Ladies and gentlemen, and thank you for standing by. Welcome to today's HSBC Q2 Fixed 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 turn the conference over to your speaker, Ewen Stevenson. Please go ahead.
Good morning or good afternoon all. It's Ewan here, the Group CFO. I'm joined today by Ian McKinnon, our Group Treasurer, He's 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 chance or will have the 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 Ian McKinnon 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're 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 The liquidity positions at our core Tier 1 improved to 15% in the quarter. Turning to the 2nd quarter results themselves.
Given the impact of COVID-nineteen, the 2nd quarter was tough financially. We had an 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 2nd quarter in a row of very high expected credit losses, and we also had a $1,200,000,000 software On revenues, adjusted revenues were down 4%, which included a $507,000,000 benefit from volatile items, Which in part reversed some of the negative impacts we saw from mark to market movements in the Q1. Expected credit losses were up on the Q1, dollars 3,800,000,000 in total or 148 basis points to gross loans with the largest impact seen in the U.
K. Geographically and in Commercial Banking amongst our 3 global businesses. The worsening economic outlook for the UK, of which $900,000,000 related to our UK ring fenced bank. Stage 3 expected credit losses were broadly stable at around $1,500,000,000 in both the first and second quarters, Although the Q1 included 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 $8,000,000,000 to $13,000,000,000 The lower end Reflects a path closer to our consensus set 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'd caution that there remains a wide range of potential Outcomes including the risk at the upper end of this range may need to increase further. And in that respect, I'd encourage you to read As we look out to the second half, there remains Considerable uncertainty, whether that be from the continuing impact of COVID-nineteen, the ongoing Brexit negotiations All of the U.
S.-China tensions and any impact that has on our Hong Kong franchise. As such, it's 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 strength in core Tier ratio of 15 percent and extra $85,000,000,000 in customer deposits through the 2nd 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, Namely, a material reduction in RWAs, particularly focused on the U. S, the non room 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 Ian to run through the balance sheet.
Thanks, Ewen. Hi, everyone. Ian here. Thanks for dialing in. Despite the weak macro environment, the balance sheet metrics continue to remain very strong and improve.
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 €85,000,000,000 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 Those high quality liquid assets of over $780,000,000,000 on hand, that's up $138,000,000,000 from the end of last year. Our consolidated liquidity coverage ratio on the European delegated ad basis was 148%.
That's broadly flat in the half. With regard to the 2020 issuance plan, as you have 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 €3,300,000,000 of 2021 Buller Securities, while issuing €3,500,000,000 of new 5 10 year Colvo paper, Managing down next year's refinancing needs.
This year, we continue to expect to keep our net issuance around 0 in Enbrel Senior. Our Tier 2 remains 0 our Tier 2 needs will remain 0. We don't expect to grow the balance over 81s. With that, I'll hand back to you, Ed.
Thanks, Ian. Sharon, if we can now open up the lines for any questions, please.
Thank you. Please standby while we compile the Q and A for you. This will only take a few moments. Your first question comes from the line of Daniel David, Autonomous.
Hi, hello. Thanks for taking my thanks for the call and thanks for taking my questions. I have 2. Just looking at your issuance And as you said, it looks like mostly refi in Holdco Senior in AT1. Looking ahead at maturity profile, you've also got a lot maturing In 2022, on Hawker Senior, would you look to pre finance any of that $15,000,000,000 that's rolling off alongside the $9,000,000,000 in 'twenty one?
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 think might be behind the transition effort? And also how are you thinking about the DISCOs in the context of LIBOR transition? Thanks.
Yes. John, do you I want
to start with that. We've got Greg here too who can pick up.
Yes. On the 2022 Refinancing, yes, we are looking ahead, and 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 AQ1, with regards to the double leverage, with the fallback And the cessation of the dividend, double leverage is running at or above risk appetite. So we've actually seen Nothing untoward there.
And then on the final point, Maybe hand over to Greg, but I don't feel I Can you really comment on the DISCOs at the moment?
Yes, sure. Thanks, Ian. This is 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, Still got plenty of time to work that through. Specifically on the DISCO, I think we're not going to talk to individual bonds. We don't want to give any kind of legal analysis, but our main intention where we can is Try and remediate bonds and move over the new reference rates where we can.
Okay. Great. Thanks a lot.
Thank you. Your next question comes from the line of Paul Sena, Deutsche General. Please go ahead.
Hi. Can you hear me?
Yes.
Hi. Thanks for taking my question. I've got 2 quick ones. First, I didn't quite just to be completely clear, are you still aiming to issue To 81 this year, to cover what you redeemed earlier or is that now off the The table for the remainder of 2020, that's question number 1. And question number 2, 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 Have become more or less comfortable with at least in terms of the uncertainty and the transformational people are worried about other businesses that have Typically gone okay in Asia. And so I certainly put the recent HSBC underperformance in Bondland, I can only you think that that's because people are worried about what's going on In China, what is it that you can tell us about
Paul? Sorry, yes. Hello?
Yes. Sorry, we just missed up the question at the very end
there. Yes. So my question is with investors, that's what they're kind of worried about. And I'm never quite sure what it is 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 visavis China, Hong Kong, where that could impact Your business most readily and so we can kind of just stop to factor in some potential downside risks.
Yes. Look, 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 it's our Hong Kong business, which was continuing to attract deposit 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 81 issuance.
Yes, sure. So, 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 NewStyle AT1 call is not until next summer. 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 81, it would be to refinance rather than anything else.
Sorry, and that won't happen this year?
We wouldn't rule it out. But at this stage, there's nothing immediately planned.
Okay. Thank you.
Thank you. Your next question comes from the line of Robert Smalley, UBS. Please go ahead.
Hi. Thanks for doing the call. Just a couple of quick questions, because you've covered a lot already. This Look, 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 seem to be indicating that you're going to have similar levels at least in the Q3. Could you 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 us a breakdown Geographically, how much of that liquidity is in the UK, for example? And how much do you need to keep there Around changing economic circumstances and Brexit.
And then 3rd, I just want to be clear on issuance On Page 18, as a gross number, roughly how much Holdco
It's not what we said in relation to ECLs. The We indicated in the first half of the year, we had just under $7,000,000,000 of BCLs. And for the second half of the year, we've indicated a range of 8% to 13% for the full year, which mathematically implies somewhere between 16% For the second half, so I don't think we're indicating that we continue to naturally expect the 3rd quarter To see the same run rate that we saw in the 1st two quarters. The I think the key determinant will be yes, as we go into 3rd 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 will 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 the interim report. So you can The HQLA by entity on Page 82 of the interim report we put out this morning. That should give you more insight. On the issuance plan in terms of gross Holdco Senior, but 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 to do with the rest of the year, we've got about €3,000,000,000,000 3,500,000,000 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
Thank you. Your next question comes from the line of Zack of Litchburn, RBC. Please go ahead.
Hi, there. Thanks for having the call. Just one from Nifli, more on the payment holidays And Gloria, when you think of the stock of loans with mostly Phase 2, I understand that these do not include the long term payment holiday. When you think of these both the categories, Stage 2 and payment holidays, which one do you think is riskier? Can you give us some sort of idea about What are your thoughts around the risk of P-twelve?
Where do you expect more losses to materialize Over the next 7 months, 6 months, 12 months. And yes, anything would be helpful.
Yes. I mean, I guess within the payment all of that, I mean, you're clearly having to make Significant assumptions in terms of likely impairments against Those payment holidays when they roll off, I guess, we'll learn a lot more in the next one to 3 quarters as they do. But we have Built in assumptions into that range of $8,000,000 to $13,000,000 that we came out with. For example, in the U. K, there's very big judgment calls, For example, on where does UK unemployment go post the end of the furlough scheme, which then rolls through to Yes.
Whether that's put stress or what degree of stress that puts on patent policy. We set out on Page 67 of interim report, What relief we've given where and you can make your own assumptions on that as As in terms of top loss ratio, we'd factor in, but we have made those adjustments and coming up with the 8% to 13% range.
Okay. Thank you.
Thank Your next question comes from the line of Lee Street, Citigroup. Please go ahead.
Hello. Good afternoon all.
Thanks for taking my questions. I've got a couple of questions on Stage 2 and then one on ratings. Just on Stage There's obviously been quite a significant increase in the Phase 2 balances, which is the most impact 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 And so moving things from stage 1 to stage 2 because we're not necessarily seeing a uniform movement across all banks. That's number 1. Number 2, 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 banks that are actually past due, which I'm guessing that was obviously coming from the payment moratorium. So just How would you recommend that we go about looking at an understanding what proportion of Stage 2 balances are likely going to actually move into Stage 3? Because obviously that's the key question. And Just finally on Moody's, I'm presuming you have a regular interaction with them. Any thoughts or comments on Yes, the risk of potential Moody's downgrade for you basically.
That'd be my 3 questions. Thank you.
On the last one, I don't think Speculate what Moody's may or may not do and it's probably a question that's better directed at them. On 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 run through 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 as any group began to stabilize in July I.
E. The trough of what For 2020, we did see some uplift on economic recovery in 2021, Not enough to offset the sharpness of the fee or the recessionary event in 2020. Yes. I mean, you obviously have to run your own math on this. I mean, it's a very complicated That adjustments that you need to make in this environment given the models haven't seen Any event like this.
So yes, 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 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 into the best extent we can and coming up the 8% to 13% range. And we'll try to give you as much detail as we can to allow you to take different assumptions And applying different probabilities to our various scenarios as set out 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 calculate incredibly high quality credit that's seen a slight deterioration in probability default as well as things are much risk Is there any commentary you can give around sort of the is that the case? Is it high quality stuff that's sort of blowing up the balances in Stage 2 there?
Or is it just a mix?
Lee, so the Pillar 3 doc is coming out in a week or 2 and you'll be able to see how the CRR or that's Credit ratings that we use internally have migrated. So you'll be able to get a reasonable idea from that.
All right. Perfect. All right. Thanks all for your comments.
Thanks, Lee.
Thank you. 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. I appreciate you taking the time to join. If you have got follow-up questions, if
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.