滙豐控股 (HSBC) 2017 Q3 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 earnings release.

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

This presentation contains non-GAAP financial information.

Reconciliation of the difference between the non-GAAP financial measurements with the most directly comparable measures under GAAP is provided in the earnings release available at www.hsbc.com.

The analyst and investor conference call for HSBC Holdings plc's earnings release for Q3 2017 will begin in 10 minutes.

(Operator Instructions)

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc's Earnings Release for Q3 2017.

For your information, this conference is being recorded.

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

Thanks very much.

Good morning from London, good afternoon to everyone that’s dialed in from Hong Kong, and welcome to our third quarter results call.

I'm here with Iain MacKay.

We've made good financial and strategic progress since the half year, and Iain will run you through the details shortly.

Today's call will focus on the numbers, but there's the usual slides, and our strategic actions in the appendix of the investor deck outlines some of our achievements in the quarter, and I'll give a fuller update at the full year.

I'm now going to hand over to Iain to take the rest of the call before we go to Q&A.

Iain?

Thanks, Stuart.

Our businesses has got a good momentum for the first half into the third quarter.

Third quarter reported profit before tax was $4.6 billion, up $3.8 billion, due largely to nonrecurrence of a number of large significant items from the same period last year, including the impact of the disposal of our operations in Brazil.

Adjusted profit before tax at $5.4 billion was broadly stable, that's higher revenue and lower loan impairment charges, were marked by increased operating expenses including continued investment in growth and higher performance-related pay.

For the first 9 months of the year, adjusted profit before tax was up 8%, and reported profit before tax was up by 41%.

Growth in loans and advances translated into higher adjusted revenue in our 3 main global businesses.

Retail Banking and Wealth Management had a good quarter, with strong revenue growth from current accounts, savings and others, and further loan and deposit growth in Hong Kong, the U.K. and Mexico.

Commercial Banking benefited from another strong revenue performance from Global Liquidity and Cash Management, particularly in Asia.

And Global Banking and Markets continued to grow revenue despite a challenging quarter for the industry, demonstrating the benefits of its differentiated business model.

It achieved this largely through growth in Global Liquidity and Cash Management, Equities and Securities Services, which exceeded the impact of subdued market activity on our banking and fixed income businesses.

We grew lending by a further 6% across all our global businesses since the third quarter of 2016, or 8% excluding our U.S. C&L portfolio and (inaudible) balances, mainly in term lending and mortgage balances in Hong Kong and the U.K. We have completed 71% of our most recent $2 billion equity buy back as of 26 October, and we expect to finish by the end of 2017.

Looking quickly at some key metrics for the year-to-date, the reported return on average ordinary shareholders' equity was 8.2%.

Reported return on average tangible equity was 9.3%.

On an adjusted basis, with a negative jaws of 1.3% reflecting the increased investment in business growth in the second and third quarters.

And we had tangible net asset value per ordinary share of $7.29.

Slide 3 provides detail on the items that take us from reported to adjusted for both the third quarter and the first 9 months of the year.

The income statement for this year's third quarter includes no gains or losses relating to fair value on debt, whereas the comparable period in 2016 included a negative fair value movement of $1.4 billion.

The reported results for last year's third quarter also included a $1.7 billion loss on the disposal of our operations in Brazil, as well as higher charges relating to our cost-saving programs and U.K. customer address.

The reported results for this year's third quarter included $104 million of releases in relation to legal settlements and provisions.

You'll find more details of these adjustments in the appendix, but the remainder of the presentation focuses on adjusted numbers.

Slide 4 breaks down adjusted profit for the year to date by global business and geography.

Adjusted profit before tax of $17.4 billion was up $1.2 billion or 8% driven by higher revenue and lower loan impairment charges.

Our business remains well-balanced as the breakdown of global businesses demonstrates.

Slide 5 looks at profit before tax for the third quarter, which was broadly stable compared to the same period the last year.

Profits were up in 3 out of 5 regions.

The reduction in Europe and Europe's profit before tax was driven by higher interest costs in the holdings company; valuation differences in long-term debt and associated swaps; and the non-repeat for a 2016 U.K. bank levy credit in the Corporate Centre; and increased costs in global banking markets, including higher performance-related compensation.

We had negative jaws of 4.9% in the third quarter.

Slide 6 provides more detail on revenue.

Our global businesses maintained the momentum from recent quarters, growing revenue by $540 million or 4% compared with last year's third quarter.

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

Slide 7 looks at Retail Banking and Wealth Management, which grew revenue by 6% compared with last year's third quarter.

Wider spreads and higher balances in Hong Kong helped increase revenue from current accounts, savings and deposits by $312 million.

Income from investment distribution increased by $86 million from higher sales, reflecting the impact of renewed investor confidence.

And we grew customer lending and customer deposits by 6% and 5% following strong performances in Hong Kong, the U.K. and Mexico.

Revenue in Commercial Banking grew by 5% compared with last year's third quarter.

Global Liquidity and Cash Management had another strong quarter, growing revenue by 16% in wider spreads and balance sheet growth in Asia.

Credits and lending grew by 1% as balance sheet growth in the U.K. more than compensated for the impact of margin compression in Asia.

Global trade and receivables financing revenue was also up slightly as growth in Asia and the U.K. more than offset the reduction from repositioning in the Middle East and North Africa and spread compression in Asia.

Slide 9 looks at Global Banking and Markets, which grew revenue by 2% compared with last year's third quarter.

This was a good performance in spite of subdued trading activity across the market, thanks in large part to our diversified business model and continued market share gains.

Markets revenues were broadly stable compared with last year's third quarter, as the 25% increase in equities revenue almost eliminated the impact of lower fixed income and revenues.

Our transaction banking products continued to perform well from higher balances and higher spreads and deposits, particularly in Global Liquidity and Cash Management, which grew by 19%.

Global Private Banking revenue was broadly stable compared with last year's third quarter.

We have now grown client assets in Global Private Banking in 4 consecutive quarters and seen positive inflows of $13.1 billion in our target markets since the start of the year.

Revenue grew by 7% in our target markets in the third quarter, particularly in Hong Kong.

Corporate Centre revenue fell by $220 million compared with the third quarter of 2016.

The biggest driver was $178 million reduction in revenue from our one-off U.S. CML portfolio, as we all but completed the wind-down of the business.

Balance Sheet Management revenue also reduced by $160 million.

This is a consequence of repositioning activity and lower liquidity surpluses as we grew our lending across the group by $69 billion or 8% since last year's third quarter.

Slide 12 looks at net interest margin, which was broadly stable from the half year.

Net interest income of $7.1 billion was $137 million higher than the second quarter.

Our net interest margin for the first 9 months of the year was 1.63%, 7 basis points lower than 2016, excluding Brazil.

This was mainly driven by lower asset yields, which reduced the year-to-date net interest margin by 5 basis points.

This included a fall of 10 basis points, split broadly equally between the C&L one-off and lower U.K. interest rate, which was partly offset by 5 basis points increase, primarily due to loan growth in Mexico and Asia.

The increased cost of debt and the negative impact of 5 basis points primarily related to MREL issuance.

Conversely, wider deposit spreads from higher interest rates, primarily U.S. and Hong Kong dollar rates, raised the 9-month net interest margin by 5 basis points.

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

Slide 13 looks at operating expenses.

We achieved a further $580 million of annualized cost savings in the third quarter, which helps support growth and absorbs the cost of inflation and continued investments in regulatory and compliance programs.

We had negative jaws in the third quarter, which largely reflects our decision to accelerate investment in business growth, as we told you about at the half year.

We remain committed to achieving positive jaws for the full year.

Third quarter costs were $534 million or 7% higher than the same period last year, mainly due to increased business investment and higher performance-related costs.

We invested $184 million in business growth in the quarter, mainly in Retail Banking and Wealth Management, which was partly funded by the sale of our shares in Visa Inc.

in the second quarter.

We plan to invest around $200 million more in growth initiatives in the fourth quarter.

Performance-related compensation rose by $324 million, reflecting the strength of our year-to-date performance.

With remaining expense, growth came from continuing enhancement of our digital and IT security capabilities, marketing initiatives in Asia and a small number of one-off expenses.

We expect to spend around $400 million of cost-to-achieve in the fourth quarter in line with the guidance we gave you at the half year.

We remain on track to hit our targeted annualized cost savings of around $6 billion by the end of 2017.

Moving on to Slide 14, loan impairment charges were $448 million in the third quarter, or 19 basis points as an annualized percentage of gross loans.

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

Moving to capital on Slide 15.

The group's common equity Tier 1 ratio was 14.6% on 30th September compared to 14.7% on 30th of June.

Our common equity Tier 1 capital increased by around $900 million, which included $900 million of capital generation from profits net of dividends and scrip, $1.8 billion of favorable foreign currency translation differences and the full impact of the $2 billion share buyback that we announced at the half year.

Our 2017 Pillar 2A requirement is 3.5%, of which 2% is met by common equity Tier 1. The increase of 60 basis points versus the 2016 requirement is mainly due to the reduction in risk-weighted assets between the end of 2015 and the end of 2016.

Earlier this year, we committed to update you on the potential impact of IFRS 9. As many of you are aware, we can't give you the actual impact until it's adopted on 1st January, 2018.

That will depend on changeful factors, such as the size of our balance sheet, market conditions and forward-looking macroeconomic assumptions, as well as our ongoing work and models data and other improvements.

However, recognizing those constraints, our current estimate is that we will see an increase in loan-loss allowances of around $2 billion before tax, which would impact the common equity Tier 1 ratio by fewer than 15 basis points.

Note that this is the fully loaded impact and does not take into account any transitional release that may be available.

Slide 16 looks at our group returns metrics.

The return on average ordinary shareholders' equity was 8.2%, and the return on tangible shareholders' equity was 9.3%.

You can see from the slide that the impact of significant items and the bank levy was to reduce returns by around 1.5%.

Our global businesses are performing well and the strength of our global network continues to drive improving 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're committed to delivering positive jaws for the full year, and we remain a well-funded business with strong capital generation and a diversified balance sheet.

We'll now take questions, and the operator will explain the procedure and introduce the first question.

Operator?

(Operator Instructions) Our first question today is from the line of Tom Rayner from Exane.

Two questions, please.

Firstly, I guess on costs, wasn't expecting to be asking this because I thought there would be such a deluge of cost questions.

But obviously, it makes sense not to try and manage your jaws on a quarter-to-quarter basis, I guess, and hence, the sort of negative jaws in Q3 maybe we shouldn't overreact to.

But I'm trying to get a sense, you obviously are reaffirming positive jaws for 2017.

Can you say anything about the sort of jaws going beyond this year into 2018, '19?

I am conscious as well we have a new chief executive coming next year, so maybe that limits how far ahead we can look.

But just wondered if you could give us an update on your thoughts on jaws beyond this year.

And then I have a second question on impairments, please.

Yes, Thomas, it's Stuart.

So look, I think you're absolutely right that we also believe it makes no sense to manage a firm this size and scale to jaws on the quarterly basis.

We kind of manage it to a much longer time series, and clearly look at jaws on a calendar year basis.

And we've recommitted that we're working to hit positive jaws for current year 2017.

Post 2017, it will again remain the case that the group will be committed to work towards positive jaws.

And as you say, managing on a quarterly basis creates a distortion, we have to invest for the future of the business.

And we have a number of investments into digital and so on during that quarter.

We also had good strong performance in revenues in certain businesses where we needed to top up the compensation, which is the direct result of increased revenues.

So yes, we need to think about jaws on a calendar year basis, and the commitment to positive jaws will continue.

Okay.

Just on the impairments, I think if I asked you sort of --or Iain, what the normalized impairment rate for HSBC is, you'd probably tell me 40 basis points, yet we've had another quarter of sub-20.

And I look at the gross charge and that's sort of running somewhere in the sort of mid-30s, and releases of about 15 basis points doesn't feel like that's particularly an unusual level of releases and recovery.

So I'm just trying to get a sense of whether normalized is changing or is likely to change at any point given that we've sort of derisked -- you've derisked the group underwriting standards, I guess, for change post the financial crisis.

We're in a lower rate world, your mix is different.

I mean, is there any thoughts about what normalized actually means for HSBC given everything that we know today?

As you quite rightly said, Tom, we've debated this one with yourselves and the wider community at great length.

You continue to see very stable credit performance across our portfolios this quarter, as you see over recent quarters.

The underwriting standards across the business has remained very consistent and you know the prudence that's embedded within that.

This quarter, we've got 19 basis points LICs as proportion of gross loans and advances.

And the only [end] which we saw slightly higher loan impairment charges within the U.K. And even there, it represented 18 basis points of gross loans and advances to customers.

So across our portfolios, we're seeing a very stable picture.

And as in previous quarters, Tom, I'd very much guide the market to look at this performance over a number of years and certainly extend well beyond sort of 8 or 12 quarters in terms of getting a sense of what normalized credit costs are that incorporates some of the changing conditions within the credit cycle.

So I won’t say this is guesswork, because, clearly, we've got a very strong connection with our risk colleagues across the group in terms of how we underwrite business and what the emerging trends are.

But what I can say is that we continue to see stable performance at both across the global business profile as well as the geographies.

Our next question comes from the line of Ronit Ghose from Citigroup.

Just had a couple of questions related to margin, please.

Thanks for the extra disclosure you're giving now on margins.

Can I ask you what was your exit run rate on the NIM?

So the 1.64% that's gone down to 1.63%.

Would it be closer to 1.60%, 1.61% as an exit run rate?

Yes, that's about right, it’s about 1.61% coming out of the quarter.

And the key drivers, Ronit, across that was exactly what we described in the call here.

We saw slightly wider margins on the liability side of the balance sheet.

A little bit of compression coming through the corporate, both in Commercial Banking and Global Banking Markets, spread both within -- in the U.K. and Asia, to a lesser extent.

Continued margin spread on the mortgage product in the U.K. But again, very, very muted as has been the case in previous quarters, and has been largely offset by expanding net interest margin.

I think the other thing to take into consideration, which will be a dwindling influence in net interest margin is the runoff of our consumer and mortgage lending business in the U.S. We're now down to $300 million of unpaid principal balances.

We would expect to see that gone by the end of this year or early next year.

So the number of quarters in which you will see a negative impact to net interest margin from the C&L business is pretty numbered now.

I think it's probably 1 or 2 quarters, probably at most.

And then the only other feature that's in NIM is slightly higher costs of holding company debt as we continue to issue and loan with regulatory requirements and guidance that we've provided around minimum requirements and eligible liability.

That's really -- it's a pretty stable picture from a NIM perspective.

And if you take the holding company debt out of it, just broadly speaking, liability expansion on the liability side, margin expansion on the liability side and a little bit of compression on the asset side.

Great.

And would the -- if we took the holding company debt or the TLAC out, does the -- if you just look at the liability spread widening versus the asset spread pressure, on the asset spread side, how much of this is a mix effect versus at a product-by-product level you're still seeing asset spread pressure, i.e.

you're growing faster in mortgages you called out in your presentation deck?

I'm just wondering, is there, within the mortgage piece, a material fund book back book margin difference in the U.K. and Hong Kong?

Similarly, in Corporate, I think on the global banking space, you said there's still margin pressure including in Asia.

So I'm just wondering, how much of this is sort of product level versus asset mix level?

It's pretty muted, Ronit.

In terms of mutual difference between the U.K. front book, back book and mortgages, it's really pretty muted, nothing of significance.

When you look at the compression in that product, you're usually talking about a couple of basis points, if that, in any given quarter, it continues to be an extremely attractive and a profitable product for the group.

And the same is true within the Hong Kong and wider [duration] in context.

The compression that we're seeing in corporate lending, again, is here in the single basis point type category.

So broadly speaking, what we're seeing is an offset between liability margins and asset margins in the round.

There's no particular standout feature on any particular product within the group.

Our next question today comes from Alastair Ryan from Bank of America.

So 2 on revenue growth, please.

First, it looks like volumes are broadening.

So you've been a very Asian-driven business for the last few years.

Is that fair that as mortgages start to kick in, in the U.K., Mexico is growing, the runoff's finished in North America, that you've got a broader front of volume growth there than you had before?

And then second, back to the net interest margin, and again, thank you for the disclosure.

I note that HIBOR's started going up almost exactly when you predicted it would, and we now get a base rate rise in the U.K., dollar LIBOR's a bit higher every day.

At what point -- now that MREL issuance is pretty much done, should that deposit spread expansion be outweighing the asset spread compression you've -- you discussed?

Okay.

Thanks, Alastair.

From a revenue perspective, we've had pretty good spread across the different businesses and the geographies.

As you see from our numbers, you've got good revenue growth coming through Retail Bank and Wealth Management, and that's informed by balance build both in the U.K. and in Hong Kong in mortgages.

Further afield, we see improvements also in the rebuild of our Mexican business.

But when you look at Commercial Banking and Global Banking and Markets, very strong performances in Global Liquidity and Cash Management across both of those global businesses.

And then within Commercial Banking, we continue to see a build in credit and lending with about 1% to 2% growth within that.

And again, that's most notable within the U.K., Hong Kong and Mainland Chinese markets.

When you look at Global Liquidity and Cash Management, again, very strong growth in the first half of the year.

Growth in the third quarter more in line with the guidance that we provided to you at the half year.

But again, as we rebuild businesses, we see improvements within Mexico, within Canada, further afield within the Asian businesses, looking away from Hong Kong and Mainland China.

So I think globally speaking, as you work country-by-country, there's good news in the vast majority of the markets in which we're operating, and certainly across the 3 main global businesses that we've referenced in the earnings release today also.

On net interest margin, you're absolutely right, in terms of improvement in HIBOR, which we're beginning to see come through the deposit base in Hong Kong, as the gap between HIBOR and U.S. dollar LIBOR tightens up.

It's not quite exactly aligned at this point, but it continues to move in the right direction.

If one were to assume that we get a base rate change in the U.K. in the month of November, that would clearly translate positively into the U.K. net interest income position.

I mean, broadly speaking, if you thought about an increase of 25 basis points in the month of November, that would broadly translate into about $45 million worth of increased net interest income in the fourth quarter for the U.K. business as an example.

On the MREL question, we certainly are in a good position.

And in that, we're not finished.

We'll continue to issue into the market when the conditions are particularly advantageous to us.

And as you know, we've had some very good outcomes from the issuance that we've done over the course of this year and last.

But I think, broadly speaking, if we see a couple more rate increases from the Fed and we start seeing the Bank of England bank rate moving in the right direction, then the NIM expansion that we see in liabilities will more than compensate, we would expect, for some spread compression in the asset side and the cost of MREL.

Just one follow-up, if I may, on the Balance Sheet Management.

Rude not to ask while Stuart's here.

I mean, we would expect it to go down a bit in periods where sure rates are rising, I think that's quite natural.

But what -- well, your famous $2.5 billion to $3 billion on a 12-month or a longer-term view.

Any comments, please?

Yes, so I guess -- yes, so I think we're still looking at $2.5 billion to $2.7 billion for this year, for '17; next year, lower.

So probably kind of $2.3 billion to $2.5 billion, something around that.

Because you're absolutely right.

I think if you remember, as rates go up, Balance Sheet Management will make less because of the shape of the book.

Commercial Banking and Retail Banking and Wealth Management will make more.

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

I had a couple as well, please.

Just wanted to follow-up on the margin question.

I guess if I look at your disclosure, and I appreciate it's relative to a parallel shift in the yield curve, but if I put through a 25 basis point rise in U.S. and U.K. rates, that would look like sort of a $450 million to $500 million benefit next year.

Just wondering, how much of that you think would be offset on the asset margin side?

So that'd be question one.

Then question two, just to clarify the cost guidance of the $7.3 billion run rate as we exit this year, you're talking about another $0.2 billion investment spend, I think, in the fourth quarter.

That -- presumably, that $7.3 billion excludes the $0.2 billion investment spend.

Perhaps you can clarify those 2 points, please?

So on NIM, your -- so the broad base of your interpretation around 25 basis points in U.K. and U.S. rates is in the right ballpark, Rohith.

In terms of how much of that may be are eroded away on the asset side, I think that's a pretty difficult one to guide on, right?

It's going to be very much informed by market dynamics.

It can only be development.

We've, obviously within the U.K. market, got an interesting couple of years ahead.

And we’ll see exactly how that translates into customer behavior.

Across each of our main businesses, it's really difficult to say.

So I would be hesitant to give you any guidance on that point right now.

But I think you can be rest assured, we'll give you as much insight as we can on a quarterly basis as we see the numbers coming through.

From a cost perspective, very much targeting the exit rate of $7.3 billion in the fourth quarter on a constant-currency basis in line with the guidance.

You've picked up on, obviously, with regard to that in terms of run rate, is the bank levy, which this year or next year, broadly speaking, is going to be about $1 billion slightly less.

If you then think about the investment that we've done over the second quarter, what we've signaled for the third quarter, we are in a growing revenue environment.

We have the capital available to support that growth, and it's clearly important that we maintain the investment around investing for that growth.

So whilst in that environment, we'll continue to invest across each of the main global businesses and the repositioning of our private bank.

So what you shouldn't take away from this is that we're targeting, in a growth environment, with momentum, a flat cost picture.

We will hit the exit rate that we talked about.

We'll deliver the savings that we talked about.

But we absolutely will continue to invest and support our businesses, and we'll give you the guidance as we work through that from a quarterly perspective going forward.

But you can see the $200 million that we've talked about, and that is not included in the $7.3 million (sic) [$7.3 billion] exit run rate that we're referencing on our charts today.

So I guess what you're reminding us on costs is that we should think about positive jaws rather than specific cost numbers as we go forward?

Yes, think about positive jaws and think about positive jaws in the context of 1.5, 2, 2.5 points, not 5%, 6%, 7%, 8% positive jaws.

If we're in that kind of environment with clearly growing revenues, we'll continue to invest in the capability of our businesses across digital, across process efficiency, the product and service offering to our customers and the footprint that we've got.

So positive jaws is absolutely what we would guide you to.

But I would exercise a little bit of caution about going up into the higher digits and positive jaws, because that would certainly indicate growing market, an opportunity to invest into that growth and to support that momentum.

Our next question comes from Manus Costello from Autonomous.

I had a couple of questions, please.

On capital, first of all, I wondered if the increase in your Pillar 2A is going to be permanent, I would have thought, or certainly linger for some time.

So when will you give us an update on your 12% to 13% CET1 ratio guidance?

I know you said you'll be above it for a period, but thinking about the 2A increase, presumably your stress test drawdown will go up as well, given that you've got lower RWAs as well.

I just wondered if you could clarify what you see is the go-to CET1 ratio now.

And then on costs, my question was about the $300 million top-up that you put through in the quarter for compensation.

I wonder why that didn't come through in the first half?

Why top-up in Q3?

Let me take the last question first, Manus.

The adjustment to the compensation is really a fraction of year-to-date.

We strengthened our provisioning for performance related compensation and the needs of the first, the second and the third quarters.

And then spend some time with Stuart and the team looking at the overall performance on -- through the first 3 quarters of the year and then adjusted accordingly for that.

So there's clearly a component that addresses first half performance, which was strong, and then reflects a year-to-date update in that overall scheme of things.

And is that something that we should -- is that always something that goes on over the summer with that?

Should we sort of look out for Q3 being a point where there's catch-up from bonuses?

No, not necessarily.

I think perhaps what differentiated 2017 with previous years is that we have had consistently strong performance.

If you reflect on the third quarter of last year, Manus, it was a pretty tough quarter for our numbers, with -- from an overall reported and, frankly, from an adjusted perspective.

So our reflection from a performance-related pay is exactly that.

It's related to performance of the business in terms of revenue and profit generation, okay?

On capital, look, the Pillar 2A now takes the overall common equity Tier 1 requirement to 11.4%.

We've been very consistent in targeting a common equity Tier 1 ratio between 12% to 13% and to the top end of that range.

Sitting around 13%, that's 1.5 points or so of buffer within the common equity Tier 1 space of a management buffer, over and above capital conservation, countercyclical, G-SIB and so on and so forth.

So we continue to have the view that around this 13% range, the top end of the range from the 12% to 13% is an appropriate place for us to have the capital.

Now the other thing that I'd bring out on the individual capital guidance in the updates with the Pillar 2A is within actual dollar terms, the capital requirement has gone down.

And that is largely that the rate increases informed by the fact that we have a, frankly, been very successful at taking our risk-weighted assets down between the end of 2015 and 2016.

And the Pillar 2A is informed by an annual ICAP.

The ICAP is built off the year-end risk-weighted assets position.

And correspondingly, that significant increase between the end of '15 and '16 translates into higher weight, but in actual fact, lower dollar requirement from an overall ICG perspective.

So that's the take, but I think sitting above the 13% top end of the range at this point, we clearly have a very strong capital position.

And even progressively bringing it back into the 13% range will continue to sit with a strong management buffer.

And clearly, as we continue to improve capital management or risk management across credit, traded risk, operational risk and the other risks, which are considered within Pillar 2A, it gives us the opportunity to work with the regulators to move those numbers both down as well as up.

Our next question is from the line of Joseph Dickerson from Jefferies.

You've basically targeted above $500 million of investment spend in the second half of the year.

How do you think about the return on that discretionary investment in terms of revenue?

And then secondly, is there any offset to this from regulatory costs coming down?

I noticed they were down about $100 million quarter-on-quarter in Q3.

Any color on those 2 items would be appreciated.

In terms of investing, any investment decision is taken with a focus on the return on investment targets that we've set, return on equity targets that we've set for the business; and specific focus around return on risk-weighted assets, return on tangible equity within those businesses; and the opportunity to move that number north for the group.

A significant proportion of the investment that we've targeted in the second half of the year has been on Retail Bank/Wealth Management.

But it's a high return equation within those businesses.

And at this point in time, that's where a significant shape of the investment is going.

So the decisions are informed by return metrics not project-by-project basis within each geography and within each global business.

And I think that's certainly what the market would expect from an investment decision and capital allocation perspective.

In terms of overall regulatory costs, they remain broadly consistent across the piece.

So reasonable stability within what we see from a financial crime risk management perspective.

We would expect to see, as time moves forward, the benefit, marginal benefits, of the productivity from a digital perspective within financial crime risk management.

So we’ve deployed globally platforms around transaction monitoring, supporting KYC.

And overall, as those become more embedded and finely tuned, we would expect to see some productivity.

But I think it's fair to say that over certainly the next few quarters, it would be reasonable to expect a broad-based stability within that number.

So when you think of some of the dynamics, implementation of some -- continuing implementation of regulatory requirements around the Basel III regime or CRD IV within Europe, a continued embedding of the financial crime risk requirements, continued emphasis from our regulators around things like stress testing, solvent wind-down, recovery and resolution.

And all of that expenditure falls within the overall regulatory spend bucket.

So you will have a little bit of variability quarter-to-quarter, but I think for the next couple of quarters, I think stability's a reasonable position to reflect on.

Our next question today is from the line of Claire Kane from Crédit Suisse.

Could I have 3 quick ones?

The first is to clarify on the investment spend.

Should we take the -- I think, it's $400 million that you're doing for the second half this year, just annualize that going forward, is that the best run rate?

The second one, just on -- clarify the NIM commentary you mentioned.

In terms of some of the allocation of the funding costs, it’s like you said, you have U.S. C&L drag.

But overall, are we expecting funding costs to go higher from here?

So even though you had a negative in that division from the assets running off faster, will we actually see any benefit from that running away as those funding costs just get allocated to other divisions?

And then my final question is just a follow-up on the capital.

Early this month, we had a paper from the PRA about group policy.

And just wondered if you foresee any implications on your 13% target from the requirements considered the local capital requirements of your main subsidiaries.

And on that, if there's any update on the downstream and of capital to the U.K. subsidiary previously meant to be $1.5 billion to $2 billion.

Okay.

So I'll take those in reverse order.

From a U.K. subsidiary capital requirement, the ring-fence bank, broadly speaking, based on our current understanding, the common equity Tier 1 requirements and overall capital requirements, we'd expect to be broadly consistent with what we've said from a group perspective, so in the range of 12% to 13%.

MREL requirements in the group, we've seen the guidance from the PRA.

So at the local level, I think it's 2x Pillar 1 plus Pillar 2, or 2x the leverage ratio calculated in local regulatory basis.

I think that, again, remained broadly consistent, maybe slightly higher, than the consolidated group picture from an MREL perspective.

So really, no change and no specific or growth divergence from the group guidance as it relates to the U.K. main operating subsidiaries.

In terms of U.S. C&L impact in net interest margin, clearly, we've got the higher-yielding assets running off.

And broadly speaking, that will be down to 0 by the end of the year or early next year.

We do have some residual liabilities on our balance sheet, which we will manage out over the course of the next 2 to 3 quarters.

And really have a clean and zeroed balance sheet from a U.S. HSBC finance corporation perspective.

I would suspect no later than middle of next year.

So we have a couple of basis points impact, if that, on net interest margin from a cost of funding perspective.

But not particularly significant.

And then lastly, on your investment, it -- annualizing that is broadly speaking in terms of working on the old spreadsheet fund is probably not a crazy idea.

But again, the investment will be informed by the opportunity to invest for improving profitability.

It will be informed by positive jaws.

So when we're in a growth environment, we'll invest to support the momentum around that growth, were that growth environment traverse, then our focus will be on constraining costs such that it continues to deliver positive jaws.

And all of these investments are subject to a very detailed cost and investment global process.

So this money just doesn't get easily spent.

And instead, our asset Q2 expenditure will also be defined on how the overall operating environment is and how the fund is doing.

So from building a spreadsheet, yes, it may make some sense.

But understand that we'll reverse it pretty quickly if we need to reverse it pretty quickly.

And no money is spent without us being able to see significant financial benefits for the group.

Our next question is from Raul Sinha from JPMorgan.

Can I have 2, please?

Just the first one on the U.K., could I ask you to comment a little bit on your U.K. loan growth appetite, particularly in the mortgage market as you've seen some decent growth picking up?

And there's clearly an expectation that the intermediary platform, as it comes online, will drive potentially more higher market shares and maybe a bit more net loan growth than we've been seeing in our business in the past.

So could you give us a sense of what magnitude of growth we should expect in this area?

And against that, what do you actually view the outlook for U.K. risk currently?

At the current time, the U.K. credit portfolios across the businesses are pretty stable.

We talked about this a little bit earlier, Raul, so there's nothing to add on that front.

In terms of market share at the end of the second quarter, we were about 7% of the U.K. mortgage market.

We've certainly grown into that during the third quarter, putting over $2 billion of new mortgage balances on.

The underwriting criteria around that remains pretty prudent, with new business, LTVs that are just over the 60% mark; the portfolio overall is 40%.

And as we continue to increase the number of intermediaries that we engage with, we're now seeing about 68% of the intermediary market.

In terms of the direct market, i.e.

through the branch network, we're seeing probably about -- well, we're probably about 20% of the market in that regard.

And overall, we're somewhere north of 7% now.

So the profitability of the product, the overall risk positioning of the product in the marketplace and the pricing is an attractive product.

The new platform, I think, is going live early in the fourth quarter.

So we should see some benefits occurring from that as well.

But the appetite for this product remains fairly well-positioned within the group.

And again, as I say, it's a prudently underwritten portfolio, but with good returns attaching to it.

There's also quite a detailed slide in the appendix, Slide 26, on U.K. credit quality.

And in terms of the margin implications of that, can I sort of assume that you're very happy to trade off the attractive returns these -- the U.K. mortgage product [close off] against the fact that, obviously, it's going to be quite dilutive for the margin from an asset perspective?

Well, you've seen, certainly in the last couple of quarters, sort of a about a basis point of net interest margin erosion emanating from the U.S. -- from the U.K. mortgage book.

So it is absolutely clear that there's a lot of competition, plenty of liquidity, chasing mortgage product in the U.K. right now.

But notwithstanding some of that pricing competitiveness, this remains a very profitable product within the group and within the U.K. business.

Can I just ask a second one on HIBOR?

Obviously, great call on the move-up.

But I guess most of that move-up in the Hong Kong 3-month HIBOR obviously was towards the end of the quarter.

Can you talk a little bit about how actually that flows through in terms of the net interest income within the Hong Kong business?

I mean, is the sensitivity here driven predominantly by the liability side?

Or is that an asset side -- size kicker that comes in with a lag as well?

Right.

So there is liability benefit clearly.

To date, within Hong Kong, that's largely been driven by U.S. dollars because we have a significant U.S. dollar liability base in Hong Kong, as well as Hong Kong dollars and renminbi.

However, the mortgage portfolio in Hong Kong is almost exclusively a variable rate mortgage portfolio.

And progressively, we'd expect to see a move-up in HIBOR reflected in repricing on the mortgage book as well.

So in Hong Kong, where we have a very significant, virtually all of the mortgage portfolios are variable rate products; whereas in the U.K., we've got quite a significant portion which is a fixed-rate product.

So we will see coming both -- through both assets and liabilities in the Hong Kong balance sheet as you see, over time, greater conversions between the U.S. dollar LIBOR and HIBOR.

Our next question is from the line of Natacha Blackman from Societe Generale.

I just have a quick one on funding.

Would you be able to comment on where you are on your plans for this year (inaudible) senior, and I assume you have no more AT1 or T2?

Look, we obviously are on track in terms of meeting our goals from an AT1, T2, MREL/TLAC perspective, Natacha.

But what we've also seen is that when the market conditions are particularly conducive from a pricing and from size [additions] opportunity by different currencies and different markets, we'd been happy to issue into that.

And as you've also seen, the product has been extremely well-received by the marketplace over the last few quarters.

And our treasury and DCM teams have done a great job writing into those markets.

So I think we will continue to approach the market fairly opportunistically.

We know what we need to accomplish, broadly speaking, over the course of the next 2 or 3 years.

And if we can prefund at a particularly attractive rate, then we will continue to do so.

Okay, sure.

But for AT1, are you able to issue during a buyback?

I mean, surely, I think that's...

Not this year.

But to the extent we would do any future buybacks, we would look to find a way to possibly restructure those such that if we were -- if the market was particularly conducive to AT1s, we'd be able to issue instead.

But under the current buyback scheme, you're correct, we are unable to issue AT1s.

Our next question is from Fahed Kunwar from Redburn.

Just a couple of questions.

The (inaudible) performance in the markets was exceptionally strong, particularly versus your peers.

What products did you take market share and was there any kind of positioning gains within that revenue line?

And then a second question was just going back to the jaws point.

I think you talked about 3% jaws being feasible, kind of going forward.

And after that, consensus to have kind of around 4% jaws going forward.

Is that still the right kind of positive jaws?

Or is that too high or too low?

Any kind of help would be very good.

Okay.

Thanks, Fahed.

Look, on the equities front, really strong performance in the prime spaces especially in Asia, and that's really the standout performance in the quarter on the equities front.

And on a year-on-year basis, that represents 25% up.

But it was largely within prime and mostly within the Asian business.

On jaws, I think guiding to 3% to 4% is probably a little bit too (inaudible) from a jaws perspective.

I think if you're talking 1.5%, 2%, 2.5% -- and again, in a growth environment, going back to Stuart's comments earlier, where we see momentum around growth within our key markets at an attractive returns level, then we would continue to invest into that.

And therefore, I would -- our behavior and cost will be informed by generating positive jaws on an annual basis.

But positive jaws of 1 to 2 points.

Going beyond that, I think it really starts the question whether we're appropriately investing and supporting growth in the business.

And we will take our final question today from Martin Leitgeb from Goldman Sachs.

I just have 2 questions, please, one is a follow-up on the U.K. mortgages and one on Brexit.

And just looking a little bit in more detail on mortgages, it seems like that growth in the third quarter has accelerated from around 5% in the first half to around 9.8% in the third quarter.

And I think the implied share in gross mortgage lending is now at around 9% or even slightly higher.

I was just wondering if you could shed a little bit of light on how much of step-change the new platform for intermediaries will be in that mortgage origination going forward once that becomes live?

And should we expect that gross share to edge up meaningfully higher from the end of (inaudible)?

Do you think that this might go double-digit from here, so I guess it's low teens or mid-teens from here?

And the second question was about the mortgages' risk appetite.

And as you mentioned, your loan-to-values in terms of new business are significantly below where the competition is.

And I was just wondering, do you see any scope to edge a little bit higher in terms of this average loan-to-values?

Or essentially, should we think about the risk profile to stay broadly stable from here?

The second one on Brexit, it's just a general question whether you see any form of or any change in customer behavior in the U.K., whether that's on the corporate side in terms of delaying some investment decision and, hence, less corporate loan demand?

Or whether that's within the investment bank, whether you see increased demand for using your French legal entity as a booking center for, say, Continental European clients?

Okay.

Thanks, Martin.

So I'll take the second question first.

In terms of U.K. customer behavior, across Commercial Banking, Global Banking and Markets, perhaps as you'd expect, just a little bit of caution.

But is it really showing up in a fundamental shift and change of behavior or, for that matter, impact in the performance as to how that translates into our business?

I think the question is probably no.

Is there caution and a great deal of deliberation around decision-making by certain segments of our customers, then I think that would be an accurate statement, when they discuss, either with Noel Quinn or with me and Stuart in terms of what they're seeing in the U.K. customer base.

But is it -- but is there a grand shifting?

Certainly not at this point in time.

Going back to U.K. mortgages, I think, overall, we’re probably seeing market share probably around about the 8% mark right now.

In terms of growth of new platform, clearly facilitating mortgage underwriting, speeding up cycle times, that clearly, we would expect it to have some impact.

However, I think what is more telling is the extent of market coverage that we're getting in terms of compounding what we see through the branch network with the number of intermediaries that we work with.

And over the course of the last 2 years, as you can see, we've significantly increased our engagement with intermediaries.

We're seeing much more of that market probably approximating -- certainly approaching 70% of intermediary market now.

And that, seeing a greater wave of opportunities to underwrite within our risk appetite, is one of the contributing factors to the continued growth in that product line.

The platform will clearly facilitate that in terms of the interaction with our customers.

In terms of risk appetite, we've got a pretty well-distributed book across the various loan-to-value ratios.

So yes, we've got -- obviously, given the overall portfolio at 40%, we've got a higher proportion of lower than 50% LTV mortgages within the portfolio.

But we also have segments going all the way up to 90% and less from an LTV perspective.

And the pricing and risk management is reflected appropriately with that segmentation.

So is there a broad-based opportunity for change within risk appetite?

I suggest probably not, given that we've continued to build market share reasonably successfully, with a profitable product offering in the U.K., with the appetite that we have.

Thank you very much, Martin.

And I think with that, that was our last question, so thank you very much for joining us today.

Thank you, ladies and gentlemen.

That concludes the call for the HSBC Holdings plc Earnings Release for Q3 2017.

You may now disconnect.