滙豐控股 (HSBC) 2020 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and 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, Ewen Stevenson. Please, go ahead.

Good morning or good afternoon all. It's Ewen here, the Group CFO. I'm joined today by Iain MacKinnon, our Group Treasurer, who is actually joining by phone from a different location; and Greg Case, our Head of Fixed Income, Investor Relations. There's a fixed income-specific slide deck available on our website, but we don't plan to speak to specific slides as part of these introductory comments. We'll keep the comments brief. And I know you all have had a challenge, so we'll have a chance to listen to the equity call that Noel Quinn and I did earlier today.

I was planning to quickly run through what we announced today and then hand over to Iain MacKinnon for more detail on capital and funding before opening up for any questions you have.

Firstly, a few words on the current environment. Yes. We clearly continue to be in a very unpredictable environment, but I think we've responded well. And we continue to do what we can to support customers and colleagues through what is an exceptionally difficult period. I think in that context, we're satisfied with how the business is performing, Asia has held up well for us. And within Global Banking and Markets, the fixed income business delivered a very strong revenue growth in the second quarter.

Businesses that performed less well are largely in areas that we've already committed to change, and we'll be accelerating our transformation in the second half. The bank remains strong and resilient with excellent funding and liquidity positions, and our core Tier 1 improved to 15% in the quarter.

Turning to the second quarter results themselves. Given the impact of COVID-19, the second quarter was tough financially. We had 82% fall in reported profit before tax and a 57% drop in adjusted profit before tax.

Our results were heavily impacted by lower revenues, which came from a combination of subdued customer activity in many parts of our business and the building effect of ultra-low interest rates. It was the second quarter in a row of very high expected credit losses, and we also had a $1.2 billion software intangible write-off largely as a result of the weak return outlook for the non-ring-fenced bank.

On revenues, adjusted revenues were down 4%, which included a $507 million benefit from volatile items which in part reversed some of the negative impact we saw from mark-to-market movements in the first quarter.

Expected credit losses were up on the first quarter, $3.8 billion in total or 148 basis points of gross loans, with the largest impact seen in the U.K. geographically and in Commercial Banking amongst our 3 global businesses. U.K. expected credit losses were $1.1 billion higher than the first quarter, reflecting the worsening economic outlook for the U.K., of which $900 million related to our U.K. ring-fenced bank.

Stage 3 expected credit losses were broadly stable at around $1.5 billion in both the first and second quarters, although the first quarter included a significant charge on a single corporate exposure in Singapore.

Recognizing the deterioration that we saw in the economic outlook in the second quarter, we've updated our range for the full year group expected credit losses to $8 billion to $13 billion. The lower end reflects a path closer to our consensus, central economic scenario, reflecting a strong economic rebound in 2021 with some unwinding of the economic adjustments taken to date.

The higher end of the range reflects a path closer to our downside economic scenario with a much more muted economic recovery in 2021, leading to further negative ECL adjustments for forward economic guidance in the second half.

I caution that there remains a wide range of potential outcomes, including a risk that the upper end of this range may need to increase further. And in that respect, I'd encourage you to read our ECL sensitivities in the interim report.

As we look out to the second half, there remains considerable uncertainty, whether that be from the continuing impact of COVID-19, the ongoing Brexit negotiations or the U.S.-China tensions and any impact that has on our Hong Kong franchise. As such, it's too early to discuss distribution policy or medium-term return targets, and we don't expect to do so until our full year 2020 results in February.

However, we're pleased that we phased into this uncertainty with a strengthened core Tier 1 ratio of 15%; an extra $85 billion in customer deposits through the second quarter; continued vigor in managing our cost base down, down 7% Q2-on-Q2; and the benefit of a diversified portfolio of franchises globally.

Noel and I remain very committed to the plan we announced in February, mainly a material reduction in RWAs, particularly focused on the U.S. for non-ring-fenced bank and Global Banking and Markets, with a reallocation of these RWAs towards our strongly performing Asian franchise; secondly, a significant reduction in the operating cost base of the bank; and thirdly, a material reduction in the ongoing operating complexity of the bank.

With that, I'll pass over to Iain to run through the balance sheet.

Thank you, Ewen. Hi, everyone. Iain here. Thanks for dialing in.

Despite the weak macro environment, the balance sheet metrics continue to remain very strong and improved. Our CET1 ratio was up 40 basis points to 15% in the quarter, and our fully loaded CET1 ratio was 14.9%. Customer deposits grew by $85 billion, resulting in a loan-to-deposit ratio of 66.5%. That's down 5.5 percentage points since the start of the year.

The group remains very liquid with gross high-quality liquid assets of over $780 billion on hand. That's up $138 billion from the end of last year. Our consolidated liquidity coverage ratio on the European delegated asset bases was 148%. That's broadly flat in the half.

Now with regard to the 2020 issuance plan, as Ewen noted, our gross and net issuance is significantly down in 2020 versus prior years. We did expect this. We did say we would remain flat.

We did successfully tender [for $3.3] billion of 2021 bullet securities while issuing $3.5 billion of new 5- and 10-year callable paper, managing down next year's refinancing needs. This year, we continue to expect to keep our net issuance around 0 and MREL senior. Our Tier 2 remains 0 -- our Tier 2 need will remain 0. We don't expect to grow the balance of our AT1s.

With that, I'll hand back to Ewen.

Thanks, Iain. Sharon, if we can now open up the lines for any questions, please.

(Operator Instructions) Your first question comes from the line of Daniel David, Autonomous.

I have 2. Just looking at your issuance plan, as you said, it looks like mostly refi in Holdco senior AT1. Looking ahead at the maturity profile, you've obviously got a lot maturing in 2022. On Holdco senior, would you look to prefinance some of that $15 billion that's rolling off alongside the $9 billion in '21?

And on AT1, can we assume that you'll run at the level of AT1 you've got now? And also, are there any changes to Tier 1 double leverage that we should think about when considering your AT1 plans?

The second question is just on LIBOR transition. Can you give us a bit of an update on how you're progressing? Are there any products that you're -- you think that might be behind the transition effort? And also, how are you thinking about the Discos in the context of LIBOR transition?

Iain, do you want to start with that? And we've got Greg here too, who can pick up.

Yes. On the '22 refinancing, yes, we are looking ahead. We will take the temperature on that as we go through the end of this year and early next year and probably look to do some refinancing a bit like we've done now. But it very much depends on market conditions and appetite.

With regard to the AT1, I think we're not expecting to extend it with regards to the extent, the base of our AT1.

With regard to the double leverage with the fallback in -- and the cessation of the dividend, double leverage is running at or about risk appetite. So we we're actually seeing nothing untoward there.

And then on the final point, I'll maybe hand over to -- maybe hand over to Greg, but I don't feel I can really comment on the Discos at the moment.

Yes, sure. Thanks, Iain. It's Greg here. So as a general point on LIBOR, I think we're aligned with the industry on this. I think we're very keen to move toward the new standards and we've been doing that with our more recent issuance. We're looking at what opportunities we'll have to make sure that we're as compliant as we can be and want to be working with the investment community to ensure that we're getting the right outcomes in time. But obviously, we've still got plenty of time to work that through.

Specifically on the Discos, we're not going to talk to individual bonds, and we don't want to give any kind of legal analysis. But our main intention where we can is to try and remediate bonds and move over to new reference rates where we can.

Your next question comes from the line of Paul Fenner, Societe Generale.

Can you hear me?

Yes.

I've got 2 quick ones. First, I didn't quite -- just to be completely clear, are you still aiming to issue AT1 this year to cover what you redeemed earlier? Or is that now off the table for the remainder of 2020? That's question number one.

And question number two, and I'm sorry if I missed it on the main call this morning. What I think is apparent is the transformation program is fixing things that investors are -- have become more or less comfortable with, at least in terms of the uncertainty. And the -- what people are worried about are the businesses that have typically gone okay in Asia. And so I clearly put the recent HSBC underperformance in bond land. Can we -- you think that, that's because people are worried about what's going on in China? Or what is it that you can tell us about [those bonds in] HSBC's business?

Maybe I can answer the...

Missed the last -- the question at the end there. Paul?

Sorry, sorry. Yes. Hello?

Yes. Sorry, we just missed the question at the very end there.

Oh. Yes. So my question is with investors. That's what they're kind of worried about. I'm never quite sure what it is that I can tell them. I know it's not in your -- you're not political analysts, you're not economists. But you can tell us something about where you think foreign policy in the U.S., in the U.K., in the European Union vis-a-vis China, Hong Kong, where that could impact your business most readily and -- so we can kind of just start to factor in some potential downside risks?

Yes. Look, I mean, I don't think we're going to sit in a call and publicly speculate about the foreign policy position of various governments around the world.

I mean all I can point to, as I said earlier on the call, was if you look at the underlying financial performance of whether in our Hong Kong business, which was continuing to attract positive flow in Q2, the China business, which profits were up materially in Q2, it's very hard to point to anything that's having any material impact on our business at the moment as a result of geopolitical tension. So -- but we're not going to speculate on the position of various government foreign policy around the world.

On the first one on AT1 issuance?

Yes. Sure, certainly. Paul, no plans to refinance that call that we made in January. We're happy with where the Tier 1 capital moved to after that. So as we look out over the course of the next kind of 12, 18 months, we've got our next new-style AT1 calls not until next summer. So we'll obviously look at that as and when.

Clearly, we've got the legacy Tier 1 capital credit starting to roll off. And obviously, we'll think about how we look at that in the future and whether or not we refinance that. But if we were to issue any AT1, it would be to refinance rather than anything else.

And sorry, are not going to happen this year?

I think we wouldn't rule it out. But at this stage, there's nothing immediately planned.

Your next question comes from the line of Robert Smalley, UBS.

Just a couple of quick questions because you've covered a lot already this morning and on the earlier call. Just in general, loan loss provisioning. A number of your peers have said that they feel that they're around peak provisioning. You're -- seem to be indicating that you're going to have similar levels at least in the third quarter. Could you talk about -- just give us an idea around that and where you think that's going to come from?

Secondly, on liquidity. Could you give us, if possible, a breakdown on -- because I'm looking at Slide 9. You've got it by division. Could you give it -- give us a breakdown geographically? How much of that liquidity is in the U.K., for example? And how much do you need to keep there around the changing economic circumstances and Brexit?

And then third, I just want to be clear on issuance on Page 18. As a gross number, roughly how much Holdco senior you're looking to issue in -- for the remainder of 2020?

It's not what we said in relation to ECLs. The -- we indicated in the first half of the year we had just under $7 billion of ECLs. And for the second half of the year, we've indicated a range of $8 billion to $13 billion for the full year, which mathematically implies somewhere between $1 billion and $6 billion for the second half.

So I don't think we're indicating that we continue to naturally expect the third quarter to see the same run rate that we saw in the first 2 quarters. I think the -- I think the key determinant will be -- as we go into third quarter, will be is there any material shift in forward economic guidance. So -- and I think unlike some of our peers, I know a couple of our U.K. peers last week talked about much lower sensitivity. But they would caveat that there's no change in forward economic guidance.

That's not what we've said. We've acknowledged the fact that there could be changes in forward economic guidance, and hence why we've come out with a broader range.

Rob, so on the LCR, so we've given the ratios on the slide. There's more detail in interim report. So you can see the HQLA by entity on Page 82 of the interim report we put out this morning. So it should give you more insight.

On the issuance plan in terms of gross Holdco senior, well, I think when we set out the plan at the start of the year, we obviously had in mind that we were looking to do the liability management that we undertook, and that's why we were very clear with our guidance that it was refinancing. So if you look out at what we've got with -- to do with the rest of the year, we've got about $3 billion, $3.5 billion of Holdco senior that matures this year -- or is callable this year, sorry. Subject to those calls being made, then we'll probably look at refinancing them, but it's -- that's not even necessarily going to be 100% of the case either.

Your next question comes from the line Jakub Lichwa, RBC.

Just one from me, please, more on the payment holidays and [moratoria.] When you think of the stock of loans that's mostly Phase II, I understand that we did not include the longer-term payment holiday. When you think of the -- both of these categories, stage 2 and payment holidays, which one do you think exists here? Can you give us some sort of idea about what are your thoughts behind the risk for each of these? Or do you expect more losses to materialize over the next, I don't know, 6 to 12 months? And yes, anything would be helpful.

Yes. I mean I guess within the payment holidays, all of that -- I mean, you're clearly having to make significant assumptions in terms of likely impairments against those payment holdings when they roll off. I guess we'll learn a lot more in the next 1 to 2 quarters as they do. But we have built-in assumptions into that range of $8 billion to $13 billion that we came out with.

For example, in the U.K., there's very big judgment calls, for example around where does U.K. employment go post the end of the furlough scheme which then rolls through to -- yes, whether that puts stress or what degree of stress that puts on payment holidays.

But we set out on Page 67 of the interim report, yes, some fairly detailed analysis of what relief we've given where. And you can make your own assumptions on that as -- in terms of the top loss ratio we'd factor in. But we have made those adjustments in coming up with the $8 billion to $13 billion range.

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

I've got a couple of questions on Stage 2 and then one on the ratings.

Just on Stage 2, there's obviously been quite a significant increase in the Stage 2 balances, which that's been mostly coming from the corporate and commercial lending. So I'm just trying to understand, what's driving this? Is this fundamental in terms of a real greater risk? Or is this HSBC being a bit more conservative in the way they're doing IFRS 9 and sort of moving things from Stage 1 to Stage 2? Because we're not necessarily seeing a uniform movement across all banks. That's number one.

Number two, linked to that and a little bit like the last question. Obviously, there's quite a big discrepancy at the moment between Stage 2 balances and Stage 2 balances that are actually past due, which, I'm guessing, are obviously coming from the payment moratoria. So just how would you recommend that we go about looking and understanding what proportion of Stage 2 balances are going to actually move into Stage 3? Because that's obviously the key question then.

Just finally on Moody's. I'm presuming you have a regular interaction with them. Any thoughts or comments on the risk of potential Moody's downgrade for you basically? That'd be my 3 questions.

Well, on the last one, I don't think we're going to speculate what Moody's may or may not do, and it's probably a question that's better directed at them.

On Stage 2, I mean, it's mainly the deterioration in forward economic guidance that we've seen. If you go from end of April when we announced Q1 results and run through a week-on-week through to about mid-July, what we saw is a steady deterioration in the economic outlook for the global economy and more pronounced in some places such as the U.K. almost week-on-week. And then they again began to stabilize in July, i.e. with the trough of what people thought for 2020. We did see some uplift in economic recovery in '21 but not enough to offset the sharpness of the V or the recessionary event in 2020.

Yes, I mean, you obviously have to run your own math on those. I mean it's a very complicated set of adjustments that you need to make in this environment given the models haven't seen any event like this. So the models are probably less predictive and reliable, particularly when you get to more extreme ends of downside scenarios.

We have had to take some underlays as a result that we've set out the -- you're trying to factor in the impact of government support packages and when those government support packages roll off, what is going to be the impact on credit. And yes, so all of that thinking has been factored in to the best extent we can and coming up with the $8 billion to $13 billion range.

And we'll try to give you as much detail as we can to allow you to take different assumptions and apply different probabilities to our various scenarios as out in our interim report.

Okay. Okay. And just a quick follow-up. So just in terms of Stage 2, because I guess Stage 2 can also encapsulate incredibly high-quality credit that's seen a slight deterioration in probability of default as well as near-terms are much riskier. Is there commentary you can give around sort of the -- is that the case? Is it the high-quality stuff that's sort of blowing up the balances in Stage 2 there? Or is it just a mix?

Lee we'll -- so the Pillar 3 doc is coming out in a week or 2, and you'll be able how the CRR, all about the credit ratings that we use internally have migrated. So you'll be able to get a reasonable idea from that.

There are currently no further questions. I'll hand back to you, sir.

Okay. Thanks a lot, Sharon, and thanks a lot, everyone, for joining the call today. Appreciate you taking the time to join. If you have got follow-up questions, if you could follow up with Greg Case, Head of IR, through the normal IR channels that you have. But thanks again for joining and we'll speak in the coming months.

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