Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's HSBC Q2 Fixed Income Results Conference Call. 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 Palerini, 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 Kaye, Head of Debt Investor Relations together with Richard Boynes, 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.
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 and 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 pre tax profit of $5,100,000,000 for the quarter, $4,000,000,000 up year on year and that included a release of $300,000,000 of ECLs taking the year to date ECL release to $700,000,000 And as a reminder, we still retain about $2,400,000,000 of the ECLs we had built out during the post COVID period. 2nd, in terms of strategy, we are making very good progress across all the four priorities that NOL has set, which is 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, 1st, 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 NDA of about 4.7 percentage points. In terms of liquidity, we also have a very, very strong liquidity position. We have about 8.50 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 EUR 200,000,000,000 of surplus requirement across the different entities of the group. And finally, to talk about funding. In terms of AT1, you would have seen us in the market issuing about $2,000,000,000 of AT1 In year to date, we have also redeemed EUR 2,000,000,000 and that is in line with the guidance that we have provided in 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 the moment and you shouldn't expect us to be anytime soon in the market.
In the Emerald space, our guidance for the year is $15,000,000,000 as it was at the beginning of the year. You would have seen us issuing about $7,000,000,000 of Emerald 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 have in 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, too.
Depending on market conditions, we would continue to look at other places for us to diversify the funding sources from. That takes our MRL ratio to 30.6%, significantly above our 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.
Thank
Your first question today comes from the line of Lee Street from Citigroup. Please go ahead. Your line is open.
Hello. Good afternoon all. Thank you very much for taking my questions. 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, in your Pillar 3 capital instruments disclosures, you've got quite a few instruments that only work as capital until June of 2025. Just any thoughts on did they actually
to what extent are they sort
of serious impediment to resolution after June of 'twenty five? And Are there any easy fixies to get around that? And then finally, I suppose on a sort of similar vein or similar theme, so you've got quite a lot of Operating 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 perspective. So just any thoughts around how efficient that is for you as a sort of form of Capital instrument as one looks ahead.
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. 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 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 EUR 200,000,000,000 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 is not necessarily a bad thing. But then what happens is those deposits in some entities generate capital requirements, if those entities are leverage constraints. In other entities, you have MREL requirements that are also driven by leverage requirement. 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 and resolution. I mean, this space is, 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 that 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 we're having with a supervisor and a regulator. 2nd, there is, of course, the practicality that I mentioned. We need to see what is the practicality of potentially affecting those instruments.
The most challenging example perhaps is the New York law instruments where there is 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 for you from the outside to understand. I mean, clearly, we have a fiduciary duty to our shareholders and we will look to act 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 or 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 three dimension. And Depending on that, then we are looking at what to do. I can't comment on the discussions we're having with a 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, at the moment that an instrument stops being self qualifying from a regulatory perspective and it 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 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, the discussions with PRA that are ongoing, they're private, I fully understand. Did you say the first that we would hear about would be June next year?
Or would you expect to, for example, in your Pillar III capital instruments, disclose 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. So What will be the what's your best guess or that you can give us on when you first might be communicating back to us in all of this?
So the timeline is the timeline the official timeline is as follows. We need to assess about we need to make self assessment on our resolution by 1 October. Then that assessment is made public by both us and the Bank of England by June next year. To the extent that it's something material in the interim according to our disclosure obligation, then of course, we would make that public.
Okay. That's very clear. I'll leave
the floor for someone else.
Thank you. Cheers. Thank you.
Your next question comes from the line of Violetta Baraboy from Societe Generale. Please go ahead. Your line is open.
Hi, good afternoon, gentlemen. Thank you very much 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 Then the second question is about NPL ratio. So currently, we have it at 1.8% in Stage and it's unchanged year to date.
Have do you think that they've already peaked? And if not, 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 stands is, do we are we going to slowly track back to 2019 levels at around 7% to 8%? Or do you think you're going to stay elevated for a while? Yes, that's it from my side.
Thank you very much.
Thanks, Vyaches. It's Richard O'Connor in. I'll start with all 3 and let Carla 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.
They've been highly respectable. We've at least maintained market share, had yet another good market performance based on trade performance, taking market share in Hong Kong, Ditto in Main China, good growth in the book there, heavy investments in the Wealth business, showing early signs of bearing fruit. We've got nearly 1,000 clients in China. We're not going to comment on any individual one of them, be it them state owned or other. But we've won a very good pipeline of deals and transactions, including from the government bond issuance in China.
We've also won licensing, so a fintech license, the first four fintech license. And we're obviously looking to expand that, particularly that world 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 China continue to perform well despite, obviously, near some challenges from COVID in China.
We've seen them 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 regulating governments at all levels in China and have very good engagement with them.
On the $0.01 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 $400,000,000 recovery. We don't think you should expect that every quarter. As we said to the equity analysts, you do some of those get a bit of bumpiness in our Stage 3 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 that the economy improve that over the next 12 to 18 months, you do see those stable balances come down. But again, with the price that at the early stage of 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 UK, we're seeing people coming to furlough. Companies are starting to pay down effective government debt.
So we there's still some uncertainty 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 names on Stage 2, it's not Stage 2 NPLs, it's Stage 2 balances, which as you say are quite higher at 15% of the book. They did come down slightly in Q2. And again, we would expect that to continue as we would expect economies to recover over the coming quarters 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 is good. It's been very, very solid through the last 12, 18 months, and we expect And net net, we'd expect the Stage 2 overlays to reduce, but e commencing a slightly different methodology. And we think our Stage 2 overlays to get to that 15% are higher than some of our peers. Thanks.
Understood. Thank you very much.
Thank you. Your next question comes from the line of Corinne Cunningham from Autonomous. Please go ahead. Your line is open.
Afternoon, everyone. 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? And with I guess with the focus more on RWAs. We've seen that with a couple of other significant U. K.
Banks. I just wondered if that was happening the same with yourselves. Thank you.
Hi. Thanks for the question, Corinne. So the Emerald requirements for us, as you saw, is the most binding of 3 dimensions, the RWA, the leverage requirements or the sum of the bars. 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, but you will see that in each of different resolution groups, leverage them 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 at some 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're guiding that the current requirement is about in RWA terms around 28%.
Thank you. And given that you issue all of your MREL from the holding company anyway, Would it just be easier to become single point of entry? Or are there other technical reasons why you stick with the multiple point of entry?
Well, easy to become a single point of entry is it depends on what you mean by easy. So let me step back. So We like to call ourselves an MP plus group. What that basically means is that the group issues Emerald 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 and the days that ensue, holding the groups together has a big advantage because it is you preserve value, you avoid chaos, it's better from a perspective and from a market wide impact perspective. And then it buys you time to allow you to then to 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 of this advantage in going either SP or purely MP, if any? And then do remember that there are a lot of parties involved in this discussion.
They are interested in each of the different region. So at the moment, we have a situation where potentially everyone has kind of the best solution because there is optionality. Obviously, we continuously review the SG and A together with the college supervisors. But as I said, at the moment, we are an NPE plus for the full reasons that I mentioned.
Thanks very much.
Thank you. Your next question comes from the line of Tom Jenkins from Jefferies. Please go ahead. Your line is open.
Thank you. Good afternoon, champs. Good afternoon, everybody. I've got one question and I suppose one point of order. I'll start with the question And then go to point of order.
As usual, Lee and Corin, Nick, my Best questions, unfortunately. Obviously, trigger happy on Star 1. But there was one I still had, which was You've 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 What's your look, I'll leave it open ended. What's your thinking on those debts? And then Your 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 fixed income side. And I just want to say, and I hope I embarrass him terribly, but I just want to say That Craig is one of the very better ones. So both in the Olympic spirit. I'm not going to give him the gold medal necessarily, but he's definitely on the podium. But for the question, I'd appreciate an answer.
Yes. I was going to say, I mean, first of all, 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 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 $3,000,000,000 of loans and about EUR 10,000,000,000 of deposits with EUR 1,800,000,000 of RWAs. So from a Specifics, that means that basically all else equal, there is an $8,000,000,000 funding gap that needs to be compensated for.
It's not exactly like that because their surpluses and their requirements are different, but that is high level the way to look at it. In the case of France, It's actually quite balanced. Customer lending is $25,500,000,000 and deposit, dollars 22,400,000,000 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 kind of rebalance. But there isn't anything meaningful coming out of both of them. There isn't anything significant from a debt holder perspective 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 add? No, Bob wouldn't say that much. Just say, Tom, you need to look what's left. We will retain substantial wholesale businesses in both and in the U. S.
In a medium sized but highly influential clinical 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 of the entity or entity is concerned. And the fact is, a, it's good news that we are exiting these Mass Retail Operations. But we're not exiting France and the U. S.
We remain substantial in economies. We invest heavily in both. It's very strong connectivity with the rest of the group, very strong multinational business, wholesale and markets business in both, obviously, Paris being the center of our eurozone activities and the 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 Carlos said, These are not meaningful transactions from just a pure balance sheet loan deposit RWA. This is but they are meaningful in terms of the profit and loss of both entities. So I would look at it from a P and L and return perspective rather than a sort of a funding perspective, although clearly you need to look at both.
Well, no, in that case, Richard, I think you have both results. I mean, if that's the case, then one, if you're looking at it from a P and L perspective, And again, I do not know how you hedged or hedged against sort of various bonds. But if I'm looking at that sort of Whatever, 75 year, 80 year bonds. I've got to pay 7.1% on almost mineral capital. I'm just wondering what the purpose of that would be In the U.
S. Yes. No, I guess the only other dimension to think about is, of course, the value of focus in the strategy, right? So obviously, focusing on our strength and trying to avoid dilution of management in areas that are perhaps less kind of in line with our strategic, there is an additional value. But yes, what the point you In the value one, we look at that.
And of course, as we rebalance, we take into account.
Yes. And then what Carlos said about looking at our capital including legacy capital securities, that those coins remain valid here as much as anywhere else.
Thanks very much indeed.
Thanks, Tom.
Have a lovely afternoon.
Thank you. We will take our last question from the line of Alvaro Ruiz from Morgan Stanley. Please go ahead. Your line is open.
Hello, guys. Thank you very much for taking my call.
And I have a very specific question, and
it's about the DISCO issued from the Hong Kong Bank. As Your Pillar 3, the security is not eligible anymore after January. And reading all your disclosures, this bank has a lot of liquidity and cheap liquidity. I just want 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. Thank you very much.
Hi, Alvaro. Thanks for the question. You answered the question for me. I mean, We cannot quite disclose name specific. So I so what are the things that I could say that are 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 long term 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. But I'm afraid That's all I can say. But I think that from your question, I think the components that you're raising are the right ones to consider.
And just to confirm, you look this 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 MRL is pulled down from the top from the entity. So the entity will have a requirement and that requires 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.
Okay. And just look, these securities are not EMRA eligible, then it's just pure funding. Do you just compare it with the cost of deposits or am I missing something?
No, those are the right components.
Okay. Thank you very much.
Thanks, everyone.
Thank you. I will now hand the call back for any closing remarks.
Well, thank you very much for joining. Hopefully, this Q and 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.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.