滙豐控股 (HSBC) 2021 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's HSBC Q2 Fixed Income Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your speaker today, Carlo Pellerani, Group Treasurer.

Thank you, Sharon, and hi, everyone. This is Carlo. I'm joined today by Richard O'Connor, our Head of Investor Relations; and Greg Case, Head of Debt Investor Relations; together with Richard Boyns, Head of Capital.

I joined HSBC in March after about 9 years at UBS. I know a few of you, but looking forward to meeting the rest of you hopefully in person soon in the future. On my first few months at HSBC, I have found the organization to be full of opportunities. We have a tremendous franchise, and that is also true in the financial resources space, which is kind of the bread and butter of what we do in treasury. We have a very strong set of resources, and one of the key opportunities for us in the future is to look at how we optimize across all of those.

I'm sure you would have spent the last few days going through our results, so what I thought of doing today is just giving you a very high-level introduction and then going straight to Q&A. I'm not going to refer to any of the slides. So today, I'll speak a little bit about the quarter, our strategic delivery and our financial resources.

So first, on the quarter, as you saw, we generated pretax profit of $5.1 billion for the quarter, $4 billion up year-on-year, and that included our release of $300 million of ECLs, taking the year-to-date ECL release to $700 million. And as a reminder, we still retain about $2.4 billion of the ECLs we had built out during the post-COVID period.

Second, in terms of strategy, we are making very good progress across all the 4 priorities that Noel has set, which, as a reminder, they were to focus, to digitize, to energize and to transition. You will see in the announcement from Monday pages across all 4, so we're very, very happy on how that is progressing. And alongside that, we are well on track to meet the financial resource commitments that we had made, including our reductions of cost and RWA programs.

In terms of financial resources, first starting with balance sheet, we have increased our loans by about 2% for the quarter, both on the side of mortgages and on the back of trade finance balances. And our deposits have gone up by about 1% in the quarter.

In terms of capital, we continue to have a very, very strong capital position, our CET1 ratio of 15.6%. We have declared an interim dividend of $0.07 per share for the first half of the year, and we remain very comfortably above MDA of about 4.7 percentage points.

In terms of liquidity, we also have a very, very strong liquidity position. We have about $850 billion of HQLA across the group. You would have seen that we have announced a technical adjustment in our calculation of our LCR that is taking our LCR to 134%, which is about a 10% adjustment, which basically reflects a new methodology that better captures transferability challenges of liquidity across the group. But just to stress, that still represents significant surplus liquidity across the group. We have over $200 billion of surplus requirement across the different entities of the group.

And finally, to talk about funding. In terms of our AT1, you would have seen us in the market issuing about $2 billion of AT1 in year-to-date. We have also redeemed $2 billion, and that is in line with the guidance that we have provided and broadly expect to issue for refinancing, mainly. We have no additional plans for AT1 at the moment.

Tier 1, likewise, we have very limited interest in that instrument for a moment, and you shouldn't expect us to be anytime soon in the market.

In the MREL space, our guidance for the year is $15 billion, as it was at the beginning of the year. You would have seen us issuing about $7 billion of MREL instruments during the last 6 months, and you would have seen as well that we have started to venture in some of the locations that we haven't past -- in the past.

We had inaugural transactions in both Hong Kong dollars and in CNY. Diversification is something that we deliberately will continue to pursue by trying to take a little bit of pressure off the most natural markets, in particular, the dollar markets, where the majority of the demand is out there. So depending on market conditions, we would continue to look at other places for us to diversify the funding sources from.

That takes our MREL ratio to 30.6%, significantly above 28% also requirement that we have.

And finally, from an OpCo perspective, subsidiaries have very little funding needs, and OpCo issuances will continue to be relatively rare.

So just to wrap it up before we open for question, we feel that this was another solid quarter, good earnings diversification across the group and perhaps, more importantly, making very strategic progress on all our medium-term goals.

On that note, Sharon, we can open up for questions.

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

I've got a couple for you, please. Firstly, I guess, as new Treasurer, you talked about there's lots of opportunities. Just any thoughts on what maybe HSBC could do to make it a bit more efficient or what potentially might change or be different under your stewardship?

Secondly, obviously, Pillar 3 capital instruments disclosures, you've got quite a few instruments to -- and you work as capital until June of 2025. Just any thoughts on -- did that actually -- to what extent are they sort of serious impediment to resolution after June of '25? And are there any fixes to get around that?

And then finally, I suppose, on a similar vein or similar theme. So you've got quite a lot of operating income company or HSBC Bank plc Tier 2 paper. I think I'm correct in stating that, obviously, that won't work for MREL after this year-end, but obviously still works as Tier 2 from a capital's perspective. So just any thoughts around how efficient that is for you as a soft form of capital instrument as one looks ahead? They would be my 3 questions.

Thank you. Thanks very much, Lee. So from an opportunities perspective, when you look across all the financial resources, capital, liquidity, funding and also NII, what you can see is that, historically, HSBC has had significant surpluses across all the metrics. So what we're trying to do is to make sure that the financial resources are fully deployed and aligned with our strategy.

So we are putting a strong spotlight on each of the resources, and we are looking as symmetrically as having too little resources or too much resources and trying to have the best deployment for all of those. I can give you example if you're interested in each of those, but one that perhaps is most obvious is on the liquidity side.

As I mentioned, we have $200 billion-plus of surplus liquidity across the group. A lot of that liquidity is not necessarily a bad thing. If you kind of receive surplus deposits, and those deposits are not costing you. It's not necessarily a bad thing.

But then what happens is, those deposits, in some entities, generate capital requirements if those entities are leverage constrained. In other entities, you have MREL requirements that are also driven by leverage requirements. So there is a cost to those deposits even if they come at 0.

So what we're doing is we're putting a spotlight on all the resources. We're making sure that those are priced adequately to each of the businesses and each of the clients that are sourcing them. And then we're trying to find the best way of aligning them to the strategy of the group.

On your second question on, let's call them, legacy instrument and resolutions, I mean, this space, of course, is extremely complicated. And the way I would describe it is there are 3 dimensions that have to be taken into account in -- simultaneously.

One is the regulatory dimension. You would have seen, of course, comments by the Bank of England and PRA about it. We are in communication with them. Obviously cannot comment on the private discussion, but that is an ongoing communication. I would stress that this is not a space, from a regulatory perspective, is black and white necessarily. Remember that when those instruments were issued, they were fully compliant. And somehow, their rules are changing. So that is a discussion we're having with a supervisor and a regulator.

Second, there is, of course, the practicality dimension. We need to see what is the practicality of potentially affecting those instruments. The most challenging example, perhaps, is the New York loan instruments, where there isn't a magical solution that we have found about them. So there are practical considerations that are perhaps challenging for us to affect those instruments.

And then finally are the economics of these transactions. Some of those economics are relatively easy from you -- for you from the outside to understand. I mean, clearly, we have a fiduciary duty to our shareholders, and we will look to us economically over time.

But some of the dynamics, perhaps, are a bit more difficult to observe externally because, depending on whether we have or not hedged those instruments, whether to the extent that we have hedged, those are hedge accounted or not, the economics for us internally may not necessarily be the ones that you're expecting externally.

So long story short, you have almost a triangle with those 3 dimensions. And depending on that, then we are looking at what to do. I can't comment on the discussions we're having with the supervisor and regulator. You will see us making a statement June next year when this is public. We'll make a self-assessment on resolvability coming October.

And on your third question, yes, I mean, I guess, the moment that an instrument stops being -- stops qualifying from a regulatory perspective, any changes, if you want, in the stack, then, of course, the economics of that instrument change. So to the extent that you had an instrument that was more junior that drops from the stack, then you need to look at the pricing of that instrument in the context of replacement, more senior instruments. So that will be taken into account together with the practicality of potentially affecting that instrument in the market when -- at all times.

Okay. That's helpful. And just one quick follow-up there. You suggested on the, obviously, discussions with PRA, that's ongoing, that's private. I fully understand.

Did you say the first that we would hear that would be June next year? Or would you expect to, for example, in your Pillar 3 capital instruments disclosed at the year end, to disclose the ultimate treatment and the like then just because my understanding was this all needed to be wrapped up by the year-end when the grandfathering period ends? What would be the -- what's your best guess or what you can give us on when you first might be communicating back to us in all of this?

So by -- so the time line is -- the time line -- the official time line is as follows. We need to assess about -- we need to make a self-assessment on our resolution by 1st of October. Then that assessment is made probably by both us and the Bank of England by June next year. To the extent there is something material in the interim according to our disclosure obligation, then, of course, we would make that public.

Your next question comes from the line of Violeta Baraboi from Societe Generale.

Three questions on my side, if I may. The first one would be on the China-Hong Kong political situation, has there been any commercial impact? We haven't heard anything about it on the equity call, and there have been things in the press about state-owned companies reducing activity with HSBC. If you could give us a bit of color on that.

Then the second question is about NPL ratio. So currently, we have it at 1.8% in Stage 3, and it's unchanged year-to-date. Have -- do you think that they've already peaked? And if not, do you -- when do you think this ratio might peak? And how far are we away from that peak, currently?

And then the third question is about stage 2 NPLs. They are still quite elevated at 15% of the book. And we've seen with other banks that most of them have seen reductions in stage 2. And for some, there have been significant reductions. Therefore, the question I have is, do we -- are we going to slowly track back to '19 levels at around 7% to 8%? Or do you think you're going to stay elevated for a while?

Thanks, Violeta. It's Richard O'Connor here. I'll start with all 3, and then Carlo will chip in. On the first one, the China-Hong Kong situation, clearly, nothing much to say. You've seen the Hong Kong and China results for the last 12, 18 months, where they're highly respectable. We've at least maintained market share, had yet another good mortgage performance based on trade performance, taking market share in Hong Kong. Good tone in Mainland China, good growth in the book there, heavy investments in the wealth business showing early signs of bearing fruit.

We've got -- we have fixed asset clients in China. We're not going to comment on any individual one of them being state-owned or other, but we've won a very good pipeline of deals and transactions, including from the strength -- the government to turn the bond issuance in China.

We've also won licensing, so fintech license, the first-won fintech license. And we're obviously looking to expand that -- particularly that wealth franchise, as we said, into 5 more cities.

So results are very solid. Customer getting very strong, very resilient results. And economically, you can see that Hong Kong and China continue to perform well despite, obviously, near-term challenges from COVID in China we've seen in the last week, unfortunately. And hopefully, that situation improves.

So yes -- no, we continue to invest heavily, and the business continues to perform well. We've obviously want to perform even better. That's why we're investing more heavily in the business and that -- those investments are showing good signs of traction. And we strive for very good relationships with the regulating governments at all levels in China and have very good engagement with them.

On the 1.8% stage 3, I'll give you 2 contradictory answers. Look, you saw that the stage 3 charges in Q2 were very, very low. In fact, they were 0 of that $400 million recovery. We don't think you should expect that every quarter. As we said to the equity analysts, you do sometimes get a bit of bumpiness in our stage 2 charges and, indeed, our safety balances. But with that, obviously, you've seen that stage 3 NPL being broadly stable and ultimately not a lot in the pipeline.

So with the comment that it can be volatile, we're hopeful as the economies improve, that over the next 12 to 18 months, you do see those stage 3 balances come down. But again, with a plateau, that, that -- at the early stage of the economic cycle, sometimes you get some late-stage impairments as economies start to come out of difficult economic situations.

I'll just give you one example. Obviously, in the U.K., we're seeing people coming off furlough. Companies are starting to pay down effective government debt. So there's still some uncertainties out there. But generally, you've seen stage 3 NPLs very stable, and we're hopeful they can touch down from what's already quite a respectable level over the coming quarters.

I'll just correct your lines of stage 2. You've got stage 2 NPLs. You've got stage 2 balances, which, as you say, are quite high at 15% of the book. They did come down slightly in Q2. And again, we would expect that to continue as if -- again, as we would expect the economy to recover over the coming quarters. It's difficult to compare banks on a like-for-like basis because we certainly do quite a lot of overlays when we look at stage 2 balances.

So I personally wouldn't compare each bank by bank. Look at the trends, look at the commentary and look at the overall condition of the book. And the condition of our book has -- is good. It's been very, very solid through the last 12, 18 months, and we expect that to continue.

And net-net, we would expect the stage 2 overlays to reduce. But each bank has a slightly different methodology, and we think our stage 2 overlays to get to that 15% are higher than some of our peer banks.

Your next question comes from the line of Corinne Cunningham from Autonomous.

Just a quick one for me on MREL. Do you think the CRR leverage requirement is going to drop out of your requirements? Do you think it's going to stop being a binding requirement with -- I guess, with the focus more on RWA? We've seen that with a couple of other significant U.K. banks. I just wondered if that was happening the same with you -- with yourselves.

Thanks for the question, Corinne. So the MREL requirements for us, as you saw, is the most binding of 3 dimensions: the RWA, the leverage requirements or the sum of the parts. At the moment, and for the foreseeable future, we see both the leverage requirement and the sum of the part being kind of equally binding. If you decompose the sum of the parts components as well that you will see that in each of different resolution groups, leverage then, also, to be one of the important drivers.

So even if you got to a position where leverage in aggregate didn't become binding, it might be binding in the sum of the parts bottom-up calculation. So you almost need to do the calculation bottom up and then trying to figure out what it is.

Of course, when you are at the margin of where we are, that sum of the parts or leverage is the most binding, then, perhaps, there is a little bit of stickiness to the calculation. As we said, we are guiding that the current requirement is about, in RWA terms, around 28%.

And given that you issued all of your MREL from the holding company anyway, would it just be easier to become a single point of entry? Or are there other technical reasons why you stick with the multiple point of entry?

Well, easy to become -- see, the point of entry is -- it depends on what you mean by easy. So let me step back. So we like to call ourselves an MPE-plus group. What that basically means is that the group issues MRELs top down and distributes to the entity, but the fact that we have 3 resolution groups. At least, in theory, that could be advantageous from a resolution perspective because it gives our supervisor an optionality that perhaps other groups do not have. And the optionality is to either hold the group together or to resolve it as 3 separate groups.

At least, at the beginning, in that hypothetical resolution, we can, on the day that ensue, holding the groups together has a big advantage because it is -- you preserve value, you avoid chaos. It's better from a systemic perspective and from a market-wide impact perspective. And then it buys you time to allow you to then extract the most value to the group and to minimize the impact that it may have into the system.

Then in terms of -- if that is the starting point, then the question is what is the advantage or disadvantage in going either SPE or purely MPE, if any. And then do remember that there are a lot of parties involved in this discussion. There are interests in each of the different regions.

So at the moment, we have a situation where, potentially, everyone has kind of the best possible solution because there is optionality. Obviously, we continuously review these together with the colleagues and supervisors. But as I said, at the moment, we are an MPE-plus for the reasons that I mentioned.

(Operator Instructions) Your next question comes from the line of Tom Jenkins from Jefferies.

I've got one question and I suppose one point of order. I'll start with the question and then get to the point of order. As usual, Lee and Corinne have nicked my best questions. Unfortunately, obviously, trigger happy on *1. But there was one I still had, which was you're obviously in the process of divesting some chunks of business in France and in the U.S. Obviously, not the equity of the entities, more the assets or the branches or whatever you want to call it.

There is debt left in those entities that either looks redundant from a regulatory perspective or expensive from a capital utility perspective. I was just wondering, is there -- what should -- look, I'll leave it open ended. What's your thinking on those debts?

And then the point of order is -- and I think probably everyone on this call will agree, and I hope they do, is that we are very blessed in the U.K. to have fantastic IR people on the fixed income side. And I just want to say, and I hope I embarrass him terribly, but I want to say that Greg is one of the very better ones, both in the Olympic spirit. I'm not going to give him the gold metal necessarily, but he's definitely on the podium. But for the questions, I'd appreciate an answer.

Yes. I was going to say, I mean, first of all, it's -- on your last question, Tom, it's a bit early for the bonus season. So if you and Greg have had a discussion offline, I mean, maybe you should have waited another call for doing that. But thank you. We appreciate that.

I mean on your question in terms of disposal, I mean, obviously, what we do is we look at the balances that are being transferred and the resulting effect, right? So you just need to look at what is being transferred.

So in the case of the U.S., we are disposing about $3 billion of loans and about $10 billion of deposits, with $1.8 billion of RWA. So from a specifics, that means that basically, all else equal, there is an $8 billion funding gap that needs to be compensated for. It's not exactly like that because there are surpluses, and the requirements are different, but a high level, the way to look at it.

In the case of France, it's actually quite balanced. Customer lending is $25.5 billion and deposits $22.4 billion. So the way it happens is you look at what is being transferred. You look at the resulting effects on all the financial resources, plus also on the economics of your natural hedging that you had in place, and then you cannot rebalance. But there isn't anything meaningful coming out of both of them. There isn't anything significant from a debt holder perspectives to mention.

The only thing I would point out that it would be our intention to try to move the cover bond programs to the buyers in France that requires consent of the bondholders. But except for that, it should not be a major issue from a liabilities perspective. I don't know, Richard, if there is anything else you want to say.

No. I wouldn't add much. Just to say, Tom, you need to look what's left. We will retain substantial wholesale business in both, and in the U.S., a medium-sized, but highly connected wealth business, which will still hold the majority of the deposits by value because they're obviously the higher-value customers. So I think you need to look at it in context of the entity or entities concerned.

And the fact is, a, it's good news that we are extending these mass retail operations, but we're not actually in France or the U.S. We made substantial economies. We invest heavily in both, with very strong connectivity with the rest of the group, a very strong multinational business, wholesale and markets business in both. Obviously, Paris being the center of our Eurozone activities, and U.S. being the biggest capital market in the world. So I think you need to live in the context of the total balance sheet in both.

And as Carlo said, these are not meaningful transactions from just a pure balance sheet, loan deposit, RWA, because these partly are meaningful in terms of the profit and loss of both entities. So I would look at it from a P&L or returns perspective rather than sort of a funding perspective. Although, clearly, you need to look at both.

Well, in that case, Richard's own color, it's -- I mean, if that's the case, then, one, if you're looking at it from a P&L perspective. And again, I do not know how you hedge or hedge against sort of various bonds. But if I'm looking at absolute, whatever, 75-year, 80-year bonds that I've got to pay some 7 and change percent on sort of almost minimal capital, I'm just wondering what the purpose of that would be in the U.S., for example -- just for example.

Yes, I guess, the only other mention to think about is, of course, the value of focus in the strategy, right? So obviously, focusing on our strength and trying to avoid the dilution of management in areas that are perhaps less kind of in line with our strategy, there is an additional value. But yes, what -- the point you make is a value one, we look at that. And of course, as we rebalance, we take it into account.

Yes. And then about what Carlo said about looking at our capital security, clearly, next to capital security, that first point remain valid here as much as anywhere else.

We will take our last question from the line of Alvaro Ruiz from Morgan Stanley.

And I have some very specific question, and it's about the discourse issued from the Hong Kong Bank, as per your Pillar 3 security is not eligible anymore after January. And reading all your disclosures, this bank has a lot of liquidity and [cheap] liquidity. I guess, wanted to have some sense about the economics, about not redeeming the security. The more information, the better, but I know that you cannot disclose that much.

Alvaro, thanks for the question. You answered the question for me. I mean we cannot quite disclose name specifics. So I -- so what are the things that I could say that are helpful? I think the first thing is just to restate what you said is the security in -- locally doesn't have regulatory eligibility. So of course, going back to what I was saying earlier, the economics of the security have to be assessed against the replacement cost of a more senior note and, hence, a cheaper note.

Having said that, the spreads on those securities are relatively cheap. It gives you a long-term optionality. So the way to think about it is, to the point you're making, you assess the surplus liquidity you have, you assess what are the additional kind of expectations you have. In time, you try to project that, and then you decide whether there is a need for the security or, indeed, there is a value in keeping it.

I'm afraid, that's all I can say. But I think the -- from your question, I think the components that you're raising are the right ones to consider.

And just to confirm, you look the security independent from the other securities issued out of the non-ring-fenced bank.

Broadly, yes. Broadly, yes. We look at each of the entities. So MREL is pulled down from the top from the entity. So the entity will have a requirement, and that require -- triggers a demand from the holding company, and the holding company will put it down. So you start at the entity and the requirements of the entity to evaluate the need and the economics indeed.

Sorry. I'm just lost. These securities are not MREL eligible. Then just your funding, you're just comparing with the cost of deposits. Or am I missing something?

No. That's -- those are the right components.

I will now hand the call back for any closing remarks.

Well, thank you very much for joining. Hopefully, the -- this Q&A was useful. If you have any more questions, please reach out to Greg, Richard and the IR team. And hopefully, everyone will have a good end of the summer. Thanks very much.

That does conclude our conference for today. Thank you for participating. You may all disconnect.