滙豐控股 (HSBC) 2021 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's HSBC's 2021 Annual Results Fixed Income Call. (Operator Instructions) I must advise you that this conference is recorded today.

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

Thank you very much, Martin, and good afternoon, everyone. This is Carlo. I'm joined today by 2 individuals that need no introduction, Richard O'Connor, Global Head of Investor Relations; and Greg Case, Head of Fixed Income Investor Relations. I'm not going to go through the slides that we posted nor going to give a very long speech. I'll limit myself to making a few highlights about the results, and then I'll go through into a bit more detail on the financial resources and then pretty quickly go into Q&A. .

In terms of the highlights for the results, 8.3% return on tangible, quite helped by the release of ECL provisions, but we have very good earnings diversification with all the regions being profitable. Revenues grew by 2% in the quarter, and we have given the rate environment, more confidence on a positive NII trend. And you would have seen that we have announced that we are now flagging 10% return on tangible for 2023 onwards while a year earlier than previously planned.

In terms of balance sheet dynamics, we have $38 billion of loan growth across wealth and personal banking and commercial banking. And as well, we had $24 billion of growth in deposits for the quarter. Our credit quality remains good. We had low Stage 3 charges. And you would have seen that our Stage 3 loans represent about 1.8% of the total loans, and they have been stable at that level. We have now released about 85% of the COVID reserves that we had put during 2020, and we have $600 million of those still remaining. We are expecting our ECL charges to normalize somewhere around 30 basis points during 2022. You would have seen that we took some charges on China CRE, and we have given you some slides in the document and some more information where you can see our exposures and details around those.

Turning to financial resources, taking each of them in turn. First, from a capital perspective, our capital ratios continued strong, 15.8% CET1 ratio at the end of the year, a dividend of $0.25, and we have announced a new $1 billion buyback on top of the up to $2 billion that we had announced in the last quarter. As a reminder, we have flagged that we are planning to be back within our target range of 14% to 14.5% CET1 ratio from this year onwards.

From a liquidity perspective, liquidity continues to be super strong, LCR of 138%. But that, of course, masks the surplus liquidity we have in all the subsidiaries, which gets deducted from the HQLA ratio. So if you were to take into account that, the total HQLA that we have as a group is $880 billion. We continue to pursue initiatives to increase the returns and efficiency on the excess liquidity in addition to our desire to increase our customer lending book.

MRO ratio, very, very healthy at the end of the year. Please note that our requirements have actually gone down by 170 basis points on the back of the U.K. leverage computations, which affects both the leverage-based requirement but also the sum of the parts, given that a lot of the entities are leverage constrained from an MRO perspective.

From a funding perspective, we have been until now in a building out phase of our MREL stack. We have ended that phase. And now we're getting into a refinancing and rebalancing mode of the stock. So we should be expecting pretty much 0 net senior holdco issuance for the year. We are flagging about $10 billion from a growth perspective. We are likely to be in the market for AT1 this year. We don't quite have much of a need. Of course, we reserve the right to be in the market should we think that's appropriate.

We are conversely planning to return to the Tier 2 market. We have been absent from that market for about 5 years. And you would have seen that we are -- saying that we are planning to have around $4 billion of issuance for the year. And we have added some disclosures in terms of our legacy capital stack and some updates on our position on LIBOR.

That's all I wanted to say. So in summary, a very strong year. Return of targets have been brought forward by about a year, improved rate environment, which gives you a nice tailwind. Capital funding and liquidity positions are all very, very strong. Net issuance substantially down on prior years, and our MREL stack now at a steady state.

So with that very brief introduction, I'll open up for questions. Martin, back to you, please.

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

I have 3 for you. Firstly, just on the Slide 21, the fixed income slides, we've had a fair few questions always about how the infection risk works that you have there now. [Assuming it] doesn't [align] with anything new, but could you just clarify exactly how that works?

Secondly, as you highlighted, you're returning to the Tier 2 market, and you flagged about $4 billion of difference. Obviously, you've got a significant volume of operating company Tier 2 still outstanding. A lot of that's not going to work any longer. I guess the question is why wouldn't you look to do some form of liability management?

And then finally, on additional Tier 1, I mean you highlight limited needs. Just any thoughts around that. So obviously, it looks like you've got quite a few bonds components coming out to call over the forthcoming year and why you need to be quite so limited. That would be my 3 questions.

Thanks very much for the question, Lee. So on the first one on infection risk. Infection risk can be mitigated when we voluntarily derecognize the securities. So you would have seen that, that is kind of the plan that we have for each of the components of the stack. So we don't think that, that poses any issue at the moment that each of the securities lose kind of eligibility.

In terms of Tier 2, yes, you're right. We have a number of Tier 2 outstanding that have lost as well some value and some of those that will lose value in the future. Liability management is always one of the potential options that we have. We will look at each of those. In turn, we will continue to look at all our options available.

In terms of AT1, yes, I mean, you should for now assume, and that's what we have in the plan, that we will let those transactions to come, and we wouldn't be replacing them. So we have no plan at the moment to replace those AT1 for this year. Again, depending on market conditions, we may want to get ahead of next year or a few years.

So just to clarify, so you have no plans to replace them or you will only look to replace them? So I'm not sure I understood.

Yes. So we have no plans for issuing any AT1 this year.

Okay. And can I read anything in terms of your attention as regards to other for the quarter that are coming up?

No. You shouldn't.

Your next question today comes from line of Daniel David of Autonomous.

I also have questions from the legacy area because I think there's quite a lot of interest there. Just focusing on the legacy Tier 1 and noting your comments, I can see that they're not MREL or capital. Can you just help me with the rationale for leaving these bonds outstanding given the CT run headroom you've got and what they're costing you? And are these bonds swapped? So could the interest rate be hedged when you come to do -- potentially do a make-whole?

The second question I have just goes back to your point on derecognition from an infection risk point of view. I had understood the EBA guidance is quite clear that you can't do this unless you call, change terms or LME to mitigate the infection risk. So my question is, is the U.K.'s approach different for the EBAs? So PRA, I guess rolled over and let you take this treatment. I'm just a bit surprised to read this.

And then finally, just on the resolvability assessment framework. Could you just help us understand the time line? Have you submitted all your information? When do you expect the results? And do you expect to be told the PRA stance before the public disclosure in June?

Thanks, Daniel. On the legacy securities, so when we're assessing the legacy securities that are outstanding, we always look at if you want 3 different components. And the blended result of those 3 components drives whether we will be making any -- taking any action on those securities.

Those components are, first of all, the regulatory requirements. We are in ongoing discussions with the regulators around those. Maybe we'll get more information around midyear about those. But it's fair to say that the regulatory treatment of the legacy securities is not black and white. I mean there are shades of gray there in all sorts of securities. I would note that some securities are particularly challenging, and that includes newer law securities, where, as you know, even if we wanted, it would be impossible to pretty much eliminate a full stack.

So the point I'm trying to make is this is not a black and white. Obviously, from a regulatory perspective, it will be better for those securities not to be there. But given the complications and all the different components, I think the regulatory treatment tends to be a little bit grayer than that.

The second component is, of course, yours and investors' interest. We are a long-term issuer in the market, and we want to have a long-term constructive relationship with investors. And as such, we will take those interests in mind.

But finally and very, very importantly, we look at the economics of those securities. And the economics of those securities, as an outsider, outside-in from the firm, is not totally straightforward for you to see how those economics play out because you need to look at the accounting treatment that we have for those securities internally.

We need to look indeed as to whether we have those securities hedged or unhedged from an interest rate perspective. We need to look at what is the optionality value of those securities for future funding. Like for example, we have, at the moment, in the case of the Discos. So there is all sorts of security components from the -- all sorts of economic components that affect whether those securities are or not in our interest to be called. Clearly, I'll leave it at that, but that basically drives whether we would or not call some of the securities.

In terms of hedging, we're not going to comment on individual hedging on individual securities, but likewise, we shouldn't assume that we have hedged them all.

In terms of the recognition, I think you pretty much -- you answered it in your question. It is the U.K. rather than the EBA approach. From a U.K. perspective, we can deal with that by voluntarily derecognizing the securities that is acceptable way of dealing with infection risk in the U.K.

And in terms of the rough time line, we submitted our self-assessment last year. We have been in contact with Bank of England. And in theory, they have sent a number of questions. On the back of those, we actually sent an update to that a couple of weeks ago in line with everyone else in the market.

And the next step of the process is midyear. Just in June there is going to be a public disclosure made by both the Bank of England and ourselves on the status of that assessment. I guess we'll have to wait for that one. Obviously, we will have discussions with them ahead of that in terms of what is it that we're going to be disclosing, and we'll be aligning communication.

Can I just double check. So on the voluntary derecognition point, on the slide, you say subject to regulatory approval. So has this been approved? Or is it waiting to be approved?

That is part of the discussion on the self-assessment. On the right, and you'll, I guess, the effect of that at the middle of the year.

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

Following up on one point and then another subject. You mentioned the Discos. If you were to leave those outstanding, how would they be categorized within the liability stack? And then 2 other questions. One, you made a large provision for real estate in China. Could you just talk about the Hong Kong real estate market and if there's going to be any need for provision today given the economic slowdown and the moves we've seen of personnel out of Hong Kong?

And then third, on U.K. mortgages, swap rates moving much faster than you could probably reprice mortgages. So could you talk about the impact on your margin for the next couple of quarters on that?

Yes. Robert, so in terms of the Discos, the fact to become a senior debt. And that senior debt is actually not that expensive. So the Discos are LIBOR plus 10 to LIBOR plus 25 perpetual funding. So we looked at them in the context of funding value. Most of the Discos are issued out of non ring-fenced bank fence, which is an entity that is naturally in funding need long term. So having that optionality is actually quite valuable. So that's how we look at the Discos.

In terms of China CRE. Yes, I think the segment of the China CRE that is most impacted is the offshore segment. We have exposures to that segment in Hong Kong. We have about $11.6 billion of exposure there. About half of that book is in what we call enhanced monitoring mode. The other half is investment grade or -- and investor. So there is always, of course, a chance that you will get more impact.

At this stage, we have reserved what we think is appropriate for where we are. Just note that we have announced or we have mentioned that we're expecting that we would be returning to around a normalized 30 basis points or provisions for the year. That 30 basis points includes as well any foreseeable impact that we can, at this stage, see on the CRE market.

Having said that, of course, the situation is fluid, and we will continue to look at it. I mean, if you were to look at development this year, there seems to be a little bit more support for the China CRE market coming in terms of commentary and some of the dynamics in the market. But again, trying to predict that ahead is pressure. So I think we will have to see how that develops.

Just add 1 thing. Clearly, the property companies you've read about having liquidity and other issues are mainly in China property companies, most of which just because of exposures with offshore. The question was very much more, I think, about Hong Kong incorporated property companies who have been -- we've got -- had a very strong relationships with through the decades tend to be very well resourced, very concerned with LTVs. The Hong Kong property market has been very, very resilient. And indeed, we still very, very good prices clearing in both commercial and residential property in Hong Kong. So clearly, we keep an eye on all our portfolios, but the issue is really at that mainland and China offshore market at the moment.

And in terms of U.K. mortgage pricing, yes, your observation is right. I mean a lot of the mortgages in the U.K., of course, are fixed and the dynamics of the swap markets are slightly different to the domain. So yes, it is quite possible that, that market will continue to have a little bit of competitive pressure. It is a very, very competitively priced market. We continue to originate new mortgages at return on returns that are higher than our cost of capital. So at the moment, we are comfortable with those more -- those mortgages even at the compressed spreads. But of course, it's something that we will keep an eye on. I don't know, Richard, if you want to add anything.

Yes. The other thing is, clearly, the market tends to look at mortgage prices in the newspapers today versus swap base today. But clearly, there's a lag between swap rates either moving up or down, and companies such as ourselves moving mortgage pricing. We don't move it every day. Clearly, we move it on a regular basis, but there's always a lag between mortgage pricing going up and down versus swap rates. So clearly, that's just bearing in mind that swap rates have moved and interest moved dramatically in the last 6 weeks. But just bear in mind, there's normally a lag there before mortgage pricing start to reflect that.

(Operator Instructions) Your next question today comes from the line of Alvaro Ruiz of Morgan Stanley.

And apologies because I have 3 questions and all of them about legacy. And the first one is about HSBC 5.844%. And if I follow with what you just said, that there are 3 angles to LME or to exit and make-whole call of this activity, you are looking at regulatory requirements, investor interest and accounting treatment. I think it's quite clear that this activity is useless from a capital perspective. Is it from an SPB? And with all the details that you already said in the Pillar 3, then if you can provide some color on this activity, that will be great.

The second one is about Tier 2 more broadly. You said that you are going to issue Tier 2 for the first time this year. In order to LME the make-whole call Tier 2 securities, do you need to issue it first? In other words, the approval to LME, the securities is subject to replace or other Tier 2 securities, assuming from -- obviously from the holding company?

And my third question is about the Discos. I think we discussed this point in the past, but 1 of the Discos is issued from the Hong Kong subsidiary. Can you please confirm that you look at this security in a different way to the other 3?

Thank you, Alvaro, despite the questions are all on legacy. The first -- your first question, I think, is on the non-reinsurance bank trust preferred security. Yes, you have identified correctly, I think, one of the 3 conditions, the regulatory treatment. I mean we haven't called the securities. So it must mean that the other conditions kind of affect why we haven't made a decision. I'll leave...

I'm sorry, which condition, investor interest? I mean -- or accounting treatment?

It must be also the economics.

It's not economical to exercise the make-whole call of the securities is what you're saying?

That could be one of the conclusions. So overall, we haven't made a decision to call them because on balance, that doesn't work for us at this stage. We will continue to look at it.

So in terms of the Tier 2s. No, no, I think we don't a specific requirement on the Tier 2 stack, right? We have a capacity to have Tier 2 in our stack up to a certain amount that at the moment we have underway, right? So it's not a precondition for -- one is not a precondition to the other. So we will continue to look at all the options for Tier 2. I mean that could include SMEs, equal exchanges. It would be issuances. We will look at all of the above.

In terms of Discos, yes, I think the only similarity between the Hong Kong securities and the ones who are non ring-fenced is the type of instruments. The 2 are very different because the legal entities have very different needs. You could say that our Hong Kong entity is less of a natural funding need entity than it is the non ring-fenced bank. And also from a regulatory perspective, the Hong Kong Discos are no longer counting from a regulatory perspective. So we don't treat them the same. We would make those decisions individually in each of the entities.

We do have one more question at this time. This comes from the line of Tom Jenkins of Jefferies.

Sorry, don't keep you very much longer. And guess what? It's on legacies, which you should be very proud of because it means no one's concerned about anything fundamental or anything else. So if we see quite a good thing that we focus on, these sort of the trends in (inaudible) of these securities.

But I've got 1 question, which I don't know if I missed earlier. I only heard Lee on the firs one. It was one of the first questions, so I don't think I missed anything. But LIBOR, I know you put up a slide in there after the, I think, Slide 22 on the slide deck. How are you thinking in terms of your fallback language on the Discos? Because it's really not clear. I talked about sort of lowest deposit rate sort of as a base of the fallback with LIBOR. Software is not based on deposits. So I was just wondering what you're thinking in terms of whether you're fix, whether you've got an alternative? Is there an alternative that I don't know about? I'm sure there is. Just talk to me a little bit about your forward language on the Discos, if you may.

Tom, yes, so sterling newer law instruments for those, the U.S. legislative solution doesn't quite work. The -- of course, the conundrum with those securities, like for all the new law securities, is that we will not be able to successfully consent for 100% of the securities given the dynamics of the newer law. So we are looking at the options with those securities. I mean just...

Sorry, I think -- I don't want to waste your time. We're talking across purposes. I was thinking of the Discos, which on the English law, and what the transference would be into LIBOR as part of your Discos. No, no, please don't apologize. It's -- I obviously it wasn't clear.

Yes. In terms of those securities, we are looking to offer similar consent solicitation as we did. With all the other securities will come with those in due course. I mean those securities, we have time until 2023 for them.

Sure. But do you think based on the language in the documentation that you can use software and then maybe upscale the coupons as compensation as you did with the sterling LIBOR bonds? Or would you use a different base rate? I mean -- because it doesn't -- I can't square the circle in terms of what the language in the bonds says about the lowest deposit rate and what you're talking about in terms of offering a new -- what the lowest deposit rate sort of replacement would be if it's not suffer -- it's not -- it's treasury rate.

Yes. The fallbacks on those securities are unquestionable at this stage.

Okay. So would you consider fixing? Or would you consider just getting rid of the damn things and stopping these irritating questions from people like me?

It is tempting. It is definitely tempting. We will -- listen, we will leave our options open at this stage. I mean, overall, we are committed in seeking to remediate or mitigate anything around LIBOR demands, and we are going to work together with investors to find a solution that works for everyone. And this is a complex space highlighted by the call.

You should go into politics, honestly. Right. Okay. So -- okay. So basically, there's no firm answer. There's no guidance. It's just like let's hope for the best and not for the worst. Is that the kind of thing?

Yes. Yes. I think it's more than that, right? In terms of the English law securities, including the Discos, we expect to offer a similar constant solicitation as the one we did for U.S. LIBOR securities. I think that's the best I can say at this stage.

Okay. All right. Well, as and when you know what the possible base might be, do please let the market know would be, I'm sure, very appreciative.

There are no further questions at this time. Mr. Pellerani, back to you.

Okay. So thank you. Thank you very much for the call and for the interest in legacy securities, in particular. I hope that the call was helpful for you. If you have any more questions, please pick it up with Greg and the IR team, and we will endeavor to answer especially if they're not around legacy securities. So thank you very much.

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