Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's HSBC 4Q26 Income Results Conference Call. At this time, all participants are in a listen only mode. There will be some opening remarks followed by a question and answer session. 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 This is Ewan 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-nineteen, we're actually all in separate locations. So Please bear with us if we talk over each other during Q and 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, UK time. Call. 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 to your Q and 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'll describe them as a solid set of results, particularly against the backdrop of COVID-nineteen and a now ultra low interest rate environment. Adjusted pretax profits of $12,100,000,000 reported pretax profits of $8,800,000,000 Our core capital base strengthened nicely with the year end core Tier 1 of 15.9%. That's up 30 basis points in the 4th quarter and 120 basis points over the full year. And deposits grew over $170,000,000,000 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 EUR 100,000,000,000 of gross wish weighted assets, saves in targeted areas. We delivered over half of that in the 1st year of the program that we're very Pleased to bear on operating costs, we reduced those by $1,100,000,000 or 3% in 2020, And we committed today to achieve a further $1,000,000,000 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 Wholesale Banking with a target of increasing our capital allocated to Asia from 42% currently to over 50% over the coming years. On the 4th quarter, again, a decent set of results. Reported pretax profits of $1,400,000,000 Adjusted revenues were down 14% on last year's 4th 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 pull for the full year down 17% on 2019. Expected credit losses were $1,200,000,000 in the quarter, bringing total expected credit losses for the full year to $8,800,000,000 And that's at the lower end of the targeted $8,000,000,000 to $13,000,000,000 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 Q3, which was broadly a range of 40 to 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, Ewan. Hi, everyone. Iain MacInan here. Thanks for dialing in. I'll just continue with the respect here.
Despite the weak macro environment, the balance sheet metrics continued to show strength. Our CET1 ratio was up 30 basis points in the 4th quarter to 15.9%. Of $0.15 per share dividend announced today has impacted the ratio by around 40 basis points. During 2020, customer deposits grew by over $200,000,000 Our loan balances remain 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 $8.30 billion to 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 an increase in liquidity risk. Note that this may decline further as we implement further regulatory adjustments, but the decline will have no material implications for 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 2021 and 2022 while delivering negative net issuance. By tendering for nearly $12,000,000,000 of MREL in 2020, We reduced this year's refinancing requirements from $12,000,000,000 to less than $6,000,000,000 and next year's from $15,000,000,000 to less than $11,000,000,000 Looking out over this year, we expect to issue around $15,000,000,000 of NREL against maturities and calls of nearly SEK 6,000,000,000.
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 of where they lose capital eligibility. This is in line with what we did in 2020, where we redeemed nearly $2,000,000,000 worth of bonds and issued $1,500,000 in return.
For Tier 2, we have no plans to issue Q and 2021. On IBAR, 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 you, Ian.
Thanks, Ian. Look, before we open up for Q and A, I did want to take this opportunity with all of you on the call. Actually, to say many thanks to Ian. It's actually his last fixed income call for us as group treasurer. Ian's 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, who will be known to a number of you, Carlo Palerini, who was the recent group treasurer of UBS. Carlo starts on Monday, so be with us. With that, if we could now open up some questions.
Thank Your first question comes from Paul Fenerz, Societe Generale. Please go ahead. Your line is open.
Hi, good afternoon, gentlemen. And 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, the Stage 2 exposures ticked up again in the 4th quarter, not by much, but by something.
It's basically doubled during the year. But I think I might have been 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? Thank you.
Sorry about the long winded question.
It's Richard O'Connor here. I'll start and Greg, if you maybe chip in. Look, State Street, primarily due to the forward looking guidance and those calculation and indeed overlays. And obviously, when we get to year end, then clearly, in the last few weeks, maybe the economics improved a little bit due to the vaccine, but clearly there was still some deterioration, for example, in the UK. And you're right 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 not going to get drawn too much on specific forecast. Clearly, stage 3 defaults in some of these are leggings indicator. And certainly, as government schemes mature this year, you may see a recovery stage 3 from some of those elements, hopefully not. And then if forward economic guidance improves during the year, then the masons will 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 me, Ewen, today, our overall expectation for the charter issue remains in the 40 to 60 basis points of loans, and that's been unchanged since the Q3 stage. You've seen 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 a quarter of our corporate In stage 2 right now, we're within the risk grades that we would classify as effective investment grade. And obviously, with Those type of exposures that are relatively low PDs, 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 that has been upgraded and that has been reflected in the numbers somewhat.
Thank you.
Thank you. Your next question comes from the line of Ceesh Street from Citigroup.
Three questions from me. Firstly, on Page 2 as well now. In the fixed income slide deck, you've got that chart on Page 11 that shows the strong old good quality credit. Of course, that's gone to 75% of the book down to 70.3% every year. But Stage 2 loans have increased by sort of bigger proportion, from 7.7% to 15.5 Thanks.
So is it more like to compare those things together? And I suppose my question is, given the moving of Phase II loans, shouldn't I have seen a So greater reduction, the strong good quality credit has been the first one. Secondly, obviously, if you sell the French retail operations and for U. S. Retail Operations.
Would that be sufficient to alter your funding plans in terms of holding company senior debt for the year given the reduction in And finally, on the Bank of England legacy capital review, I think you referred 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 on How much of the debt you have as a broken pot of debt you have outstanding? That being my three questions. Thank you.
Okay.
Not much to add to Stage 2. Look, you're right to say that clearly The strong oil grid has gone down in the year as we've shown in our chart. There's another chart in the deck, so we've got a lot of little graphs here, which showed actually is more on that pruning rate migration, but there was a bit more of a stabilization across the grades in Q4, albeit clearly 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 statutory 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 done and that can obviously give you A slightly different picture to other banks. We may be slightly fewer or different scenarios in the IFRS nine modeling.
Yes. On the question on French and U. S. Retail, and without concerns
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 3rd 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 DSFFO 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 from some of our UK 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 that are grandfathered in 2021.
And we're going to share the analysis with the PRA and have a discussion from then on.
And is it in anticipation of the rules or materiality? Or is it both?
I think that's all for discussion. All right.
Thanks very much.
Thank you.
Thank you. And your next question comes from Daniel David from Autonomous. Please go ahead. Your line is open.
Good afternoon.
Thanks for the call. Just a quick one hopefully on Legacy Capital. I just wanted to touch on your Yourco Tier 2. So although they might not cause an infection risk, I suppose they could be deemed an impediment resolution. So my question is, do you expect the PRA to consider other factors such as retail holdings or non resolution entity impediments as part of the process which is going on this year?
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 EBITDA strategy at HSBC? Thanks.
So, Greg, you want
to start off on the legacy question.
Yes,
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, and be it either as part of the DSFO 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 say, there's not a huge amount to say on the subject. Obviously, With impediments 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 have 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 have, as you can imagine, a portfolio of green assets that we can put together things like green bonds. 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 to the market.
Great. And just on the EC taxonomy, I guess many market business It's quite a big step forward in terms of improving disclosure. 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
I'll kick off here. I'm not 100 to understand the question, but clearly, as an ESG bank, we're looking at a variety of frameworks, SADP And the one which we're looking at particularly is the West Bromwich 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 data pack. So clearly, we are working hard with all the relevant providers.
But I think the one we're moving forward for more general in these geysers is the WER framework. I'm not sure that I answered the question, but that's how we're currently thinking about it.
Okay. Thank you very much. Thanks.
Thank you. And your next question comes from Alvaro Rios de Alba from Morgan Stanley. Please go ahead. Your line is open.
Thank you very much for taking my call. I have three questions. The first question is regarding viscous. Should we think differently about the security that is from the Hong Kong subsidiary As the LCR from New Zealand is quite high and the security will not be underreliable after January 22. My second question is a more broader question.
It's regarding any impact because of the movement to Hong Kong And in terms of regulatory environment, my third question is regarding ratings. If you guys have any comments or thoughts about Moody's or Fixed, Andre.
Yes. Greg, 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 an extent, you should think about the Hong Kong and the U. K. Viscos separately and that they are issued by Two 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, and something that's important to note. On the rating side of things, we're I think we're broadly comfortable with the ratings that we have. Obviously, we always like them to be higher. 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 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. Noel's comments around considering moving some members of his senior management team to Hong Kong. That's driven at all by regulation. Yes, we are very much domicile 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 written by either a push factor from the PRA or a pull factor from the HKMA.
Okay. That's great. Thank you very much.
Thank you. Your next question comes from Tom Jenkins from Jefferies. Please go ahead. Your line is open.
Hi, Tom. Thank you very much. Hello, everybody. I'm going to throw Greg under the bus one more time on something with this goes, 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 like me,
you're basically homeschooling several inpatient and petulant traders. And the 31st 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 Probably asking, it's 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 have concluded. And if that's the case, what sort of time frame? Best guess.
And I'm probably I'm not going to hold you to a best guess, would you put on that before you observe a market communicate? 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 NA, the bulk of The retail business, is it the intermediate whole curve that sits above the HSBC USA Inc.
As a package? Or are
you pretty much open to
just selling parcels of loans if that's all you can get a bid 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. Thank you.
Yes. So Greg, do you want to pick up the SBA question and
then I can pick up the M and A questions?
Yes, of course. Look, generally speaking across the piece, obviously, the March 31 deadline is the deadline for us to submit 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 again 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, Very conscious that there may be price sensitive information in the mix here. And if we need to make a disclosure, we'll make a disclosure. But we're not kind of planning at this stage, At the wholesale disclosure piece, to To be honest with you, it's more around if we do become party to anything, we'll say something.
Right. Okay. I think it is much. Just wanted
Yes. And look, I'm obviously somewhat constrained to tell on
what I can say about the
M and A processes. But I think If M and A prices 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, I was just cracking up a bit there. Did you say
If that fair score was then what happened?
Yes. Sure, sure. Okay. Interesting. Thank you very much.
Thank you. And your next question comes from the line of Robert Smalley with UBS. Please go ahead. Your line is open.
Hi. Thanks very much for taking my questions and good luck to you. And Greg, thanks very much for the package that you send every quarter. Very helpful. Two topics.
1, and I guess they're 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, non legal entity. The call broke up, and I'm not really sure what you were referring to. Thanks.
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. Okay. On trapped capital, this has been an issue that has persisted for a number of years. And Yes.
Today, order of magnitude, probably something in the order of about $5,000,000,000 of capital. You don't Yes, 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 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 the normal dividend upstream.
Okay. Makes sense. Thank you.
Thank you. And your next question comes from the line of James Hyde from TTIM. Please go ahead. Your line is open.
Hi, everyone.
Yes, my question is more slightly philosophical one about where you're going, especially for us as the investment the developed market investment portfolios that my company runs. Now 42% tangible equity invested in Asia goes to 50%. Kind of why stop at 50% given the ROE differential? Is that a sort of stop that then makes you have to revisit domicile? Or is this to do with balance rating agencies.
I just want
to understand the thinking of any such benchmark. Well, that's the first question.
Well, I mean, I guess it was driven by a sort of realistic medium to longer term target of shifting of capital. I mean, when you do the math on, there is a fairly material reallocation of capital from Yes, I wouldn't say it's 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 UK.
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, the time frame here was for 3, 4, 5 years, depending on which particular targets. And so clearly, as we go through that time period, we're well forward. Our plans to suit on the opportunities that you see at those particular times. It's very much meant to be a pathway for the next few years.
Thank you, and thanks, Richard. Just another question on these proposals regarding ESG that, well, 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. Just one
more time, what would satisfy the
some of the shareholders, ESG shareholders that are
and have been vocal.
I'll take that. And look, 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 final resolution filed.
But clearly, as you saw with Barclays last year, there were actually 2 resolutions filed, but Ultimately, a number of investors would prefer. There was just one resolution filed. So we're still in that process, Jim. So I'm afraid we can't be too specific. But as the CEO in Mel 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 2,050. But That's still a work in progress, and we can obviously update you as and when or before we file the AGM notice in a few weeks' time.
Great. Thank you very much, Richard.
Thank you. Thank you. We will now take our final question. And your final question for today comes from the line of Dan Krew from Goldman Sachs. Please go ahead.
Your line is open.
Hi, there. Thanks for the call. Just a quick one and my line broke up a little earlier. So it's more of a clarification on issuance in AT1. I assume there that the refinancing includes The €2,000,000,000 in AT1 coming and then the €1,800,000,000 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 here at Tier 2, would that change your issuance there? And then I'm sure this was covered in the call earlier, but that's a 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 reached next year with pretty significant excess capital. I guess that's the hands of talk of buybacks. Or is there something this year that I should
Conference. I'll take the AT1.
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 3rd period,
We're not seeing any, I
think, for every vigorous action from the PRA beyond 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 insurance plans.
Then on
RWAs, on the equity call, it's more I mean, firstly, we haven't guided Capital ratios at the end of Q1. What I did say was the following. I mean, firstly, yes, we have probably more broader consensus on loan growth as you would expect us to be. But Yes. We are targeting mid single digit loan growth over the next couple of years.
We have about $10,000,000,000 of IWA uplift and regulatory pressures this year and probably a combined $40,000,000,000 to $50,000,000,000 over the period through 20 23. We've got the RWA rundown program that's still ongoing. We did 52 in the first Yes. We've got another 30 to do this year, we think, and the remainder of the year after. And Yes.
You'll have your own views on credit rating migration. So there could be I agree that this year, the other conservative reasons, we're seeing 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 sell side that we weren't planning any buybacks on top of dividends this year.
Okay, perfect. But there's nothing beyond That I should be taking it. I mean that's all stuff I assumed. There's nothing.
Can I ask that?
Any other woodwork?
No. Okay.
Perfect. Thank you very much.
Okay. Well, look, thanks, everyone, for joining the call today. If you've got Any follow-up questions? Please follow-up with Craig Case, who'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.