滙豐控股 (HSBC) 2020 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to today's HSBC 4Q '20 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, Ewen Stevenson.

Please go ahead, sir.

Thank you, and good morning or afternoon all.

It's Ewen here, the Group Chief Financial Officer.

I'm joined today by Iain MacKinnon, Group Treasurer; and Greg Case, Head of Fixed Income, Investor Relations.

Given COVID-19, we're actually all in separate locations so please bear with us if we talk over each other during Q&A.

There's a fixed income specific slide deck that's available on our Investor Relations website.

We don't plan to speak to those slides in our introductory comments, and we'll try to keep our comments brief as I know a bunch of you would have already listened to various things, including our equity call this morning, U.K. time.

I'll quickly run through what we've announced today, then I'll hand over to Iain for more detail on capital and funding before we open up the Q&A.

Today, as you're aware, we announced our full year 2020 results, together with a business update with a refreshed strategy and some new financial targets, including a new dividend policy.

For the full year 2020 results, yes, I'd describe them as a solid set of results, particularly against the backdrop of COVID-19 and a now ultra-low interest rate environment, adjusted pretax profits of $12.1 billion, reported pretax profits of $8.8 billion.

Our core capital base strengthened nicely with the year-end core Tier 1 of 15.9%.

That's up 30 basis points in the fourth quarter and 120 basis points over the full year.

And deposits grew over $170 billion in the year on a constant currency basis, a growth rate of 12%.

Relative to the plan that we announced in February last year, the 3-year target to achieve $100 billion of gross risk-weighted asset saves in targeted areas, we delivered over half of that in the first year of the program that we're very pleased about.

On operating costs, we reduced those by $1.1 billion or 3% in 2020, and we committed today to achieve a further $1 billion of savings by 2022 relative to our previous target.

However, the impact of the ultra-low rate environment means that we no longer expect to hit our 10% to 12% return on tangible equity target in 2022.

We've reset that target to at least 10% over the medium-term, which we've described as 3 to 4 years.

And that's premised on a similar rate environment to what we see in the markets today.

Underpinning this is a much stronger set of growth aspirations for us in Asia, both in wealth and in the wholesale banking, with a target of increasing our capital allocated to Asia from 42% currently to over 50% over the coming years.

On the fourth quarter, again, a decent set of results, reported pretax profits of $1.4 billion.

Adjusted revenues were down 14% on last year's fourth quarter, which was mainly driven by the progressive impact of ultra-low interest rates.

Operating expenses were up 1% ex the bank levy, but this was mainly due to an increase in the variable pay accrual in the quarter, with the variable pay for the full year down 17% on 2019.

Expected credit losses were $1.2 billion in the quarter, bringing total expected credit losses for the full year to $8.8 billion, and that's at the lower-end of the targeted $8 billion to $13 billion range that we announced earlier in the year.

While we do remain cautious on the outlook for credit for 2021, we still expect the ECL charge to be lower than 2020, with no update to the guidance that we gave on this at the third quarter, which was broadly a range of 40 to 60 basis points for the full year.

And by 2022, we expect ECLs to have fallen materially from the 81 basis point charge we had last year towards or even below the lower-end of our 30 to 40 basis points normalized range.

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

Thanks, Ewen.

Hi, everyone.

Iain MacKinnon here.

Thanks for dialing in.

I'll just continue with the script here.

Despite the weak macro environment, the balance sheet metrics continue to show strength.

Our CET1 ratio was up 30 basis points in the fourth quarter to 15.9%.

The $0.15 per share dividend announced today has impacted the ratio by around 40 basis points.

During 2020, customer deposits grew by over $200 billion.

Our loan balances remained broadly flat, resulting in a loan-to-deposit ratio of 63.2% and by 8.8 percentage points since the start of the year.

The group remains very liquid with gross high-quality liquid assets of over $830 billion at hand.

Despite this, our consolidated liquidity coverage ratio was down 11 percentage points at 139% versus 2020, largely reflecting technical consolidation adjustments in the calculation of the consolidation, rather than an increase in liquidity risk.

Note that this may decline further as we implement further regulatory adjustments.

The decline will have no material implications for the group's overall liquidity risk management.

On issuance, I'm pleased with what we achieved in 2020.

During the year, we took a lot of action to reduce our refinancing risk in '21 and '22 while delivering negative net issuance.

By tendering for nearly $12 billion of MREL in 2020, we've reduced this year's refinancing requirements from $12 billion to less than $6 billion and next year's from $15 billion to less than $11 billion.

Looking out over this year, we expect to issue around $15 billion of MREL against maturities and calls of nearly $6 billion.

The difference is the fact that in this year, it marks the final year of material increases in the amount of senior holdco debt needed to meet regulatory requirements.

From 2022 onwards, we expect the balance of senior holdco debt to follow the progression of the group's RWAs.

For AT1, we probably expect to refinance our instruments that we choose to redeem or where they lose capital eligibility.

This is in line with what we did in 2020, where we redeemed nearly $2 million worth of bonds and issued $1.5 in return.

For Tier 2, we have no plans to issue in 2021.

On HIBOR, our guiding principle is to work with bondholders to transition where we can, and we look forward to bringing forward transition offerings this year.

With that, I'll hand back to Ewen.

Thanks, Iain.

Look, before we open up for Q&A, I did want to take this opportunity with all of you on the call, actually to say many thanks to Iain.

It's actually his last fixed income call for us as Group Treasurer.

Iain is retiring over the next month or so after many years with us, both in tax and treasury.

On the next of these calls, we'll have our new Group Treasurer.

He'll be known to a number of you, Carlo Pellerani, who was the recent Group Treasurer of UBS.

Carlo starts on Monday, so be with us [then].

With that, if we could now open up some questions.

(Operator Instructions) Your first question comes from Paul Fenner, Societe Generale.

Iain, congratulations and best of luck for the future.

I've really just got, I guess, 2 connected questions.

On stage 2 -- and forgive me if this came up this morning, I may have missed it.

But obviously, stage 2 exposures ticked up again in the fourth quarter, not by much, but by something, so they basically doubled during the year.

But I think I'm right in saying that your stage 2 element that is past due has not changed at all during the year.

So I was just trying to understand what's happening there between the relationship between stage 2 that is still paying and those that are not paying.

Is there a connection?

And if there is, what is it?

And what might we expect from stage 2 balances during the course of 2021?

And leading on to my next question, where do you see -- for stage 3, I hear what you're saying about cost of risk.

But if we think about an NPL ratio, a stage 3 ratio, do you think it peaks in 2021?

And how far from the peak are we right now?

Sorry about the long-winded question.

It's Richard O'Connor here.

I'll start, and Greg, if you maybe chip in.

Look, stage 3 is primarily due to the forward economic guidance and those calculation and due overlays.

And obviously, when we get to the year-end, then clearly, in the last few weeks, maybe the economy improved a little bit due to the vaccine.

But clearly, there's still some deterioration, for example, in the U.K. And you're right to say that we've had a remarkably low sort of level of default throughout the year.

We've had some -- we've obviously had some hits.

In terms of stage 3, look, we're always going to be get drawn too much on specific forecast, but clearly, states with defaults in some terms are a lagging indicator.

And certainly, as government schemes mature this year, you may see a pickup in stage 3 from some of those elements, hopefully not.

And then if forward economic guidance improves during the year, then you may see we'll move back from stage 2 to stage 1. So I think there's a lot of moving parts there.

But broadly, as you've heard Ewen today, our overall expectation for the chart this year remains in the 40 to 60 basis points of loans.

And that's been unchanged since the Q3 stage.

So you've seen a continued stabilization in the last few months and indeed some better macro trends in the last few weeks.

Greg, anything to add to that?

Yes.

Just on the stage 2 side, it's worth noting that about 1/4 of our corporate [loans] in stage 2 right now are within the risk grades that we would classify as effective investment-grade.

And obviously, with those type of exposures that are relatively low PD, it doesn't take a particularly big shift for the PD to degrade to such an extent that it falls into stage 2. And then obviously, while there have been a number of -- a significant number of downgrades across the portfolio, it's worth noting that (inaudible) and that has been reflected in the numbers somewhat.

Your next question comes from the line of Lee Street from Citigroup.

Three questions from me.

Firstly, on stage 2 as well now.

In the fixed income slide that you've got that chart on Page 11 that shows the strong or good quality credit, obviously, that's gone from 75% of the book down to 70.3% over the year.

But stage 2 loans have increased by some bigger proportion from 7.7% to 15.5%.

So is it right to compare those things together?

And I suppose my question is given the moving stage 2 loans, shouldn't have you seen a sort of great reduction, the strong good quality credit have been the first one.

Secondly, obviously, if you sell the French retail operations and you sell the U.S. retail operations, would that be sufficient at all to your funding plans (inaudible) of the holding company senior debt for the year given the reduction in risk-weighted assets (inaudible)

And finally, on the Bank of England legacy capital review, so you refer to determining whether any action is required.

In terms of making that determination, is it a question of how you interpret the capital requirements regulation?

Or is it a question of materiality or how much of the debt (inaudible) debt you have outstanding?

That would be my 3 questions.

Go ahead, Richard you can take the first.

Not much to add to stage 2. Look, you're right to say that clearly, the strong or good has gone down in the year as we've shown in our charts.

There's another chart in the deck, so we've got a lot of little graphs here, which showed actually more on the credit rating migration, but there was a bit more of a stabilization across the grade in Q4, albeit clear that we still -- we had some stage 3 hits in Q4 as well.

So look, the other thing I would say is clearly, you're right to point out the stage 2 movements for us.

What I would say is we do use more scenarios than other banks, particularly in Europe.

So sometimes you just need to go through all our workings then and that can obviously, give you a slightly different picture to other banks who may use slightly -- view all different scenarios in the IFRS 9 modeling.

Yes.

On the question on France and U.S. retail and without confirming whether or not we will sell them.

But if we were to sell them, I don't think that would change our issuance plans.

They're not big enough to have any material impact.

Greg, do you want to take the third question on the legacy capital instruments?

Yes, of course.

So on the legacy piece, the wording we used in that slide was effectively to mirror the wording that the [DFCSO] letter used.

It's not necessarily pointing toward the fact that we think that there may be any actions to take at this stage.

I think it's too early to say.

But we're -- as you've heard, I think, from some of our U.K. peers over the last week or so, we're busy looking over the various bonds that we have.

As you know, we've got a relatively small amount of bonds to grandfather into 2021.

And we're going to share the analysis with the PRA and have a discussion from then on.

All right.

Can you -- is it interpretation of the rules or materiality?

Or is it both?

I think that's still fair for discussion.

And your next question comes from Daniel David from Autonomous.

Just a quick one, hopefully, on legacy capital.

I just wanted to touch upon your opco Tier 2. So although they might not cause an inflection risk, I suppose they could be deemed an impediment to resolution.

So my question is do you expect the PRA to consider other factors such as retail holding or nonresolution entity impediments as part of the process which is going on here?

And secondly, just on ESG.

So noting your issuance in the past.

Is there a percentage of your issuance plan this year that we should think of to be targeted in green format?

And more broadly, the EC taxonomy is kind of a positive step, I guess, to improve ESG disclosure.

So can you comment on how this factors into the broader ESG strategy at HSBC?

All right.

Greg, do you want to start off on the legacy question and start on the ESG question?

Sure, of course.

So on the opco Tier 2, I think it's -- again, it's still a discussion with the PRA over the course of this year, be it either as part of the [DFCSO] letter and what comes out of that during the course of the next month or so but also, of course, a part of the resolution assessment framework that obviously was pushed back by 12 months, but of course, is very much an agenda item for us for this year.

At this stage, as I said, there's not a huge amount to say on the subject.

Obviously, from an impediment to resolution perspective, we can have a view on that, and we can take that to the PRA and have a discussion.

But I think it's going to be -- has to be a 2-sided discussion, and we wouldn't want to prejudge that.

And just to touch on green bonds.

We've -- I think we've -- we have, as you can imagine, a portfolio of green assets that we can put together things like green bonds.

And in recent years, we've been prioritizing some client business that is a bit backed by green collateral.

So we have a number of client facilities like green CD program.

We have green structured notes.

But for this year, I think we would very much like to come to market with a benchmark green deal.

It has been a year or so since we've last been into the market.

Great.

And just on the EC taxonomy.

I guess I'm -- I guess, many market participants is quite a big step forward in terms of improving disclosures.

So I was just wondering, more broadly, if you're observing it and kind of if you're factoring into kind of the way that you're progressing as an ESG land bank.

I'll kick off here.

I'm not [100] on the question.

But clearly, as an ESG bank, we're looking at a variety of frameworks, SASB, and the one we're looking at particularly is the WEF framework, World Economic Forum.

Clearly, we've been a leader in TCFD disclosures.

So -- and we've made substantial disclosures today in the ESG report, in the TCFD report and in the ESG date back.

So clearly, we are working hard with all the relevant providers.

But I think the one we're moving forward for more generally is the WEF framework.

I'm not sure if that answers the question, but that's how we're currently thinking about it.

And your next question comes from [Alvaro Vias de Alba] from Morgan Stanley.

I have 3 questions.

The first question is regarding [these] costs.

Should we think differently about the security that it is -- that -- is it from the Hong Kong subsidiary as the LCR from this entity is quite high and the security will not be (inaudible) after January 22?

My second question is a more broader question, is regarding any impact because of the movement to Hong Kong in terms of regulatory environment.

And my third question is regarding ratings, if you guys have any comments or thoughts about Moody's sort of fixed downgrade?

Greg, do you want to take the first and third, and then I'll pick up the second one.

Yes, of course, of course.

So yes, I think to the extent, you should think about the Hong Kong and the U.K. disclosed separately and that they are issued by 2 different banks with different regulatory regimes.

And obviously, as you note, different liquidity positions now.

I'm not saying that we're necessarily going to look at them differently or that, one is more likely to be looked at as something to take out in the future or not.

But I think it's worth bearing in mind that they are under 2 very different regulatory regimes.

So that's important to know.

On the ratings side of things, we're -- I think we're broadly comfortable with the ratings that we have.

Obviously, we'd always like them to be higher.

The -- there's not really much we can add beyond, I think, what the various rating agencies have said publicly on the subject at this stage.

And obviously, if you want to engage with them directly, you can feel free, but we're not going to put words in their mouth.

Yes.

On the regulation point, yes, you may need to clarify the question.

But the -- I mean, there's nothing behind what we've announced today or, yes, no comments around considering moving some members of the senior management team to Hong Kong that's driven us all by regulation.

Yes, we are very much domiciled here in the U.K., Noel and I, for the foreseeable future, are based here in the U.K., and there's nothing in today's announcement that's driven by either a push factor from the PRA or a pull factor from the HKMA.

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

I'm going to throw Greg under the bus one more time on something on Discos, but it's an easy one, I hope.

And then I've got a couple of questions on the asset sales, if I may.

Firstly, on the legacies.

If you're like me -- you're basically home schooling several inpatient and petulant traders, then the 31st of March has become quite a big date in the calendar for the PRA review submissions.

What sort of communication do you think -- and I know I'm probably asking this a bit early, but do you have any plans to communicate to the market what your submissions either looks like or rough ideas?

Or are you going to wait until the sort of latter discussions with the PRA are concluded?

And if that's the case, what sort of time frame, best guess -- and I promise I'm not going to hold you to the best guess that you put on that, before, let's say, there's a market communiqué.

And then secondly, the asset sales, really, when I'm looking at the U.S., I'm just wondering what package you're looking to sell?

Is it just HSBC Bank USA, N.A., the bulk of the retail business?

Is it the intermediate holdco that sits above the HSBC USA Inc.

as a sort of -- as a package?

Or are you pretty much open to just selling parcels of loans, if that's all you can get a bit for.

And I guess the same thing goes for France really, maybe looking more at the liability side, if you're seeing, as I understand, already separated retail from commercial lending to a larger extent there.

Would -- is it your anticipation at this stage that the package you're looking to sell in France would include CCF bonds or not?

Would be my questions.

Yes.

So Greg, I'm not going to pick up the Disco question, but I can pick up the M&A questions.

Yes, of course.

Look, generally speaking, across the piece, obviously, the March 31 deadline is the deadline for us to submit kind of our initial analysis and thoughts.

How long that conversation goes on, very, very hard for us to guide on.

I think it will be a function of many things and obviously, many different priorities.

So I'm afraid I'm going to have to disappoint you there, Tom, and not give you anything again that's specific.

But look, on the market disclosure and things like that, look, it really depends on whether or not there's anything to tell you.

That's kind of the first point.

If there is something to tell you, then, of course, we're very conscious that there may be price-sensitive information in the next year.

And if we need to make a disclosure, we'll make a disclosure.

But we're not kind of planning at this stage, like, a wholesale disclosure piece, to be quite honest with you.

It's more around if we do become party to anything, we'll say something.

Right.

Okay.

I figured as much.

Just wanted to check.

Yes.

And look, obviously, somewhat constrained telling what I can say about the M&A processes, but I think if M&A processes do eventuate, there'll be parts.

France won't include the bonds, and the U.S. wouldn't be a legal entity.

It would not be a legal entity?

Sorry, it was just cracking up a bit.

Did you say...

If that theoretical event were to happen.

And your next question comes from the line of Robert Smalley with UBS.

Good luck, Iain.

And Greg, thanks very much for the package that you send every quarter, very helpful.

Two topics.

One -- and I guess both kind of following on from Tom.

In the call earlier this morning, it was -- the idea of trapped capital in the U.S. was brought up.

How much capital is trapped in the U.S.?

How would you plan on getting it out?

Are there tax implications to that?

And what's changed?

Because I imagine that you've wanted to get some of this out for a while.

And I guess, secondly, if you could follow up on the comment you just made on legal entity, nonlegal entity.

The call broke up, and I'm not really sure what you were referring to.

Well, on the second question, I think the question was are we contemplating selling a legal entity in the U.S., and the answer is no.

On trapped capital, this has been an issue that has persisted a number of years.

And yes, today, order of magnitude, probably something in the order of about $5 billion of capital.

You don't hear it at the group level because effectively, we take on additional double leverage.

What we'd like to do is pay the capital out and pay the double leverage down.

The -- yes, we think it will be a 3-, 4-year journey for us of restructuring the U.S. business and getting the regulators comfortable that we've got a sustainably profitable business in the U.S. and then through several CCAR cycles effectively getting approval to pay that capital up to the group.

And there's no tax implications about that, normal dividend upstream.

And your next question comes from the line of James Hyde from PGIM.

Yes.

My question is a mor slightly philosophical one about where you're going, especially for us as -- for the investment -- the developed market investment portfolios that my company runs.

Now, 42% tangible equity invested in Asia goes to 50%, kind of wide stock at 50% given the ROE differential.

Is there -- is that a sort of stock that then makes you have to revisit domicile?

Or is this to do with balance or rating agencies?

I just want to understand the thinking of any such benchmark.

That's the first question.

I mean I guess, it was driven by a sort of realistic medium-term -- medium- to longer-term target of shifting of capital.

I mean when you do the math on, there's a fairly material reallocation of capital from West to East over that period for growth in East and West.

Yes, I wouldn't fixate on 50%.

But we are a global business today.

And a lot of the value in Asia is driven by that global connectivity out of customers in the U.S. and Europe and the U.K. And therefore, there will always, I think, for the foreseeable future, be material amounts of capital invested outside of Asia to support and self-reinforcing with the Asian business.

And Jim, we -- the time frame here was 3, 4, 5 years, depending on which particular targets.

And so clearly, as we go through that time period, we'll roll forward our plans to soon turn on the opportunities which we see at those particular times.

So it's very much meant to be a partner for the next few years.

Just another question on these proposals regarding ESG that are particularly climate concerns that you're going to put to the AGM.

I just want to understand, can you give us some color on what's going to change?

Is it going to be a formal refusal to do any more coal anywhere or any other fossil fuels?

I just want to understand, what would satisfy the -- some of the shareholders, ESG shareholders that are -- that have been vocal.

I'll take that.

We've obviously received the share action resolution.

And indeed, the resolution, which was co-filed by other institutional and retail shareholders.

We are in positive discussions with that group.

And clearly, we'll have to put out our AGM notice sometime towards the end of March.

And in any event, there will be a climate resolution filed.

But clearly, as you saw with Barclays last year, there were actually 2 resolutions filed.

But ultimately, a number of investors will prefer if there was just 1 resolution filed.

So we're still in that process, Jim.

So I'm afraid we can't be too specific.

But as the CEO, Noel Quinn, said today, clearly, there would be an element of a commitment to end the finance of coal during a certain period of time.

Clearly, we will also be making greater disclosures in terms of sectors and sector pathways towards the net-zero goal for 2050.

But that's still very much work in progress, and we can obviously update you as and when or before we file the AGM notice in a few week's time.

And your final question for today comes from the line of Dan Crowe from Goldman Sachs.

Just real quick on budget, the line broke up a little earlier.

So it's more of a clarification on issuance in AT1.

I assume that the refinancing includes both the $2 billion in AT1 coming and then the $1.8 billion in legacy Tier 1. And then a kind of follow-on from that.

If the PRA asks you to remove some of the opco debt that has kind of been your Tier 2, would that change your issuance there?

And then I'm sure this was covered in the call earlier, but I had to drop off.

But just trying to tie a few numbers on your RWAs.

I don't think I'm missing something in terms of increases for this year.

So it just looks like you simply reach next year with pretty significant excess capital.

I guess that's the hint of talk of buybacks.

Or is there something this year that I should take note of?

I think Greg or Iain, do you want to take the first follow-on question?

And I'll pick up on RWAs.

(inaudible) I mean on the AT1, what we said was that we would continue with the pattern of replacing when appropriate.

I don't really think we want to go beyond that.

And on the Tier 2, we're not seeing any particularly vigorous action from the PRA beyond the conversations we're having with them on the legacy instruments.

So I don't think there would be anything happening this year that would force us to change the issuance plans.

I mean that's where we are, I think.

Then on RWAs.

On the equity call this morning, I mean, firstly, we haven't guided the capital ratios at the end of '21.

What I did say was the following, I mean firstly, yes, we are probably more broader than consensus on loan growth, as you would expect us to be.

But we are targeting mid-single-digit loan growth over the next couple of years.

We have about $10 billion of RWA uplift from regulatory pressures this year and probably a combined $40 billion to $50 billion over the period through 2023.

We've got the RWA rundown program.

That's still ongoing.

We did 52 in the first year.

We've got another 30 to do this year, we think, and the remainder, the year after.

And then you'll have your own views on credit rating migration.

So there could be a degree of that this year.

Yes, for conservative reasons, we've assumed that there is until there isn't.

So yes, I think you're right that some of the equity analysts had assumed that, that led to significant capital surpluses.

I did say this morning to the analysts, sell-side that we weren't planning any buybacks on top of the -- on top of dividends this year.

Okay.

Perfect.

But there's nothing beyond that, that I should be taking -- I mean, that's all stuff -- I assume there's nothing in the woodwork.

No.

No.

Okay.

Well, look, thanks, everyone, for joining the call today.

If you've got any follow-up questions, please follow up with Greg Case.

He's been on the call and your normal Investor Relations channels.

But greatly appreciate you taking the time to join the call today.

Thank you.

Thank you.

That does conclude our conference for today.

Thank you for participating.

You may all disconnect.