滙豐控股 (HSBC) 2017 Q2 法說會逐字稿

This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position and business of the group.

These forward-looking statements represent the group's expectations or beliefs concerning future events, and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.

Additional detailed information concerning important factors that could cause actual results to differ materially is available in our interim report.

Past performance cannot be relied on as a guide to future performance.

This presentation contains non-GAAP financial information.

Reconciliation of non-GAAP financial measurements to the most directly comparable measures under GAAP are provided in the reconciliations of non-GAAP financial measures supplement available at www.hsbc.com.

The analyst and investor conference call for HSBC Holdings plc's interim results will begin in 2 minutes.

(Operator Instructions)

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc Interim Results 2017.

For your information, this conference is being recorded.

At this time, I will hand the call over to your host, Mr. Douglas Flint, Group Chairman.

Thank you very much.

Good morning from London.

Good afternoon to everyone in Hong Kong.

Welcome to our 2017 HSBC Interim Results Call.

Joining me today are Stuart Gulliver, Chief Executive; and Iain Mackay, Group Finance Director.

Let me start with a word on behalf of the board.

This is a strong set of results across our major businesses and geographies, which adds further evidence of the successful repositioning of the firm since 2011.

The benefits of diversification combined with the group's capital and funding strength were once again apparent in the first half of the year.

It's particularly pleasing that much of the improvement in both revenue and cost performance derived from management actions to reshape the group around its core strengths.

Management has continued to make good progress against the strategic actions laid out in June 2015, and a number of important milestones were reached in the first half, particularly relating to our business in Mainland China and the new ring-fenced bank in the U.K.

It's increasingly clear that these strategic actions and the transformation that preceded them have succeeded in creating a solid foundation with attractive operating optionality for the future.

They have also enabled strong capital return to shareholders through both dividends and share buybacks.

I'll now hand over to Stuart to provide some context around the results before Iain takes a more detailed look at performance.

Stuart?

Thanks, Douglas.

So we've had an excellent first half of 2017, reflecting the changes we've made since our investor update in 2015 and the strength of our competitive position.

The group profit before tax on both a reported and an adjusted basis as our 3 main global businesses maintained their strong momentum from the end of 2016.

We also achieved positive jaws in the first half of the year.

Retail Banking and Wealth Management performed well, with strong revenue increases from increased deposits, particularly in Hong Kong, improving customer investment appetite, strong Wealth Management product sales across all categories and the impact of market movements within our life insurance manufacturing businesses.

Those banking markets continue to demonstrate the benefits of its differentiated business model, with revenue increases in the majority of businesses, particularly FICC, equities and Global Banking.

Commercial Banking grew revenue on the back of strong growth in global liquidity and cash management, while global trade and receivables finance revenue began to stabilize after a difficult 2016.

Adjusted operating expenses rose slightly, as we invested more in business growth and made provision for more performance-related compensation, in line with increases in profit before tax.

We remain on track to hit our revised cost-saving target by the end of 2017.

Loan impairment charges were lower than the first half of 2016, mainly due to improved credit conditions in the oil and gas industry in North America.

Our common equity Tier 1 ratio was 14.7% at the 30 of June, up 260 basis points on the same point last year.

And where we have excess capital, we are open to returning it to shareholders.

And to that end, and having received the appropriate regulatory clearances, we will execute a further share buyback of up to $2 billion in the second half of 2017, which will commence shortly.

This will bring the total value of shares repurchased since August 2016 to USD 5.5 billion.

We received regulatory approval in June to establish HSBC Qianhai Securities, which will be the first joint venture securities company in Mainland China to be majority owned by a non-Mainland Chinese bank.

We expect new business to launch in December 2017, pending the granting of the necessary securities licenses.

We also removed a further $900 million of costs from the business in the first 6 months of the year, taking the total annualized cost savings achieved since 2015 to $4.7 billion.

Targeted initiatives also removed a further $29 billion of risk-weighted assets from the business in the first half.

Our risk-weighted asset reduction programs have extracted a total of $296 billion of risk-weighted assets from the business since the start of 2015, comfortably exceeding our target.

Finally, the U.S. business received a non-objection to its capital plan from the U.S. Federal Reserve Board as part of CCAR in June.

Iain will now talk you through the numbers in detail.

Thanks, Stuart.

A quick look at some key metrics for the first half.

On an adjusted basis, we have positive jaws of 0.5%.

And of course, the return on average ordinary shareholders' equity was 8.8%.

The positive return on average tangible equity was 9.9%.

And we had tangible net asset value per ordinary share of $7.26.

Slide 4 provides the detail on the items that take us from the reported to adjusted for both the second quarter and the first half.

Last year's reported results included fair value gains on the credit spread component of our own debt, which we refer to as FVOD.

You'll recall this changed as of last quarter.

These movements are now reported in other comprehensive income following the adoption of IFRS 9 rules relating to presentation of these instruments.

That means that the income statement for the first half includes no gains or losses relating to FVOD, whilst the comparable period in 2016 included a positive fair value movement of $1.2 billion.

The reported results for this year's first half also include $1.7 billion of investment to achieve our target cost savings compared with $1 billion in the same period last year.

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

The remainder of the presentation focuses on adjusted numbers.

Slide 5 breaks down adjusted profit for the first half of 2017 by global business and geography.

Adjusted profit before tax of $12 billion was up $1.3 billion or 12%, driven by higher revenue and lower loan impairment charges.

We achieved positive jaws of 0.5% in the first half of the year.

There's a detailed note on the accounting for our stake in Bank of Communications on Page 94 of the interim report.

The headroom between our value-in-use calculation and the book value in the accounts increased by $100 million to $400 million in the first half of 2017.

Slide 6 looks at profit before tax for the second quarter, which was $670 million or 13% higher than the same period last year.

Profit before tax was significantly higher in all 3 main global businesses and up in all 5 regions.

The increase in Europe was driven by strong increases in revenue in Global Banking and Markets in the U.K. and France and lower loan impairment charges in Commercial Banking.

The increase in North America was driven by a reduction in loan impairment charges in the U.S. and Canada, particularly in the oil and gas and mining sectors.

We achieved positive jaws of 1.6% in the second quarter.

Slide 7 provides more detail on revenue.

Our global businesses maintained a strong momentum from recent quarters, growing revenue by $729 million or 6% compared with last year's second quarter.

I'll go through each business in more detail over the next few slides.

Slide 8 looks at Retail Banking and Wealth Management, which grew revenue by 9% compared with last year's second quarter.

Wider margins and higher balances in Hong Kong helped to increase revenue from current accounts, savings and deposits by $235 million.

Income from investment distribution increased by $73 million from higher sales, reflecting the impact of renewed investor confidence.

Life insurance manufacturing revenue increased by $159 million, reflecting positive market impacts in Asia.

And we grew customer deposits and customer lending by 7% and 5% relative to last year's second quarter, following strong performances in Hong Kong, the U.K. and Mexico.

Revenue in Commercial Banking grew by 1% compared with last year's second quarter.

Global liquidity and cash management had a strong quarter, growing revenue by 11% through wider margins and balance sheet growth in Asia.

Credit and lending revenue was broadly stable as balance sheet growth in Asia compensated for the impact of margin compression.

Global trade and receivables financing revenue was down slightly compared with last year's second quarter following repositioning of the business in Middle East and North Africa, but stable relative to this year's first quarter.

Loan impairment charges were $146 million lower than the same period last year, mainly due to lower charges in the oil and gas sector.

Slide 10 looks at Global Banking and Markets, which grew revenue by 7% compared with last year's second quarter.

Global banking and transaction banking products did well in the quarter, demonstrating again the benefits of our differentiated business model.

Global Banking revenue grew by 16%, aided by increased recoveries relating to restructured facilities and investment banking fees.

Higher balances in Global Liquidity and Cash Management helped deliver a 15% revenue increase, while a 13% increase in Securities Services revenue was driven by higher balances and new mandates.

In Markets, foreign exchange revenue rose by 9%, reflecting increased market volatility.

And equities revenue increased by 25%, as the business benefited from the increased client activity.

Slower fixed income trading across the industry reduced revenue from rates and credit, which fell by 22% and 27%, respectively.

Overall, FICC revenue fell by 11% compared with last year's second quarter.

We added high-returning risk-weighted assets to the business in the second quarter, but we expect model changes to deliver around $20 billion of RW savings in future quarters.

Slide 11 shows the impact of Global Banking and Markets business model and what makes it different.

We've had clear bias in our product mix towards products that generate stable and recurring revenue.

That derives in part from our client mix, which is more evenly balanced between financial institutions than corporates within industry norm.

This has helped us to achieve the mid-single-digit compound growth that we promised in June 2015, at the same time as reducing risk-weighted assets in Global Banking and Markets by $107 billion since the start of our reduction program.

At the end of the first half, the business delivered our recurring risk-weighted assets of 2.3%.

Global Private Banking revenue was lower relative to last year's second quarter, reflecting the impact of repositioning in 2016.

However, it has now delivered 2 consecutive quarters of revenue growth, with new business more than compensating for the impact of client and market exits.

We have positive inflows of net new money in the first half in markets that we're targeting for growth, particularly Hong Kong.

66% of these inflows came from clients referred to Private Banking from our other global businesses.

Corporate Centre revenue fell by $183 million or 24% compared with the second quarter of 2016.

The biggest driver was $134 million reduction in revenue from a runoff U.S. CML portfolio as we continue to wind down the business.

We completed asset sales of $5.5 billion in the first half of the year, and U.S. CML balances now stand at $1.6 billion.

We expect to complete the runoff before the end of 2017.

Slide 14 looks at net interest margin, which was 1.64% in the first half.

We are now seeing a stable net interest margin and a higher interest income as loan balances increase, particularly in Asia.

We continue to have deposit surplus of around $400 billion and are well positioned for net interest income to grow as rates move higher.

There's a detailed slide on net interest margin in the appendix, with more information on loan and deposit structures and hybrid U.S. dollar LIBOR trends.

Slide 15 looks at operating expenses.

We delivered positive jaws in the first half of the year and are continuing to focus on delivering positive jaws for the full year.

Second quarter costs were $7.4 billion, up 3% higher than the same period last year, as our cost savings helped to support growth and absorb most of the cost of inflation and continued investment in regulatory and compliance programs.

Performance-related compensation also rose in line with increases in profit before tax.

We decided to accelerate investment in business growth in the second quarter, primarily in Retail Banking and insurance.

This is to be funded primarily by unplanned gains from the sale of shares in Visa Inc.

in the U.S. We invested some of these proceeds in the second quarter, which contributed to the increase in costs.

However, the main portion will be invested in the second half of the year.

We have achieved annualized cost savings of around $4 million -- $400 million in the second quarter, which brings annualized inception-to-date savings of around $4.7 billion.

We remain on track to hit our targeted annualized cost savings of around $6 billion by the end of the year and expect to invest $1 billion of cost to achieve in the second half of 2017.

Moving on to Slide 16.

Loan impairment charges were $427 million in the second quarter or 19 basis points as an annualized percentage of gross loans.

The reduction in loan impairment charges compared with last year's second quarter was mainly in North America.

This reflected improved credit conditions, primarily in the oil and gas sector, while last year's second quarter also included a single significant charge in the mining-related corporate exposure.

Our credit standards remain robust and the credit outlook within our portfolio remains stable.

Moving to capital on Slide 17.

The group's common equity Tier 1 ratio was 14.7% on the 30 of June compared with 14.3% on 31st of March.

Our common equity Tier 1 capital increased by $6.5 billion, of which $2.8 billion came from profits net of dividends and scrip, $2.1 billion came from foreign currency translation differences and $1.6 billion came as a result of lower deductions from capital.

Today's buyback announcement reduces the common equity Tier 1 ratio to around 14.5%

Slide 18 looks at our group return metrics.

The return on average ordinary shareholders' equity was 8.8%, and the return on tangible shareholders' equity was 9.9%.

You can see from the slide that the impact of significant items and the bank levy was to reduce returns by 1.6%.

I'll now hand back to Stuart.

Thanks, Iain.

So it's now more than 2 years since we announced our strategic actions, so I'm going to spend some time recapping some of the things we've achieved since then, and most importantly, the way they have improved the business.

We'll start there with Slide 19, which provides the usual update on our achievements in the first half of the year.

There are 4 main things from the slide that I want to note, and I'll the cover the others in the slides that follows.

The first concerns the U.K. ring-fenced bank, which was granted a restricted banking license from the FCA and the PRA in July.

This is a major step towards establishing HSBC U.K. and it keeps us on course to complete the process in 2018.

We've made good progress in establishing the HSBC U.K. IT infrastructure in the first half and have now moved around 170,000 customer sterling accounts to new HSBC U.K. sort codes.

We expect to move the remaining sterling accounts that require new sort codes by the end of September.

We're very well advanced in filling the roles that will move from London to Birmingham and remain on track to have a fully functioning team in place for the opening of the new HSBC U.K. headquarters in the first quarter of 2018.

The second point concerns our NAFTA businesses, all 3 of which increased profitability in the first half of the year.

Mexico contributed another strong performance, growing revenue and capturing market share, particularly in Retail Banking.

And both the U.S. and Canadian businesses grew profits on the back of significantly lower loan impairment charges.

And we continue to make very good progress winding down the U.S. CML legacy portfolio.

The third point concerns the work we've done to deliver above GDP revenue growth from our international network.

We've now upgraded this action to on track.

Stronger links between our network and businesses are having a lasting impact on our ability to increase international revenue, as demonstrated by a 17% increase in revenue from business synergies in the first half of the year.

By building better links both within and between businesses, we've also increased the strength of our transaction banking franchise, which I shall return to shortly.

And the fourth point concerns Global Standards, which you'll see has an amber checkmark next to it on the slide.

This is to provide clarity about what HSBC controls and what it does not control.

We remain on track to meet all of the 2017 performance metrics we have set for Global Standards, which is how we measure implementation.

This has resulted in a dramatically improved ability to manage financial crime risk.

At the same time though, we do not have certainty about what will happen with our DPA, which is within the discretion of the Department of Justice, as described in detail in the annual report and accounts.

We remain on course to complete the majority of our strategic actions by the end of 2017.

Slide 20 illustrates the progress we've made since 2015 on increasing efficiency across the business, both in terms of capital and costs.

Our risk-weighted asset-reduction programs have now removed a total of $296 billion of risk-weighted assets from the business since the start of 2015, comfortably exceeding our target for the end of 2017.

The reduction in risk-weighted assets has helped us build one of the strongest common equity Tier 1 ratios in the industry, allowing us to maintain a strong dividend, return $3.5 billion to investors in the form of share buybacks and to announce a further $2 billion share buyback today.

We've also now taken $4.7 billion of annualized costs out of the business by investing in better, safe and more efficient systems and processes as Iain has already said.

Slide 21 shows the impacts of the work we've done to increase our international connectivity.

49% of group client revenue is now linked to our international network, up from 45% at the same point in 2016.

By investing in the capabilities of our network, we've also been able to increase the value of transaction banking products to the group.

Transaction banking product revenues are fundamentally international in nature, command high margins and tend to be sticky once acquired.

We've continued to grow the proportion of group revenue provided by transaction banking and increased revenue to $7.5 billion for the first half of the year.

Slide 22 looks at our pivot to Asia.

Asia's share of revenue, profits and loans have all increased in line with the changes we've made to the business mix since 2015.

We continued to develop our Asia businesses in the first half of the year, in particular, our business in Mainland China.

And as I mentioned earlier, we received approval in June to establish HSBC Qianhai Securities, which we expect to launch in December 2017.

This is a strategically important development for the group that enables us to participate in China's rapidly growing domestic securities markets.

To put this into context, without this license, it would be impossible for us to retain our #1 ranking for fixed income in Asia ex Japan over the long term.

This is obviously a new business that will require a period of investment, and we don't expect it to become a significant contributor of revenue for quite some time.

But it remains a very important strategic addition for the long-term future of the group.

We continue to win new mandates related to the China Belt & Road Initiative in the first half of the year, and we remain the world's leading international bank for renminbi business.

We were one of the first market makers for the new Bond Connect in Mainland China's Interbank Bond Market following its launch, and we underwrote both the first new bond issue and the first Belt & Road Initiative panda bond under Bond Connect.

Turning now to Slide 23.

Our strategic actions have helped us increase returns while strengthening our international network.

Critically, they've also increased our ability to deliver industry-leading returns to our investors, as Slide 23 shows.

We've paid nearly $20 billion in dividends since 2015 and remain the second largest dividend payer in the FTSE.

And we've delivered a total shareholder return of 43% over the same period.

This is all evidence that our business is in good shape.

The strategic actions we set out at our 2015 investor update are working.

Our global businesses are performing well.

And the strength of our global network is driving strong returns for the group.

Organic growth in revenue and lending is increasing and we are investing more in the business to support this growth.

We have comfortably exceeded our risk-weighted asset-reduction target, whilst also growing revenue.

And our cost-saving programs continue to create capacity for investment in growth as well as investment in Global Standards, regulatory and compliance programs.

We remain on track to achieve the revised cost target that we set in April.

We're focused on delivering positive jaws over the remainder of the year.

And we remain a well-funded business with strong capital generation and a diversified balance sheet.

We'll now take questions.

The operator is going to explain the process and then introduce the first question.

Over to you, operator.

(Operator Instructions) Your first question comes from the line of Alastair Ryan from Bank of America.

On interest-earning assets, growing at about a 4% annualized clip in the second quarter, is there anything you'd call out that would make that not representative of the pace that you're growing the bank now, please?

And secondly, on the margin, nice outcome in the second quarter.

Can that grow into the second half?

Or are you dependent on Hibor starting to move in order to get that going?

Secondly, on costs, please.

Quite a strong message on the CTA finishing this year.

How should we think about your cost targets into next year?

Are they more in absolute terms or will they be driven by jaws?

It looks like the sort of exit run rate of costs is somewhat below where consensus thinks you'll be for next year?

Okay.

Thanks, Alastair.

In terms of second half of the year, I would -- we'd certainly be inclined to, sort of, keep the outlook consistent with what you're broadly looking at, at the moment.

We clearly had a good first half of the year.

I think you've seen over the years, Alastair, the seasonality that comes through our numbers in the third and fourth quarter.

So when you think -- when we look at what you chaps on the sell side are looking at for the second half of the year, I wouldn't be inclined to change it too much, recognizing some of that seasonality that we would expect to see, but very encouraged by the first half of the year.

Net interest margin, I think, broadly speaking, Alastair, we're looking at stability.

Clearly, if we were to get more rate increases from the Fed at the end of the year, it wouldn't influence 2017 to any significant degree, but would be beneficial in 2018 and beyond.

So I think from where we sit, digging through the various components of net interest margin, I think we'd be pretty happy with stability in the second half of the year.

We continue to see some pressure on asset spreads.

And the expansion in liability spreads is clearly a welcome feature which offsets some of that pressure.

But there are no -- there's nothing really out in the market that would suggest that you're going to see broad-based repricing of assets at this point in time.

In terms of costs going into 2018, we're clearly very focused on hitting the exit rate that we targeted in the middle of 2015 and expect to hit that.

Going forward, we'll be informed by the same discipline around costs as we've had for the last couple of years and generating positive jaws for the business.

We recognize that as volumes grow and as the opportunity to grow in the business, we would expect to see pressure coming through simply from operating volumes on the cost base.

So our focus will be very much on generating positive jaws through good cost control, reflecting on the level of revenues that we're generating.

I think that would be the guidance that we would offer going from '17 into '18.

Our next question today comes from Ronit Ghose from Citigroup.

It's Ronit from Citi.

I just wanted to pick up on a couple of points, one on growth and one on capital return.

The loan growth numbers, to echo Alastair, were very strong in the second quarter.

Iain, Stuart, could you just give us some more color around what you're seeing specifically in Hong Kong and Asia?

If I sort of dig through the numbers you've presented today, you're seeing like a 6% q-on-q increase in the Asian business.

Hong Kong, GBM loan growth looked really strong in the quarter.

Just wondered, are there any unusual items in there?

It looked like it's up 15% quarter-on-quarter in Hong Kong GBM.

And in Asia, outside Hong Kong, CMB also looked very strong.

Any color around that would be great.

Separately, just circle back to capital and it's a question, I guess, you've had before.

And you were echoing this in your debt, but I just wanted to confirm.

Previously, you said capital return or buybacks are explicitly linked to other capital actions.

I'm just wondering, are we -- is there still explicit linkage, or are you going to think about maybe loosening this?

I mean, to what extent is this $2 billion for the second half any kind of indication of a future run rate, or is it still very much event-driven?

Ronit, thanks.

Stuart will take the question on capital.

But just looking at the growth numbers, you're right.

We had good growth coming through Asia.

That was really most noted within the Global Banking Markets business and most noted within Hong Kong.

I wouldn't say there's any particular feature of it other than, again, we've got a strong balance of corporate business within our Global Banking Markets business, those corporates focusing on their financing needs for the year and getting them in place early on in the year.

And I think that's the main driver within that.

More broadly, we saw good progress in Retail Bank, Wealth Management and Commercial Banking.

I think nothing other than really the fact that we saw that appetite in -- that investor appetite and confidence somewhat returning to our Asian markets, which was borne out by the growth that we were able to see coming normally through credit and lending, but more broadly, the level of revenue generation that we saw coming through Global Liquidity and Cash Management, stability returning to Global Trade and Receivables Financing after a pretty difficult '14 and -- sorry, '14, '15 and '16 in terms of volumes and commodity pricing and in CMB, again, a strong performance.

So nothing outstanding other than the fact that the mix of the customer base within the book and strong first half performances as they get their financing in place.

So on capital, you're correct that we linked the prior buyback to the disposal of the operation in Brazil, where we linked this one for one last year, the $2.5 billion.

This is clearly not linked to the disposal of reserve.

So you're right to notice the fact that, effectively, we are now starting to regularly use share buybacks as part of the general toolkit that we have for capital management.

But the way to think about this is that, clearly, we will, first and foremost, try and reinvest the capital in the business in an accretive way.

We'll obviously look to the fact that we have said again that the dividend will be $0.51 for the foreseeable future.

And then we will also have a buffer that we will want to run for unforeseen circumstances.

And before you ask what they are, by definition, they're unforeseen.

And then last of all, if we have surpluses at that point that we think are above and beyond those 3 requirements, then we have now illustrated a propensity to buy back, this being the third one in 12 months to a total of $5.5 billion.

What you should not assume is that we have a program and that there will be regular buybacks.

We will look at the criterion I've just set out as we approach each probably half year-end.

And we'll have a look at whether it's necessary for us to do a buyback or whether we actually have capital ratios that, at that point in time, are lower than whether we feel it's necessary to do a buyback.

So what is different is, yes, share buyback is now a part of our toolkit and part of a regular toolkit that we'll use to manage the capital of the HSBC group.

Great.

Iain, can I just have one supplementary, please?

Just looking at the business areas, the Corporate Centre, I mean, I've seen all the significant items you've split out.

It still looks like, even if I adjust for the significant items, that the revenues and also the bottom line is a few hundred million dollars stronger than previous quarters.

Is there anything happening in the Corporate Centre that suggests this is a sustainable run rate?

Or is it just sort of noise and I shouldn't read too much into it, Iain?

No, I think it's pretty stable.

I mean, BSM is kind of clicking along at the same annual run rate as we've had for the last of couple years.

There's a little bit of variability that comes through those numbers based on gain or loss on AFS as we reposition the book to take account of the rate environment and positioning for the longer term.

Obviously, we've got the rundown of U.S. CML coming through.

That's more of a negative.

I think the one area of volatility within these numbers, which we clearly saw last year and may continue to see some of this year, is the mismatch that we've got between own credit spread and our own debt and hedging swaps, which clearly taken some volatility in the fourth quarter of last year.

But no, the Balance Sheet Management is running very much according to our expectations.

U.S. CML continues to run down.

Legacy credit was slightly favorable with respect to credit and funding fair value adjustments, operating expenses largely where they are.

And the associated switch, so the main associated switch sit within that as well, are very much in line with expectations.

So nothing particularly odd, and we'll clearly keep you posted as we continue to manage that volatility with our own debt and hedges.

Our next question today comes from Chris Manners from Morgan Stanley.

It's Chris from Morgan Stanley here.

Just 2 questions, if I may.

The first one was on Balance Sheet Management.

Revenues looked like they were down a couple of hundred million quarter-on-quarter, but I suppose curves are a bit steeper.

U.S. rates are up.

I know the average of Hibor was down.

And I know, Stuart, you used to sort of guide us to Balance Sheet Management revenue numbers.

Is there any guidance you could give us there and maybe explain a little bit of the dynamics because that was a little bit softer than I'd thought?

And the second question was on impairments.

So it looked like a really good impairment quarter.

I know you didn't get the recurrence of the oil and gas impairment you'd had before.

And it did look like Asia ticked up a little bit.

But as I look at $663 million of impairment charge in the first half, $3.5 billion of impairment charge for consensus for next year, are there any sort of credit black spots or anything we should be worried about?

Or do you think that impairment charge could come in more benign than people are expecting?

So let me just take BSM.

So BSM, 2.5 to 2.7, no real change there.

Just one of the things to bear in mind though, that in a rising rate environment, BSM initially will do slightly less well because you get the repricing come through and the benefit will be seen in RBWM and CMB, and that's what you should expect to see.

So as rates start to rise, CMB and RBWM will benefit.

You can see that in both sets of numbers really from kind of first quarter onward, actually, probably fourth quarter of last year a little bit and then the first and second quarters this year.

And BSM will be slightly softer because, effectively, it's got the risks.

BSM makes the majority of its money in -- either when the curve is very steep and/or rates are going down.

And so therefore, when rates are going up, the converse happens.

But I'd still guide you to 2.5 to 2.7, and obviously, we're seeing rate rises there.

But you won't see bigger numbers than that because, as I say, the bigger numbers actually will be coming in RBWM and CMB.

On LICs, I'll pass it to Iain.

Yes.

On impairments, Chris, just a very stable picture across our portfolios around the world.

We had 2 specific names in Global Banking and Markets in Asia against which we made provisions, nothing common from a sectoral perspective.

Probably, the underlying feature was more to do with fraud than it was to do with business performance or economic drivers.

But beyond those couple of names, very, very stable within our retail portfolios around the world, most notably, obviously, the biggest markets of Hong Kong and the U.K. Commercial Banking credit, again, stable; and Global Banking and Markets, in the round, a very stable picture.

I mean, I think that part of the comparison is clearly aided by the fact that in the first quarter of last year -- first half of last year, we had significant charges in oil and gas and one name being provided for in the metals and mining sector, which did not recur.

But overall, we -- continued conservatism and prudence from underwriting, great consistency across the portfolios.

The risk teams are doing a good job in that regard with the businesses, so stable.

Perfect.

And so I guess, do you think with LICs at such as a low level, you're taking enough risk?

Yes.

Thanks, Chris.

Our next question comes from Raul Sinha from JP Morgan.

If I can have 2, please.

Just the first one, following up on Stuart's discussion about the buyback and the capital ratio.

If -- obviously, I understand that the core Tier 1 is going to go down by 20 basis points because of the buyback, but that still leaves you well in excess of your 13% target.

And if I look at the take of the scrip this year, I think it's about $2.8 billion so far.

So the buyback this year has broadly only offset the scrip dividend.

So just when we think about the core Tier 1 ratio, what magnitude or time frame do you think we're going to head back towards the 13%?

That's the first one.

Yes, sure.

Raul, just keep in mind, as I'm sure you do, that in the -- at the end of this year, we'll have had a transition adjustment coming through common equity Tier 1 and IFRS 9. We'll talk to you about that in more detail later this quarter, early in the fourth quarter.

I'm not going to give you a sizing of that.

The sizing hasn't changed as we continue to work through the analysis, but we'll give you specifics around that later.

But that's going to drop the common equity Tier 1 ratio by a few basis points.

I'll keep you guessing as to exactly how many, but that's going to drop it off.

And then, there are still a number of areas out there with respect to significant uncertainty on the regulatory front, most notably around revisions to Basel III where the dialogue continues but with no clarity as to how that dialogue is going to settle down.

That's still for the banking industry probably outside the U.S., frankly, and, to a lesser extent, inside the U.S., represents risks in terms of RWA inflation and consequential knock-on to the common equity Tier 1 ratio.

Add to that not insignificant geopolitical uncertainty, I think it goes again to Stuart's comment around the need to maintain some prudence in our management buffer within this.

We're clearly happy with the strength of the capital ratio in terms of more than being supportive to the growth opportunities in the various markets across our network, around the propensity to support the dividend, the propensity to support buybacks, but there are still a couple of features out there that we've got to settle down.

If you've got any particular insight as to when exactly that's going to settle down beyond IFRS 9, I'd love to hear about it, but it's still a pretty uncertain picture.

Okay.

That's really helpful, Iain.

Can I have a second one, please, just on CMB and the trends in the revenue line within that?

There are some pretty divergent trends, particularly weak performance in Global Trade and Receivables.

I guess that's probably margin pressure.

Could you give us some color on what's driving that in terms of geographies?

And then there's a Markets products in other line in CMB as well, which seems to be a little bit volatile, quite hard to forecast.

If you could give us some color on what's going on there, that would be useful as well.

Yes, absolutely.

On that last one, Raul, it is lower insurance revenues coming through.

That's where we book insurance revenues within the CMB business.

So the majority of our insurance revenues are booked through Retail Bank, Wealth Management, but there is a component comes through insurance and there were lower insurance revenues in CMB this quarter.

Going to your global -- going to your Trade and Receivables Financing, broadly speaking, we're seeing some return to stability in that regard.

We saw higher numbers in Asia, which is broadly on higher balances and volumes.

Pricing is still very much under pressure in that product space, particularly sort of in the plain vanilla and documentary credit standpoint.

We saw lower revenues coming through Middle East North Africa and that was primarily driven by repositioning and the exit of customers as we continue to just ensure we've got absolutely there a composition of the portfolio from a financial crime-risk management perspective.

So as we sort of work through and complete our work on back book validation from an AML standpoint, that's part of what contributed some of the pressure in Global Trade and Receivables Financing in Middle East and North Africa.

But I think, broadly, the GTRF team is encouraged by the fact that we're beginning to see volumes improve.

There's some semblance of stability returning to commodity pricing.

And it's certainly a more encouraging picture in the first 2 quarters of 2017 than was the case in '15 and '16.

Our next question today comes from Manus Castello from Autonomous.

I wanted to dig into the costs a little bit more, please.

I wonder, can you give us a bit more color on exactly where you're spending this extra $300 million in Retail so we can get on idea of what your priorities are when you've got flexibility to invest?

And what should we think about going into '18, to come back at Alastair's question a different way?

Are you prepared now to make additional investment, and therefore, that $7.1 billion exit number that we're looking at for this year will step up into next year, because that's the way that I was reading that extra investment?

And secondly, just a small one on the one-offs.

I notice that you've just started putting in a Brexit charge into your exceptional items.

How big do you think that's going to end up being?

So the Brexit was $4 million, which is legal fees so far.

But probably, it'll be a few hundred million, yes, a lot less than ring-fencing, but it'll be $200 million, $300 million.

More broadly, on costs, Manus, the investment, that is focused largely in North America, and within North America, predominantly Canada in actual fact in terms of automating platforms, growing market share, in actual fact, recapturing market share that we have surrendered over the course of the last couple of years.

We got that investment underway in the first half of the year.

It will be largely completed by the end of the year, so we do not expect to see that sitting in the run rate as we exit.

So the exit remains broadly consistent with that we've talked about in terms of $7.1 billion, $7.2 billion exit -- quarterly exit rate.

In terms of moving into next year, Manus, going back to my comments to the question earlier on costs that Alastair asked, the guidance should very much be positive jaws.

So as we see the opportunity to see growth in the markets across the network, that clearly has volume implications in terms of the pressure that, that puts in operations, whether it's more credit card production, more loan documentation, service calls, collection calls and so on and so forth, but also the investments that we will make to support that growth.

So the guiding feature will be, one, maintaining discipline, very, very strict discipline around cost management informed by our propensity to generate revenue growth, and within that context, generating positive jaws.

So that is, for us, the guiding metric is positive jaws.

It's not necessarily keeping costs flat.

We are not looking to start the business of investment.

Quite the contrary, we would -- through these cost-saving programs that we've executed over the last 2.5, 3 years, it is very much about creating capacity to build investment in the capabilities of the business.

And those jaws that you've delivered in the first half, I think, of 0.5%, is that the kind of level of positive jaws we should think about or am I not totally right there?

Just positive jaws, we'd happy with.

We had 1.6% in the second quarter, 0.5% for the year.

But if you look at the global business breakdown, in the Retail Bank Wealth Management had very strong positive jaws of 8.3%.

I think Global Banking and Markets had positive jaws of about 5%.

And I think Commercial Banking had about 1.8% or 2% positive jaws.

So we're not looking to generate 8%.

That would suggest necessarily that we're probably not investing at the right level.

But a couple of percentage points that creates capacity for us to take those investment decisions as and when we think is appropriate would be a nice thing to accomplish.

But positive jaws is the driving force, even if it's only 0.1%.

Our next question today comes from Rohith Chandra-Rajan from Barclays.

Just a couple of quick follow-ups, hopefully quick anyway, if I could, please.

The first one is just on RWA growth for the second half of the year.

Just, Iain, coming back to your comments around loan growth and then also the model changes in GB&M.

So if I interpreted your loan growth comment correctly, it sounds like there might be a bit of a slowdown in the second half if some of the GB&M performance was perhaps a pull forward from what you expected later in the year.

So I wanted to check if that was broadly, broadly in line with your thinking.

And then the timing of the $20 billion RWA reduction from GB&M, is that something for the second half of this year or is that longer dated?

And then the second -- sorry?

Yes, I'm sorry.

Go ahead, go ahead.

And then the second one was just to follow up on Chris' credit quality question.

Given that the -- I guess, the charge picked up, the gross charge picked up to 45 basis points in the second quarter, you flagged a couple of, I guess, notable one-offs.

So should we expect that to go -- I mean, that 45 is still not particularly high, but should we expect that to go down in the second half?

Okay.

Look, RWA growth, let me go through the models question first.

That is dependent on PRA approval, and therefore, sadly, I cannot predict whether it's second half or into next year.

Clearly, we are working very closely with our regulator to get those model approvals in the second half of the year, but that one's a little bit out of our hands.

In terms of overall RWA development, clearly, our focus is on growing the business.

As we talked about earlier, the first half is particularly strong.

I wouldn't necessarily be encouraging you to refocus on what you've already got for the second half of 2017, either in terms of revenue or balance sheet growth outlook.

But to be clear, where we are from a capital management perspective, at which RWA sits very much at the center of, the discipline within the businesses continues to be on improving the overall profitability of the customer relationships that we have.

And so there is a constant focus on taking less profitable performing business and repositioning that into more profitable product and relationships.

So that -- notwithstanding the fact that we've achieved our target of $290 billion, that discipline is not going to get slackened off.

And to the extent that we continue to grow the business, we clearly have capacity to do so within our capital resources, but we're going to keep a sharp focus on this.

But no, to be clear, the focus is on continuing to grow these businesses.

And then just on the credit quality point?

Look, the charge step-up, yes, we had a couple of names [in the industry] that stepped into, but also, as we grow our businesses in Mexico, so we continue to grow business in Mexico, that growth is coming across the businesses, but is also largely informed by what we're doing in Retail Bank Wealth Management, where, as we grow the Retail Banking products, there is an embedded higher loan impairment charge within that, and that is what is contributing the higher growth charges in the first half of the year.

But that is really the only feature.

When you look across loan impairment charges by business, by geography, it's very, very stable.

It's in line with expectations, in addition, absolutely including the Mexican market where we continue to grow balances within Retail Banking.

So predicting exactly where this goes in the second half of the year is mission impossible, but we're very happy with the stability and quality being demonstrated by credit portfolios.

Okay.

I guess if I look at the gross charge, Q1 to Q2, it was 30 up to 45.

The LatAm charge was fairly stable.

So I mean, that does suggest actually, it was pretty much driven by the -- the change was driven by the stuff you highlighted in Asia?

That's the one shade of it, yes.

Our next question comes from Claire Kane from Credit Suisse.

Just a follow-up to some of your comments around the second half revenue outlook.

I think you're suggesting that you're quite happy with the consensus there.

Given we obviously have a stronger volume number and you're guiding to stable margins, are you concerned more about the noninterest income environment?

And perhaps, could you comment on how July has been so far?

No.

July has been reasonably consistent.

But when you look at the interest income component, there's a significant component of that comes through Global Banking and Markets.

And if you look at seasonality in Global Banking and Markets, notwithstanding the stability of revenue streams within it, it is dependent on a higher proportion of noninterest income revenues, and there is clearly seasonality that we've experienced historically in that business.

And it's again informed by the composition of our portfolio, where we've got a higher proportion of corporates relative to other groups when we reflect on composition versus financial institution group.

But it's -- no, we're just -- we're looking at overall levels of activity and we think consensus right now for the second half totally reflects where we think we're headed.

Our next question comes from the line of Tom Rayner from Exane.

Just listening to a number of the answers you've given to the questions, I'm just sort of wondering if there's any change in your sort of philosophy here about what HSBC is.

I mean, are you starting to view HSBC as more of a sort of growth story now?

And the reason I ask that is Slide 30, which has a nice breakdown of the underlying loan growth, shows second quarter annualized growth rate of double digit.

Yet I think, Iain, you said there wasn't anything particularly unusual distorting that.

On the costs, the very clear message that you're sort of happier now and think about positive jaws not sort of sticking to some sort of flat cost target and if we have better revenue, we shouldn't necessarily be surprised, I guess, to see the cost growth picking up.

And then on the sort of capital return, Stuart, the way I'm sort of interpreting it, 100% may be a free cash flow to be returned to shareholders over time, but [not] very clear about what the free cash flow is, i.e., once you've invested everything you can in RWA growth at the right sort of return level.

Am I interpreting all this correctly?

Or am I, as usual, trying to read too much into things?

So the capital, you're interpreting correctly.

The capital, you're definitely interpreting correctly, so that's an easy one.

And are we saying this is a growth story?

Well, there's a lot of things growing.

The loans and advances are growing.

The revenues are growing.

And we've got positive jaws.

And we're saying, clearly, we will invest where we can get positive jaws because we're not going to starve the business.

How you characterize that is kind of up to you, but...

We've kind of always viewed it as a growth business, we've just a bit of work to do to be able to demonstrate that with the amount.

If you go back even to 2011, Tom, think about the number of transactions we've done over the last 6.5 years.

I mean, we've provisioned the business.

So Tom, we sold 97 businesses.

The headcount has gone from 330,000, down to 230,000, so there's been quite a big piece of restructuring.

We'll have taken $6 billion out the cost base, et cetera.

So you could argue there is a more focused, more logical cohesive set of businesses that now remain.

And yes, I think there is absolutely growth in these numbers.

Our next question comes from the line of Michael Helsby from Bank of America.

I've got 3 questions, if that's all right.

First, on capital, on Page 2 of your interim report, you mentioned the CCAR, and obviously, the U.S. passed what you'd asked for.

I was wondering if you could enlighten us on what it was that you actually asked for in the CCAR from a capital distribution.

Second is on the tax rate.

The effective tax rate in the first half was 21%.

I was just wondering if that was reasonable adjusting for the levy obviously in the second half, a reasonable effect of tax rate to think about going forward.

And I was wondering, with all the talk of tax cuts in America, what the sensitivity of the tax rate would be to a given fall in the U.S. corporation tax rate.

And then, finally, thank you for the extra disclosure on the U.S. -- sorry, the U.K. credit risk, some quite interesting things to draw out.

But your SVR of 5%, it's very low relative to the industry.

And it's interesting that you give us the interest-only mix, so that's at 26%, which is -- it's actually broadly in line with the industry.

So the SVR is low despite having the interest-only component.

So I was just wondering, why is your SVR so low?

What are you doing differently to other banks in the U.K. who have got much bigger SVR proportions?

And I was wondering if you could tell us what the yield on your mortgage portfolio is in the U.K. at the moment, and also, what the gross share you took in, in Q2 in terms of mortgage sales.

So stock of mortgage share in the U.K. is just over 8%, save by 1%, which I think is up about 60 basis points compared to where we were at this time last year.

Michael, I do not have the specific gross yield on the mortgage book as a whole in the U.K. We can get back to you on that one.

And we'll get back to you on the SVR as well because I have absolutely no clue as to why we've got a lower proportion of SVR compared to the market.

I think it's just largely around how we position different products within the channel.

But we'll come back to you on those points within the U.K. mortgage book.

In terms of the tax rate, 21% is -- 21% to 23%, I think is the range within which we would think the effective tax rate is most appropriately positioned when you think about the composition of profits around the globe, that generated from Asia, U.K. and the U.S. So yes, it's reasonably normal.

Obviously, last year, with these allowances around goodwill, significant charges from litigations, customer redress, fines and penalty, is all -- is very much distorted the effective tax rate in the second half last year, which was about 53%.

Now that effective tax rate which I gave you, again, obviously, is before you include the effect of the bank levy.

In terms of the impact on lower U.S. rates, well, first of all, you've got to believe that it's going to happen.

And if it does, it's unlikely it's going to happen anytime in the near future.

In the longer term, the benefit of the lower U.S. tax rates clearly would be beneficial to HSBC.

In the short term, we would have to revalue the deferred tax asset and that, almost certainly, would result in a small impair -- well, an impairment in the deferred tax asset, some of which we get back through the capital line, which obviously would reduce the deduction from capital for deferred tax assets.

So needless to say, not a straightforward answer because it's never straightforward when it comes to the impact on capital.

But clearly, if the tax rate were to be reduced from where it is presently in the 30s, down to, for example, in the low 20s, there would be somewhat an impact on the U.S. deferred tax.

Now if you took an extreme scenario, so, for example, if the U.S. corporate tax rate dropped to 15%, you'd have a deferred tax asset write-down in the first instance flowing through the P&L of about USD 2 billion to USD 2.5 billion, but we'd get some of that back through the capital calculation.

In terms of what we asked for in the capital plan in the U.S., sorry, not sharing that.

Safe to say that we had a capital plan that made recommendations around the return of surplus capital from the U.S. business to the parent company over the same sort of time frame that I had talked about when last addressing this topic a quarter ago and 2 quarters ago, and 3 quarters ago in actual fact.

So we are very focused on returning surplus capital from the U.S. to the parent company, and that was part of what was in our capital plan, which was -- which raised no objection from the Federal Reserve.

Can I just push back?

Why is it a sensitive number?

Why don't you want to tell the market what you've asked for?

Frankly, to keep some flexibility around how we manage our capital.

We will take our last question today from Martin Leitgeb from Goldman Sachs.

Just 2 questions from me.

The first one, just a follow-up again on loan growth and apologies on that, but obviously, I think the 3% growth figure in the second quarter draws a lot of attention.

I was just wondering, how should we think about the loan to deposit ratio evolving over time?

And I remember some time ago, HSBC coming down from a level of 90%, below 90%, the target to remain below 90% and an inflection point becomes visible around the fourth quarter, often which the loan to deposit ratio has edged higher towards the 70% and over 70% now.

How should we think about it going forward?

And in this context, also looking at your capital and funding position, would acquisitions, small acquisitions, loan books, similar, will be something you would consider if it's the right opportunity in order to increase lending?

And the second question, related to the U.K., which obviously, you referred to as one of the growth areas.

And I was just thinking, how should we think about market pricing in U.K. retail going forward?

We have one, the PFS window closing around February next year; and second, the comments from the PRA on unsecured and probably some too cheap market pricing in unsecured.

Would you expect that the impact of both could be that pricing asset yields would increase in the U.K.?

So around the AD ratio, the number that we put out, which actually I think was back in 2011, was a ceiling of 90%, not a target, a ceiling of 90%.

It is absolutely the case that we're happy that we sort of moved the loan to deposit ratio up from a lower ground, about 67.5%, 67%, 68%, up to just over 70%.

(technical difficulty)

Sorry about that.

I thought California exchanges had gone out with sort of the last entry, so I don't know how we got a cross line there with somebody else coming in.

Martin, if you're still on the line, are you?

One moment, please.

Yes, still here.

Martin, sorry about that.

So yes, we were talking about the LD ratio, the asset-to-deposit ratio.

So look, yes, there's absolutely capacity both from a capital and from a funding perspective, to grow the loan book.

It's encouraging to see the AD ratio move from a low of 67.7% a couple of quarters ago to just over 70% now.

Maintaining that momentum would be good.

On acquisitions, the story really hasn't changed.

Are we building capability for a big acquisition?

No.

If there were small portfolios that were highly complementary to our business, it's certainly something that we would consider and actually have considered over recent years with some very small portfolios in markets in the last 5 or 6 years.

In terms of U.K. growth, I'm really sorry, can you repeat your question for me?

Yes.

The question was more regarding the outlook for pricing in U.K. retail lending.

And the background is the TFS drawing window, which something has led to some compression on the mortgage side, is closing as of end of February.

And equally, there has been some comments by the regulator with regards to too aggressive pricing in unsecured lending.

And so the question was whether you would expect or you see already some of the upwards pressure in margins in pricing?

No, I mean, that's been a feature of net interest margin for the last few quarters.

There's been pressure on pricing in the U.K. market and with -- in mortgages in particular.

Less so across the unsecured book principally because we've got a smaller proportion of U.S. and U.K. unsecured lending overall and, again, fairly conservative position within that.

But there's no question about it, within U.K. Retail Banking, there has been pricing on the asset side for quite some time now.

Whether an unwinding of QE in the U.K. would necessarily ease that, I'm not quite sure because a number of our competitors have been really quite aggressive about attracting deposits in terms of paying for deposit and bank transfers, so people clearly focusing on diversifying their source of funding within the U.K. market.

But there is no evidence at the moment of seeing any repricing opportunity within the U.K. retail market.

So sorry we got cut off there, not that there are any other -- any last questions coming from the group?

If not, you're...

We have no further questions.

Okay.

Well, thanks very much, everyone, for joining the call.

Thank you.

That brings the analyst call to an end.

Thank you.

Thank you, ladies and gentlemen.

That concludes the call for the HSBC Holdings plc Interim Results 2017.

You may now disconnect.