滙豐控股 (HSBC) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to today's HSBC Q4 Fixed Income Results Conference Call.

(Operator Instructions) I must advise you, this conference is being recorded today, on Monday, the 25th of February, 2019.

I would now like to hand the conference over to your speaker today, Ewen Stevenson.

Please go ahead.

Thanks, Charlotte, and thanks, everyone, for dialing in today.

As you all know, it's my first fixed income call with you in my new role at HSBC.

I'm joined today by a couple of colleagues, Iain MacKinnon, Group Treasurer; and Greg Case, Head of Fixed Income Investor Relations, who I'm sure you both know well.

There's a fixed income specific slide pack available on our website.

I don't plan to speak to specific slides in our -- in the introductory comments.

We'll keep comments brief.

As you know, you all have had the chance to listen to the equity call we had last Tuesday.

Our plan to run through a few high-level points, then I'm going to hand over to Iain MacKinnon for a bit more detail before opening up for Q&A.

On our full year results and despite a weaker fourth quarter, we consider that the full year progress continues to reinforce our credit story.

We grew revenues by 5% to $53.8 billion.

We grew pretax profits by 16% to $19.9 billion, earnings per share by 31% to $0.63 and our return on tangible equity by 1.8% to 8.6%.

We achieved good top line revenue growth where we wanted to grow.

To give you a few numbers on that, we grew revenues in Hong Kong and Mainland China by 14% each, Retail Banking by 13%, Commercial Banking by 12% and international customers by 7% and the U.K. ring-fenced bank by 7%.

This top line growth enabled us to afford higher investment spend.

We're investing substantially at the moment into both growth in our -- into both growth and our digital transformation.

Investment spend was up 10% last year to $4.1 billion.

Our overall cost growth was 5.6%, which was in line with plan spend for the year, but with an unplanned 8% drop in revenues in Q4 largely due to adverse markets in November and particularly December.

We saw negative jaws of 1.2% for the full year.

We achieved loan growth of 8% while only growing RWAs by 2%, which helped underpin our core Tier 1 ratio to 14% at year-end.

Credit conditions remain benign in most places.

Our annual ECL chart was only 18 basis points, well below our 3 desirable guidance of 13 to 14 basis points.

The only market we see any softness currently is the U.K. And with more conservative forward economic guidance underpinning our IFRS 9 modeling, we took an additional overlay of some $165 million for the U.K. in Q4.

That's in addition to the $245 million opening adjustment we took at the start of last year.

On dividends, we declared a final dividend of $0.21, maintaining our annual dividend stable at $0.51.

And with that, I'll pass over to Iain.

As Ewen said, we ended last year with a very strong balance sheet.

CET 1 ratio was 14%.

We still have -- enjoy a very strong full of high-quality liquid assets of about just under $600 billion, $567 billion.

LCR is running in the mid-150s.

During 2019, we achieved a number of milestones.

We successfully completed our ring-fencing exercise in the U.K. The result of that was that we managed to obtain stable rating with HSBC Holdings, and the non-ring-fenced banks rating remained unchanged after the separation.

Last year, we issued $19 billion of holdco senior debt, MREL, and $6 billion of AT1, which was -- most of it, which is used to replace previously issued AT1.

So we are now looking into next year.

We expect to be issuing somewhere in the mid-teens for MREL to meet ongoing MREL requirements, particularly in the U.K. and in Asia.

We also expect to issue a small low number for AT1 to meet HBAP -- HBEU requirements.

These are -- Asia business and are non-ring-fenced bank in the U.K.

So I think that's the outlined issuance plan.

We continue with the plan, but the issuance should be done at the holdco level and downstream.

Although I would point out that we expect to issue senior from certain of our subsidiaries, notably France, Canada, Hong Kong and Mexico and HSBC UK, which is currently deposit-funded, and we would like to access commercial markets as well.

With that, I'll turn you all over to questions and answers, if I may.

(Operator Instructions) Your first question comes from the line of Lee Street from Citigroup.

Three, please.

So firstly, just in terms of an opco sub debt, do you believe it works an impediment to resolution if you've got opco sub debt written under U.K. law outstanding beyond 2021, which is, hopefully, you can come back to that Bank of England paper in December?

That's number one.

Number two, can you just remind us what type of buffer you intend to run for additional Tier 1 and Tier 2 relative to your minimum requirements?

And just finally, just what time frame would you expect to update the market in your plan for any further share buybacks?

That'll be my 3 questions.

Yes.

Maybe I'll take the third question, and then Iain or Greg will cover the first 2. Look, on time frame for buybacks, we said last week, going back to our policy, our policy is to script neutralize over the medium term through buybacks.

We said last week that given the uncertainty around Brexit, we wanted to pause with buybacks for the moment until we had greater clarity around the outcome for Brexit and the direction of travel.

So I'm not going to sort of get drawn on to specific dates as to when we feel we got that clarity.

And obviously, all of those is subject to regulatory approval in due course.

Okay.

I can go with question 2. It's Iain here.

With regards to the buffer on Tier 1 and Tier 2, it's fair to say that we haven't got complete visibility of the -- sum of the parts requirements that will apply to the group.

So you can't just look at 16% or 18% RWAs on top of the host and then work your way up from that.

We have to wait for further guidance from the various regulators that we deal with in establishing the -- sum of the parts answer.

With regard to the -- so that's number one.

And then number two, I would say that what's actually going to be happening, we will have Tier 2 maturing over the next 5 years.

So we expect the Tier 2 to decline back to normal levels.

And we would wait for the maturity rather than buying them out at the moment as being the better economic answer for us.

So hopefully, that deals with that.

And then, Greg, maybe you can deal with question 1?

Yes.

Sure.

So on opco sub debt with regards to whether or not they're an impediment, I think it's just going to be a piece of work that we'd be doing over the course of the next 12 to 18 months as part of our resolution planning and the report that we'll have to publish to the market next summer.

And obviously, work is ongoing there, and we're in discussions with the Bank of England.

I think the definition of what is an impediment to resolution has not been formally designed as yet.

We work with the bank on formalizing that and forming our own bid.

Our next question comes from the line of Robert Smalley from UBS.

A couple of quick questions again about issuance.

You outlined your plans for this year, and there is a bullet point in the presentation that seemed to intimate that you would like to get MREL issuance to approximate maturities.

We don't have a lot of maturities in 2020.

So should we look for a big decline there and then a ramp back up in MREL?

Or should it be kind of steady across the next couple of years?

It's my first question.

Secondly, what would be some of the swing factors that would change that?

You've mentioned that you had some good balance sheet growth, but not a lot of RWA growth.

Is China growth more RWA-intensive or not?

Or is there anything else there that would be a swing factor?

And my third question is on AT1s this year.

You're saying low single digits.

Last year, you did a fair amount of issuance.

I'm just wondering how much more you can kind of force into the stack there after a very active year last year.

And where do you see issuance 2020 and 2021?

And can the market get a little relief?

Okay.

Well, maybe I'll have a jab at second question and then hand over to Iain and Greg on the first and third.

Yes, I don't think there's any particular nuances.

And yes, we've committed to the market that we're trying to grow RWAs at about 1% to 2% per annum.

That, obviously, represents the difference between gross, RWA gross and net, with gross being the underlying growth in the portfolios that you refer to; net being after various mitigation actions and completing -- continuing to wind down certain legacy RWA pulls, model approvals, et cetera.

The other thing I've observed is while gross is other (inaudible), reasonably linear as the loan portfolio is growing, net is very much dependent quarter on quarter depending on what mitigation actions are taken in any given quarter.

Yes, our bigger influence, 1st of January, we had IFRS 16 taking back on balance sheet leased owned real estate.

That had about a $5 billion increase in RWAs.

We've obviously got Basel III [pro forma] on the horizon over the next few years.

I would say Basel III is probably the -- a much bigger influence future RWA trajectory than whether we grow loans, see loan growth in China versus another market at this point.

Rob, it's Greg here.

If I can bucket your question 1 and question 3 together on issuance.

I think on the MREL side of the thing, we try to -- and I think both actually on the MREL and AT1, we try to be a little bit more helpful in terms of giving a more longer-term view on issuance.

So yes, with AT1, we said that want to be a low single-digit billions this year.

We've also said that, broadly, we're comfortable with where the stack is.

I think it's -- I'd underline the word broadly given with our balance sheet size what it is.

Roughly speaking, 10 basis points of capital is about $1 billion.

So the swing can be like it feels material for you, guys; it's -- we don't feel as material.

And yes, broadly, we're comfortable with where it is.

On the MREL side of things, senior holdco, we said, look, it's going to be early to mid-teens in terms of billions on an ongoing basis.

And then on Slide 16 of the fixed income presentation, we give the maturity schedule of the holdco senior side of things.

So as we stand today, we've got about $62 billion of holdco senior that's MREL-eligible and about another $6 billion of stuff that was issued pre-BRRD.

So we're talking about $68 billion, $69 billion of total debt.

And this year, we have no maturities.

Next year, we have about 5. And then from then on, we're talking about being broadly flat in terms of an issuance profile on a net basis.

So that's kind of how we are thinking about things.

We don't think that's hugely material ask of the market from where we are today.

Yes, if you look across the 5 years, we're looking at a net increase over the entire period of somewhere between $15 billion and $20 billion, and that's across the entire 5 years.

There is obviously a lot of issuance and replacement of maturities, and that would include replacement of what we currently view as senior and what we currently view as Tier 2. Yes, we think we broken the back of the MREL issuance program.

Right.

So this year, next year seem to be the last 2 years that you'll be issuing more MREL than -- well, that gap between issuance and maturities will definitely diminish as we get to 2021, 2022.

But this year and next year with the $5.1 billion, assuming that you'll still be looking at kind of a mid-teens number, it'll still be $10 billion or so just for short end.

Yes, that's broadly right, Rob.

The other thing I'd say is while we are flagging, the opcos will be issuing funding in the next few years.

And we do still have a significant amount of opco maturities coming through.

So I think it's fair to say the opcos will be issuing less than the maturities.

So in the HSBC name, it won't be quite that much either.

(Operator Instructions) Our next question comes from the line of [Will Fordman] from (inaudible).

And I also appreciate doing it in U.S. hours.

On Slide 21, about Tier 2, you talked about the final implementation of CRR2 and the future path, and it may impact your plans.

What are your current reads from what has been said on non-U.

K. law language that exists in some of your long-dated Tier 2?

That's my first question.

Second is on your LCR, your ratio, you're running at a high 150s.

Is that related to uncertainty around Brexit?

And then, I guess, the third on the back of that.

In terms of planning, if Brexit is extended for a long period of time, how will that impact how you run your LCR ratio going forward?

So I guess, those are my first questions.

So I cover off one, and Iain is going to cover the...

I can do the liquidity piece.

Sure.

[Will], it's Greg here.

On the CRR2 side of things, the work -- we're starting to kick off work now with our lawyers on looking at the entire stack.

Obviously, that's dusting off some of the work we did last May as well.

And in terms of an initial view, I don't think it's going to be hugely helpful for you because the -- what we review with our lawyers and our final view will be the binding one.

So if you don't mind, we'll leave that until we've got something more specific today.

And -- but yes, I think it's fair to say we're looking at the stack, and there may well be some bonds that don't make the grade.

But the 6-year grandfathering period is helpful for us.

So it gives us time to think about what we want to do in the future.

And also, we still have a pretty chunky stack.

So when -- we still feel in a good place.

So on the 150% LCR ratio, I think you should view that as the reflection of what we're seeing in particularly Asia, in Hong Kong, where we have a significant level of liquidity, plus the fact that we have to build liquidity out when we were putting together at the ring-fenced, non-ring-fenced bank and the uncertainty with Brexit where the government asked us to -- Bank of England asked us to make sure that we held sufficient liquidity to deal with the uncertainty.

I should say that we're going through a methodology review, and we will probably see the group LCR metric fall back 10, maybe 10, 15 basis points -- 10% or 15%.

It doesn't mean that we've lost liquidity.

It's just a different methodology.

We remain healthily liquid, just trying to monitor the balance, the liquidity versus the cost of that liquidity.

Ewen, do you want to talk about Brexit generally or?

Yes.

I don't know what I can say to anything that everyone will have their own views on this.

There's obviously a wide set of possible economic outcomes coming from local decisions over the next few weeks and months.

All we're trying to do with our IFRS 9 forward economic guidance is to take what we consider to be a relatively cautious stance just reconfirm with now we got an aggregate total of just over $400 million of IFRS 9 overlays in relation to the U.K. That number inevitably will either be too much or too little, depending on the Brexit scenario, the results.

We're trying to help our customers out in whatever way we can, our own employees who were impacted potentially by depending what the Brexit outcome is.

We have a big operation and have had for a long time in France, so this sort of operational aspect of Brexit as it impacts us.

I'm not as complicated as they would be had we not had that business in France.

Yes, we've got plenty of capital funding and liquidity.

If you look in our annual report and accounts, you'll see a pretty detailed modeling set out there about what the scenarios that we have modeled.

But broadly, under forward economic guidance, we would normally have a 10% upside case, an 80% base case, a 10% downside case.

What we've done and what we said was because of the uncertainty that exists, we've been at 10% upside case, 50% base and 3 downside scenarios totaling 40%.

Obviously, the way that IFRS 9 works is it's procyclical, so what you're seeing is the impact of procyclicality now coming through our detailed [purchase].

Great.

And then, I guess, just one follow-up, talking about issuance specifically.

You clearly issued and pre-funded in 2018, $19 billion holdco and $6 billion of AT1.

Why the change in languaging not specifically sort of targeting how much you're going to issue?

You've given context.

But I guess, on the senior holdco, HSBC has been clear over the years the size and scale.

And is this more leaving yourself the optionality with Brexit uncertainty?

And then on AT1, specifically, do you have a stated buffer that you'd like to run?

I think Barclays mentioned in their fixed income call that they would like to stay with a buffer.

Do you guys -- will you give a stated AT1 buffer where you would like to run going forward as you approach your Jan 20 call?

Can I just try to deal with the MREL and the AT1?

I think the numbers sort of looking at -- or you mentioned exactly before in terms of RWAs, but we expect to be issuing somewhere of the order of 12 to 15 this year.

And I would expect it to be around 13, 13.5, of that order for MREL.

And on the AT1, we'd expect to issue 2 this year because we can see a specific need for that in the sum of the parts.

We haven't actually been targeting a threshold above the -- above our reg requirements.

It's simply being a function of what's an issue and what we can manage.

And if I can remind you that last year, we issued $6 billion, so we actually did retire in excess of $4 billion.

So it's actually a net $2 billion by the time we finished.

(Operator Instructions) We have a question from the line of James Hyde from PGIM.

First question -- I've only got 2 questions, and they're not major, but while I have you online.

One of the global investment banking peers has called out the base effect, anti-erosion tax, or BEAT, as a factor that's going to weigh on earnings.

Is that -- I mean, is this a potential for that to change your issuing structure gone?

Are you just going to keep doing holdco?

Is there a potential for U.S. holdco issuance because of that?

Or is it just your earnings there are just not important enough?

I'm just wondering that.

And actually, no, that's fine.

Well, the second question is Brexit, again, but it's about the extent to which you guys are taking market share in mortgages.

I'm aware that these are lower LTV.

But does the Brexit development in -- does the Brexit development in any way mute your appetite for that because you have had a clear impact on the competitive dynamics of the market?

Yes, just on the second one first.

On mortgages in the U.K., the average LTV of new lendings is about 65%.

We're pretty comfortable with the risk profile.

If we are seeing any softness in the U.K. at the moment, it's in very selective sectors in commercial.

The only thing I would say about the fact that the market share gains that we're taking in mortgages in the U.K. at the moment, we had a very limited presence in the brokerage channel until recently, and we've built that up substantially in the last few years.

We've got natural current account market share in the low double digits.

We're currently at about a 6.6% share of mortgages.

So yes, we think that natural market share in mortgages is materially higher than where it is today.

But the reality is that we have basically been operating in 30% of the market, which is our own originated -- own origination and until recently, had not been an active participant in 70% of the market, which has originated through brokers.

So yes, we're taking market share, but I think, in part, that is because of historical underrepresentation in the British channel for origination.

Yes.

I mean, Jim, it's Greg.

On the -- we're confident now that we'll just be issuing out of holdings.

And I think it's unlikely it needs to issue out of the U.S. specifically.

Maybe just a final point on mortgages.

You could also refer back to the Bank of England stress test last year, where they do publish, I guess, an independent view on the stress portfolio, what was focused across the U.K. then you'll see that the stress characteristics of our book stood up very, very well relative to peers.

There are no further questions at this time.

I would now hand it back to Ewen.

Okay, thanks a lot, Charlotte.

Thanks to all for joining the call.

And if you do you have any follow-up questions, please follow up with Greg and the IR team, and we'll be happy to answer them on your behalf.

But thanks to all for making yourself available today.

Thanks.

Bye-bye.

That does conclude our conference for today.

Thank you for participating, you may disconnect.