on costs, with positive jaws of 6.7% for the first nine months of this year.

We've also sold around $900 million of legacy CML assets in the third quarter, another tranche of $900 million at the start of October.

And we expect to dispose of all remaining CML legacy assets by the end of 2017, subject to market conditions.

Asia contributed 68% of Group adjusted profits in the third quarter and 66% year-to-date.

Adjusted profits were up by 14% in ASEAN for the first nine months and insurance manufacturing new business premiums and assets under management in Asia both continued to grow in the third quarter.

We also achieved one of our highest-ever rankings for China outbound mergers and acquisitions.

Our transaction banking continued to recover from the difficult first half, with revenue for the year to date now broadly level with the same period in 2015.

Increased balances in global liquidity and cash management helped to grow its revenue by 6% for the year to date.

Trade revenue remained under pressure, but we continue to make market share gains in terms of the world's biggest trade centers.

We also remain the number one provider for offshore RMB bonds and public sector onshore bonds.

In August, we acted as joint bookrunner and joint lead underwriter for both the first ever Panda bond issued by a European sovereign and the first ever special drawing rights bond to be settled in RMB.

It's been a good quarter in what remains challenging operating conditions.

The revenue environment continues to be difficult, but we're delivering on costs and have positive jaws for both the third quarter and the first nine months of the year.

Our global universal banking model continues to perform well.

And we're confident of our ability to sustain the annual dividend at current levels for the foreseeable future, through the long-term earnings capacity of the business.

We'll now take questions.

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

Thank you Mr. Gulliver.

(Operator Instructions).

Alastair Ryan, Bank of America.

Good afternoon.

I'll start with the predictable one, which I'm sure you'll get again in two or three waves, on capital.

I think my takeaway at the half year was you become sovereign in the Group, probably at the lower end of a 12.5% to 13% range.

Now, net of accounting change today, and bearing in mind I'm sure you don't know any more than we do about Basel IV, should we still think about that as a --?

That bit we can agree on, Alistair, yes.

That bit, we can definitely agree on.

Yes.

But should we think that 12.5% to -- low end of 12.5% to 13% is still more or less the way?

Or has that moved?

And the second thing, loans and advances, so slide 21, can you see positive momentum there at present, net?

Certainly, on a constant-currency basis -- I know sterling keeps going down -- or is the third quarter fairly representative of where things net off at present, which is broadly flat?

Thank you.

Okay, thanks, Alastair.

Okay, capital first of all.

I think the question you're asking is do we still see the appropriate range for us, from a Common Equity Tier 1 perspective to be in -- to be in the 12% to 13% range?

And the answer to that is yes, but I think as we said at the half year, probably in the upper half of that range, between 12.5% and 13%.

So, there's no real change in that regard.

Obviously, the strength of the capital ratio contributed by the disposal of Brazil and the change in the regulatory treatment of BoCom certainly helps us to a very significant degree.

I think it provides us with certainly flexibility in terms of dealing with any uncertainties that may come out in January from -- well, hopefully will be clarified in January when we get the feedback from the governors and heads of supervision on the Basel III revisions.

But I think again, that 12.5% to 13% range, medium term, is absolutely the right place for us to be.

And where we sit right now gives us -- affords us some flexibility, certainly with respect to sustainability of the dividend and certainly with respect to dealing with any undesirable, shall I call it -- but uncertainty that emanates from Basel III.

I think as far as loan growth goes, on a constant-3currency basis we've seen progress, albeit very slow rates of progress, but progress in the loan book over the course of the last few quarters.

If you looked at some areas of strength, mortgage lending in the UK -- we've expanded the use of the broker channel quite significantly.

The underwriting decision certainly still sits absolutely with HSBC.

But in terms of sourcing appropriate customers for HSBC the broker channel's helping significantly there.

We continued to grow the book in SME.

The commercial banking business moved ahead quite nicely in the UK in the first nine months of the year.

We continued to build the book in Mexico as we rebuild that business, both in unsecured personal lending mortgages as well as within the CMB business.

And in Hong Kong also we've seen some reduction in lending due, principally, to repayment.

We saw more active levels of activity in the third quarter than we'd certainly seen in the first half of the year.

So overall it's not necessarily cause to jump up and down for joy, but it's a fairly constructive environment and we continue to progress the book, certainly in line with the risk appetite.

Ad I think we've got more -- well, we've certainly got the capacity to do so, and continue to pursue opportunities across the market, some of which I've mentioned here.

Thank you.

Thanks, Alastair.

Thanks.

Rohith Chandra-Rajan, Barclays.

Hi there.

I have a couple, as well, please, if that's okay.

Again, sorry, slightly predictably, just to come back on the capital.

Really just following up on Alistair's question.

Your position in this quarter does seem, I guess, more cautious than certainly my understanding coming out of the Q2 results.

And I was -- with the capital ratio obviously clearly very strong now at 13.9%.

So is there any change in view on -- in terms of the scale of potential regulatory uncertainty or anything else that we should be bearing in mind when we think about medium term capital returns?

So that would be the first one.

Then just on RBWM, particularly in Asia, I guess a couple of things -- I don't know, just one, the wealth management pick-up, obviously strong year on year after a weak Q3 2015, but also gaining momentum on Q2.

Just wondering how we should think about that, going forward?

And then also the improvement in the margin there, in terms of the reduction in some of the funding costs.

You talk about current accounts in particular.

Is there any more to go there?

Thank you.

I think there's actually -- other than the fact that we've executed a couple of big capital actions -- that there's really no change, either with respect to the extent of uncertainty in the regulatory front or any change with respect to what Stuart talked about at the half year about our outlook on dividends and our outlook on the propensity to do buyback.

So the activity in the third quarter was certainly encouraging, but don't read anything into it in terms of us thinking that we've got an any worse regulatory environment than we were informed about -- were informed about at the half year.

So I think our attitude on the dividends and buybacks is exactly as it was at the half year and I certainly wouldn't talk about any greater degree of uncertainty on the regulatory front at this point in time.

Retail bank wealth management, certainly encouraging.

Obviously, I talked about the progress in the UK in that regard.

In Asia, the -- I think just overall a pick-up in the level of activity and the underlying trends within the equities markets in the third quarter certainly improved the overall standing of our wealth management business.

We saw higher levels of activity and customer volume coming through that business in the third quarter.

Margin was supported by a largely lower cost of funds.

We saw a little bit of pressure on some of the lending margins, within Hong Kong.

But with higher customer deposits, lower cost of funds coming through, overall the margin was constructive in the third quarter.

As to whether there's more to come in that space -- again, I wouldn't read too much into it.

I think we would certainly be very enthusiastic seeing a pick-up in dollar rates and if that came through from the Fed in December, it would certainly be encouraging for any of our US-denominated or linked businesses.

And I think we're reasonably hopeful probably the rest of the market will see some pick-up there.

I think the other thing is just overall, obviously the first half of this year was very weak when compared to the first half of last year.

But I think what we saw in the third quarter was just encouraging trends, broadly speaking, within wealth management, within the Asian businesses and particularly Hong Kong and mainland China.

So, something to be thankful for and clearly business continues to try and realize the benefits of those higher levels of activity.

Thank you very much.

Thank you.

Raul Sinha, JPMorgan.

Morning, Stuart, morning, Iain.

A couple from me as well, if I can.

Just to finish off on BoCom, I don't think it should, but does this capital and accounting change, change your thought processes around the distributable reserves that you consider clearly when you think about dividends and buybacks?

And then related to that, now that you've had a more favorable accounting treatment for capital, would you have any thoughts about the P&L treatment for BoCom as well?

That's your first one.

So let me take the second one first.

This is purely a change in reg capital treatment.

There's no change in the accounting treatment.

And I think, if anything -- and we actually mentioned this specifically in our note in the earnings release -- that this reg treatment much more closely aligns with the actual risk from our investment perspective embedded within BoCom and aligns very closely to equity method of accounting that we've deployed for BoCom since we've owned the 19%-plus stake in it.

So I don't think we'll be necessarily revisiting the method of accounting for BoCom, but as we have in the third quarter and certainly the last -- golly -- probably the last 10 or 12 quarters, we revisit the value and use in terms of assessing whether or not we've got an impairment in BoCom.

Just given the market value and where the share currently trades is well below our current carrying value.

And that carrying value is informed by obviously the equity method of accounting.

But no.

I think the method is absolutely consistent and is very much likely to remain so, going forward.

But we will continue to assess it against value and use for possible impairments.

And as you'll have seen from both half-year disclosure and the disclosure at last year end, it is a pretty sensitive calculation that we keep a very close eye on.

In terms of -- this has no real impact in terms of distributable profits from the Hong Kong and Shanghai Banking Corporation, which owns our 19.03% in Bank of Communications.

And the reason for that is the distributable profits are informed by HKMA regulatory capital treatment.

And the regulatory capital treatment in Hong Kong has, since Basel III was implemented, been a deduction from the threshold regime.

So, if anything, there is now a closer alignment across the different treatments and so this doesn't, in and of itself, inform our distribution capability specifically from HBAP.

Okay, thanks very much.

If I can, I've maybe a follow-up on the UK mortgage bit.

You talked about some very strong growth there.

You obviously have a very high quality book in the UK in terms of mortgages, but it also has very low risk rating, so I was just wondering if you might be able to comment on this PRA consultation [bit on] and if that might have an impact on you?

I think the safest thing to say there, Raul, is we're still evaluating that.

As you quite rightly point out, we've got a very high quality book with low loan-to-value ratios within that portfolio, very strong affordability in terms of how those books have been underwritten.

And certainly, as you've seen coming through, credit cost -- it's a very low loss incident going through.

But we're still evaluating whether that consultation has any real impact on the UK portfolio -- bit too early to say.

Okay.

Thanks very much.

Thanks, Raul.

Chira Barua, Bernstein.

Thank you, morning.

Two quick questions.

One on trade finance.

Stuart mentioned you're getting shares in Hong Kong and Singapore, yet when I see your data you're down round about 9% sequentially in trade finance, which I thought was sharp, and you're down in cash as well, 5%.

It would be great to understand the underlying trends.

Obviously, trade has been struggling globally, macro.

Your share gains then margin pressure, the different things moving around.

It would be great if you can give us some color on that.

And second is, great to get an update on this new stamp duty, which has come in, in Hong Kong.

And what do you think it does to the Q3 tailwinds that you've had in retail in Hong Kong, after a couple of sluggish quarters?

Thank you.

So I think stamp duty increase here in Hong Kong, well if we look at previous changes to stamp duty, the double stamp duty and the stamp duty on -- introduced for overseas buyers, they both resulted in a substantial reduction in volume, but actually not a particularly marked change in the price of properties.

And in both instances, within about 12 to 15 weeks, volumes returned.

And as I say, there really wasn't much change in terms of prices.

So, what I would expect is clearly that volumes will drop away, particularly in that particular price segment.

And we may well see a little bit of weakness in terms of prices.

But the LTB on the book in Hong Kong is extremely conservative.

So yes, a bit of an impact in terms of volumes.

Having said that, in terms of your comment about Hong Kong, our market share in Hong Kong is extremely strong, actually.

And market share gains in Hong Kong have been quite marked over the course of the year.

So in Hong Kong, our new business market share increased 18%.

These are all official market statistics published by the Hong Kong -- the HKMA.

New business market share 18.4% in September year to date, up from 17.6% in the full year for 2015.

We got number one market share year to date.

And number one market share in each month in the third quarter.

In deposits our market share is up to 22.5%.

Personal lending increased to 19.3% from 18.4%.

So, there's actually a lot of momentum in Hong Kong.

The Hong Kong retail banking wealth management numbers are actually very, very good.

I'll let Iain talk to trade.

Yes, Chira, from a trade perspective, certainly from an average assets perspective, we've seen a bit of a drop off from this time last year and the most noted component of that has been across Asia, with lower levels of activity.

And I think we've talked about that now for the last few quarters.

Interestingly, net interest margin has held up pretty well overall for the business globally.

That's certainly been improved somewhat by a mix from plain vanilla to structured trade finance products, as customers have acquired a little bit more complex around hedging exposures in that respect.

But overall the margins have held up pretty well.

But I think when you look at the composition of our trade balances, we've held up well in Europe, Latin America and Middle East, North Africa.

The North American business has held together reasonably well.

But we have seen a bit of a tail off in the Asian businesses, I think largely in the phenomenon that we've seen a slowdown in the Chinese economy over the course of the last two or three years.

So, nothing really inconsistent.

I think one of the counterpoints I'd put out there is this.

As we've seen some weakness in the global trade and receivables financing business, we've seen some real strength on a continuing quarter-over-quarter basis.

And now, for a number of quarters, through global liquidity and cash management.

So the business line formerly known as payments and cash management, where we've seen good pricing, increased balances, improved margins.

And that obviously is a very, very sticky business, which is attractive to us, notwithstanding the fact that it's a pretty low-rate environment in which to operate right now.

So broadly across the businesses, both global banks and markets and commercial banking that are very active in these two product sets, both are showing good progress in global liquidity and cash management, and that's effectively offsetting the slowdown that we're seeing in the trade receivables financing.

Although again, to be honest, if you look at trade receivables, it's kind of flat second quarter --

It is.

Second quarter, third quarter.

It's under tens of millions, the difference.

So I would say to be honest it's flat second, third quarter.

And actually that evidences the fact that we've done a pretty good job at taking market share to deal with, as you say, the fact that traded goods are down.

Actually those revenue volumes are more or less flat second, third quarter, which evidences a quite significant pick-up in market share.

And when you look at the year over year drop-off, it was largely informed by what we saw happening at the end of last year.

Yes, okay, thank you.

Okay?

Thanks.

Chintan Joshi, Mediobanca.

Hi, good morning.

Can I have one on capital again?

I take your point that HBAP will not have additional repatriation capacity, but the change in the reg cap should create a surplus at the Group also on the level.

I think last quarter you were talking about a $10 billion surplus at that level, so do I presume that that's gone up now, and how much to?

And then the second question -- let's take it one at a time if you will.

Well certainly moving from 12.1% to 13.9% certainly puts us in a much stronger capital position.

I think what we come back to here again, Chintan, is where we've got capital located around the Group.

One of the things we talked about at the half-year was through the ongoing CCAR process we've made some progress in 2016 with no objection to capital plan.

One very specific focus area for the Firm over the next few years is to continue to progress our work on CCAR and progress the opportunity to get surplus capital out of the US and position it within the Group to support the overall growth and strategy of the Group.

Broadly speaking what is certainly good to note is that we've got very strong capital ratios sitting in the majority of our businesses around the world, and we're going to continue to take capital actions to ensure that we're well capitalized at a local subsidiary level but that surpluses sit at the parent level.

And that clearly will then support the overall flexibility of the Group, the dividend paying capacity and, as and when appropriate, the propensity to revisit the question of buybacks.

Okay.

So I presume we'll hear something with the full-year results then on that front?

Maybe.

Yes.

Okay, and a quick one on the others revenue line item.

When I look at the underlying revenue, so ex-notable items, it's quite weak this quarter, about $800 million versus $1.4 billion run rate that you've had in the previous four quarters.

Can you explain what's happening there, if there's anything here that is non-recurring or items that are here to stay?

That would be helpful.

Sorry, come back to that question again Chintan, I missed the beginning of it.

So in others, the underlying revenues are weaker this quarter; it's running at about $800 million versus an average of about $1.4 billion in previous quarters.

So there's a bit of a delta there in the underlying others revenue item.

I'm just trying to understand what's happening there.

Specifically within other that you're at.

Yes it's mostly --

Yes, that's right.

-- we've got adverse movements on intercompany derivatives, and you see most of that offset within global banking and markets and within commercial banking.

We've also got the increasing influence -- it's not necessarily the most significant element within that, but we've got an increasing influence of TLAC which contributes a couple of hundred million dollars, which obviously is going the wrong way when we start thinking about other overall.

But it's mostly on intercompany derivative positions within the global banking and markets business, and the offset sitting within other.

So it's intersegment stuff that's principally going on there.

Okay, thank you.

Okay, thanks Chintan.

Stephen Andrews, Deutsche Bank.

Hello Stephen.

Stephen's line just dropped off.

Katherine Lei, JPMorgan.

Hi, good afternoon, here's Katherine from JPMorgan.

I have only one question.

It's that I think China is going to ban [main] members using UnionPay to buy insurance products overseas.

I heard from management that part of the reason for stronger retail banking business in Asia, maybe in Hong Kong, is due to the insurance products.

So what do you think the impact will be?

How should that impact revenue outlook in the coming quarters?

Thanks.

It's a good question.

I'm not actually sure I've got an answer to that question so I think we'll probably come back to that one for you.

Thank you.

Tom Rayner, Exane.

Morning guys.

Tom Rayner here.

Can I just stick on this --?

Hi Tom.

Hiya -- issue, BoCom and more broadly on the capital, Iain.

If I understand what you've just said, in order for the surplus capital to start being used, either for dividends or further buybacks, you need to get it to the Group.

So the US -- stuff trapped in the US currently needs to be released, which it's starting to be.

It sounds as if the 100 basis points gain from the change in regs treatment of BoCom is going to remain trapped in the Hong Kong subsidiary because that was how they were looking at it already.

So does that suggest that none of that 100 basis points gain really is going to be available to you for future dividends/buybacks?

Am I understanding that correctly?

I'm just trying to - I know a few people have asked but I don't quite (multiple speakers) please?

I wouldn't say that at all.

Tom.

We've got very strong capital ratios in each of our affiliates in Asia, whether you look at Hong Kong, whether you look at Hang Seng within Hong Kong, whether you look at mainland China, and all of those businesses represent greater dividend paying capacity.

Part of what we've worked through with our subsidiaries here, and frankly which we'll continue to work through for the next year or so, is the jurisdictional implementation of Basel III and the phasing of that.

But all our subsidiaries around the world meet and exceed local regulatory capital requirements, and part of the overall management action within the Group is just to ensure a sharpness of compliance with local regulatory capital ratios, but making sure that surpluses to that find their way back to the Group on a timely basis.

But certainly if you looked at Hong Kong, the HBAP, Hang Seng, China Bank, they all have very strong capital ratios and we'll continue to work with the teams and the regulators there to ensure that we're well capitalized but surpluses are moved back to the parent company.

So it's very true in the US, absolutely nothing different from what we talked about at the half-year.

But just broadly for the Group, as regulators around the world implement the requirements of Basel III, just working closely with them and our business teams to ensure that we don't have inappropriate surpluses caught up in any of those legal entities and we get it back to the parent to support the wider investment efforts, dividends and, when appropriate, if appropriate, buybacks.

Okay.

So at the moment you're 90 basis points above the top of that 12% to 13% range.

Assuming Basel IV is net neutral, which some regulators suggest it should be, does that suggest there's $8 billion in the kitty at some stage, or is that jumping ahead too far?

That would be quite a nice number to think about Tom.

You've changed your tune on Basel haven't you?

I didn't say that's what I thought it would be but some people suggest it might.

(Multiple speakers) can I just ask on --?

But it's worth, Iain, just point out in the fourth quarter there's a bank levy, there's a provision for the final dividend et cetera, et cetera.

Oh yes.

So --

Absolutely.

Tom, you're looking at 13.9% just now, which is a great place to be, but as you well know, we've got the billion-and-a-bit, billion and a couple of hundred million coming through in the fourth which comes straight off capital, we've got the whole of the fourth interim dividend which comes straight off capital, and obviously there's usually a little bit of seasonality downturn in the fourth.

So I don't -- we certainly don't expect to see significant capital formation.

If anything we'd expect to see the Common Equity Tier 1 ratio come off a few basis points in the fourth quarter for those items.

But broadly speaking, we've talked at some length about the surpluses that we've got in subsidiaries around the world and the capital management actions we're taking is to get those surpluses back into the parent company and put ourselves in a flexible position to take the actions we think are necessary over time.

Sure.

Just as a follow up on BoCom as well, just in terms of the commitment.

Because my understanding of this change in regulatory treatment is about this durable link concept and therefore you're probably no longer committed to increasing your stake or even maintaining your stake if BoCom for instance have had a rights issue etc.

Could you comment on what your long-term commitment is both to BoCom and to China expansion more generally please?

Well the second one is really easy Tom.

It's continuing to grow the business.

When you talk about PRD, we talked about this in June of last year.

We've got a strong business in China for many years, we're going to continue, notwithstanding the fact that it's still only 0.2% of the total Chinese market.

This is an incredibly important market so we're going to continue to invest.

As far as BoCom goes, there's absolutely no change in our relationship.

We have a strong commercial relationship; we own 19%, just over 19% of this; we've got two directors on the Board of BoCom.

But what this change in regulatory treatment is, it much more accurately reflects the nature of our relationship with BoCom, and better aligns with the accounting treatment that we've got out there.

So I absolutely would not read anything unusual into this change in regulatory treatment whatsoever.

Okay.

Thanks very much for that.

Very clear.

Chris Manners, Morgan Stanley.

Good morning Stuart, good morning Iain.

Morning.

Two questions if I may.

The first one was -- sorry to bring it back to capital again -- but in terms of your 12% to 13% guidance range, what sort of timeframe would you expect to take to get back to that range?

I guess if you don't want to do a big buyback, is there potential that you could actually potentially buy something if there was interesting opportunities out there for you?

And the second question was on this change in regulatory treatment.

Obviously you've discussed this with the PRA, they've given you an extra 100 basis points.

Is there any risk here that they could change their minds and change it back again?

Because it's something that I guess not everyone was anticipating would move this way and things can change so -- are we sure that that's not going to get changed back at any point?

Thanks.

So is there a risk that the PRA could change their minds again?

To be honest, I think there's always that risk.

But I think in fairness, the PRA would only change that if we changed our attitude with respect to the investment in BoCom.

And as I mentioned, there's no substantive change in the nature of our relationship with BoCom, either commercially or strategically.

And I think this alignment very accurately reflects the accounting treatment and the nature of that relationship.

But I suppose that risk always is -- is always out there.

But I would think it would be very much informed by a change in HSBC's attitude towards the investment as opposed to anything else.

In terms of the timeframe to get back into the top half of that range of 12% to 13%, the word medium springs to mind.

And obviously there's a number of ways that we could migrate back towards that top end, of which, as you say, buybacks subject to regulatory approval are one, but there's nothing really changed since the detail we gave you at the half-year.

The stable dividend is another and actually building the business and increasing loans and advances would be a pleasant one to think about.

But actually if we got into a situation where we can start building back loans and advances with some pace and putting on risk-weighted assets that are accretive, that would also use it up.

I think the suggestion you made that we could make an acquisition is probably the least likely.

Okay, that makes sense.

I was just also -- with again this change, I suppose your return on required equity is actually going to go up quite a bit, and you're actually going to have also a change in skew of where capital is allocated because you're having to allocate less capital to Asia because you have the reduction in the BoCom capital absorption.

Are you going to then -- to get to I guess a more optimal mix and more Asia skew are you going to have to push harder into Asia again to rebalance that geographical mix?

We already have more than 60% of the profits derived from the Asian business.

It does continue to be one of our most profitable businesses around the world.

So it would not, under present trading conditions, be an unusual place for us to want to allocate capital.

I think the balance between the global businesses and the balance between the regions, our goal in that respect remains consistent with what we set out in 2015.

And I don't think this to a very significant way changes the amount of effort or the allocation of investment that we would need to do to accomplish that.

There's obviously more work that needs to be accomplished between now and the end of 2017, but I don't think this is per se a significant factor that would require us to adjust in any dramatic way what we're working on already.

No, that makes sense.

Thank you.

Thanks Chris.

Thanks Chris.

Manus Costello, Autonomous.

Good morning all.

I have a couple of questions please.

Stuart, you mentioned in the presentation that the US principal business was not going to hit the target, so I wonder if you could give us an update on what you think we might do with that business?

Is it possible that we could see an RWA reduction in that area, given you can now repatriate that capital?

And my second question is also about capital I'm afraid.

Your Pillar 2A has gone up in the quarter.

Is that just a result of the lower risk-weighted assets or is that now your go-forward Pillar 2A for the next 12 months?

And did you know that the Pillar 2A was going to go up when you talked about being at the upper end of your guidance, the 12.5% to 13%?

Because obviously that's somewhat reduced your management buffer?

Manus, on Pillar 2A, that is the go-forward number, and that is informed by the SREP review, which informs the individual capital guidance for each firm.

And that was very recently finalized by the PRA as it completed, I believe, the JRAD process with its European partners.

So that 1.6 cover within Common Equity Tier 1 is the go-forward.

It's obviously reassessed every year and we continue to take capital actions to do with ICAP to try and refine that.

There are a couple of areas where, notwithstanding the fact it's finalized within Pillar 2A for 2017 which are a couple of areas where we continue to refine our data and debate the methodology with the PRA.

But that is the go-forward number and it is not influenced directly by the change in BoCom.

And although we did not have it confirmed, based on the work that we've done with the PRA earlier in the year on the ICAP, we had reasonable insight that this was going to be the outcome from a Pillar 2A perspective.

In terms of -- I'll just talk about risk weighted assets on the US business and Stuart will give you more detail.

But as you probably noticed Manus, we've been taking risk weighted assets in the US business down significantly.

And that's largely been informed by the disposal of the run-off portfolios in the US, and we made more progress on that in third quarter.

I think we also set out here that we expect to have really all of those assets off our balance sheet by the end of 2017.

To the extent that we already have quite significant surplus capital within the US, that would create more surplus capital within the US.

And how we then deploy that capital will be informed by the CCAR process, as is the case for every bank that's subject to it in the US.

I think we're quite encouraged by the progress we made this year.

We've got more to do and we'll keep working away at that.

There are clearly areas within the US business where the team's made great progress.

They've made great progress on cost over the last couple of quarters.

They've had a very, very tough year in terms of loan impairment charges this year with higher loan impairment charges coming through, most notably the oil and gas sector.

Progress on that seen in the third quarter with lower loan impairment charges, but that was one of the key features of the shortfall in performance for the US business this year.

We're moving retail bank wealth management more closely towards profitability, which is encouraging.

But there is still work to do in each of the global businesses that are within the US in terms of improving overall scale of the business and the profitability of the business.

I don't really have much to add Manus.

I think Iain summed it well.

Which is we have the legacy piece to run down to zero, which is the old household book, which will happen over the next couple of years.

We then need a CCAR process to be able to dividend that surplus capital which will then be completely surplus out.

Meantime, we need to get much better returns in global banking and markets and TNB.

The team have done a really good job on cost and their jaws are positive.

The LIC is unfortunate because it's not a US -- it's a US-booked asset as opposed to a geographic US LIC.

And my expectation, therefore, is that we'll get all this achieved probably by the end of 2019 or thereabouts.

So what we set as the target for the end of 2017 will be delayed by a couple of years.

Part of the reason why it's been delayed is also the simple fact that we had assumed that there would be some interest rate increases in the United States which would give us a revenue lift which would actually provide some revenue support to these tasks.

Clearly with interest rates staying lower for longer, that hasn't come through, which is why the other variable is it will take us a couple of years longer to get there.

But you're absolutely right, we will have less capital in the United States than we have today and less risk weighted assets.

Thank you.

Thanks Manus.

Stephen Andrews, Deutsche Bank.

Hello.

Can you hear me this time?

Yes.

Yes we can, yes.

Sorry about that, I got cut off last time.

Just one last question on the capital I think for me too.

It's just the 13% to 14% range.

When you were setting that, did you have in your mind 100 basis point capital relief, if you like, from this change in the BoCom accounting?

Because, as you've rightly said, this doesn't change anything from a distributable reserve point of view; it doesn't change how much capital can get up-streamed from HBAP because it was already on this methodology.

So surely really nothing has changed from a capital perspective for you guys in terms of your ability to either grow the business at the subsidiary level or indeed pay out a dividend.

So should we really be thinking about your 12% to 13% range in new money being 13% to 14%, or am I missing something here?

And I've got a follow-up question (multiple speakers) thank you.

No, I don't think you should be thinking about 13% to 14%.

I think until guided otherwise by our regulatory authorities around the world, I think 12% to 13% and the upper end of that range is the right place for us to be.

Clearly, having 13.9% Common Equity Tier 1 ratio does have an influence.

I'll give you one hypothetical scenario for example, Stephen.

The stress testing scenario will be announced on November 30.

We submitted results for that.

We obviously know what we submitted and we're pretty confident about where we are from a stress testing perspective.

But were we to receive an adverse outcome from the stress test then having 13.9% at a Group level would clearly give us greater capacity to absorb any of that stress that may be coming through.

Now it is, as we all know, something of a hypothetical exercise.

But it does go to, if you like, market confidence of the strength of the organization on a post-stress basis to have stronger capital ratios.

I think what I really go back to here is the response to the earlier question around the fact that we do have subsidiaries that as the local regulators build Basel III compliance at a jurisdictional level, we are holding very strong capital ratios at different subsidiaries around the world.

And one of our key focus areas between now and the final implementation of Basel III is to ensure that we're not carrying surplus-to-requirement capital in our subsidiaries, for example as we are presently in the US.

But the reasons in the US are well understood and exceptional.

So there are a number of capital actions that we will continue to execute which puts, if you like, the liquid capital resources at the Group level, which allows us greater flexibility around investment decisioning, and if not investment decisioning, certainly the propensity to return that to shareholders either in the form of dividends or buybacks.

Okay, thank you.

And then just on the second question, I just wanted to come back to the strength in wealth management in Asia.

I think you put it down to in the text as a favorable manufacturing environment and insurance, and I just wanted to press you a bit on what you mean by that.

Is this the -- we've seen a boom in cross-border life product sales as people are trying to move money out of China into dollars, which has recently been stamped down on as a result of the UnionPay stuff.

Is that the sort of stuff that you're seeing strength, like everybody else, that will now be a headwind?

Or is there something else that was going on in insurance?

Thanks.

It was largely informed by just a much more constructive environment in the equities markets, which supports the overall valuation of our business within the insurance.

Certainly customer flow was more optimistic in the third quarter than it had been in the previous two quarters.

But it certainly wasn't to any significant degree influenced by China flows for example.

Okay, thank you.

Talking about China flows, coming back -- there was a question from Katherine at I think it was Goldman Sachs earlier -- JP sorry about -- oh my goodness, my apologies -- about China UnionPay.

This does not have an impact on us as we do not accept China UnionPay as a payment channel.

Okay, so we'll just take the last question now.

Thank you Mr. Gulliver.

We'll take our last question today from Martin Leitgeb, Goldman Sachs.

Yes, good morning.

Two questions from my side please.

And the first one is on structural change within the entity structure in Europe.

Whether you could provide us with an update on how you're preparing the entities here for I think both moving parts, one obviously being the ringfence in the UK?

And secondly, probably more importantly, how do you think about the structure ex-ring fence in Europe going forward?

Just in light of the potential fall-away of European Union passporting right from here.

Is your base-case assumption here that passporting rights fall away and you try to consolidate most of the rest within say CCS or is there alternative structures you're thinking of?

And the second question is just a very brief follow up on your earlier comments on UK mortgages.

I was just wondering if you could steer us in the direction of what kind of quantum of loan growth you're envisaging to achieve there or what kind of flow share you're aiming to achieving there?

I think some of your earlier remarks were that you have been building up substantially your intermediary networks.

And I was just wondering do you see that at full speed already in the third quarter numbers?

Or is there a further scale-up to come through in the numbers on the next coming quarters?

Thank you.

Okay.

So ringfence banking and wider structural change in Europe.

So ringfence banking is moving ahead at pace.

We are targeting to complete the ring-fencing exercise in the summer of 2018.

In terms of progress, I think we're very much on track at this point.

There's been a great deal done but the heavy lifting with respect to operations and technology separation will take place in 2017 and early 2018, and that's where the bulk of the expense involved in that separation will take effect.

But no real change.

This is obviously informed by UK legislation.

There'll be a non-ringfenced bank, which is to all intents and purposes our global banking and markets business in the UK that serves the wider Europe.

Now when you get into licensing discussion and passporting, I think we have the advantage of having a well-established full-service bank in France, a universal bank in France, that has all the licensing and capabilities to support the product range, some of which we presently support out of our London platform.

So I think we have good flexibility, both in terms of product capability, the platforms that support it, the human resources that support that, and so, although not necessarily diving in right now to extensive re-planning of the work, we certainly are examining all the alternatives that are available to us.

And we'll take action as and when there's greater clarity about how Brexit may impact the operations of the bank.

But the focus clearly is to maintain the capability to support our customers.

And if that support capability needs to come from one of our subsidiaries in continental Europe, for example, HSBC in France, then we would certainly have the capability to do so.

And on mortgages, so approvals market shares, third quarter was 8.4% compared to 7.2% in the same -- Q3 of 2015, so 7.2% up to 8.4%.

We're nowhere near the steady state with intermediaries.

So we have 10 brokers on-boarded at the end of the third quarter and there's 13 additional brokers currently undergoing due diligence, of which a number of them will be cleared and on the platform by the end of 2016.

So no, you don't have the full impact of using intermediaries in the numbers yet.

Thank you very much.

Thanks Martin.

Thanks Martin.

Okay, thank you everyone.

It brings the call to an end.

Thank you.

Thank you.

Ladies and gentlemen, that concludes the call for the HSBC Holdings PLC's earnings release for third quarter 2016.

You may now disconnect.