Afternoon, 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'll be some opening remarks followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. I would now like to turn the conference over to our speaker, Ewen Stevenson. Please go ahead.
Good morning or good afternoon, all. It's Ewen here, the Group CFO. I'm joined today by Iain MacKinnon, our Group Treasurer, who'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. We don't plan to speak to specific slides as part of these introductory comments. We'll keep the comments brief. I know you'll 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 Iain MacKinnon for more detail on capital and funding before opening up for any questions you have. Firstly, a few words on the current environment. We clearly continue to be in a very unpredictable environment.
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's held up well for us. Within Global Banking and Markets, the Fixed Income business delivered a very strong revenue growth in the second quarter. Businesses that performed less well are largely in areas that we've already committed to change, and we'll be accelerating our transformation in the second half. The bank remains strong and resilient, with excellent funding and liquidity positions, and our Core Tier 1 improved to 15% in the quarter. Turning to the second quarter results themselves. Given the impact of COVID-19, the second quarter was tough financially. We had 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 second quarter in a row of very high expected credit losses, and we also had a $1.2 billion software intangible write-off, largely as a result of the weak return outlook for the non-ring-fenced bank. On revenues, adjusted revenues were down 4%, which included a $507 million benefit from volatile items, which in part reversed some of the negative impacts we saw from mark-to-market movements in the first quarter. Expected credit losses were up on the first quarter, $3.8 billion in total, or 148 basis points of gross loans, with the largest impact seen in the U.K. geographically and in Commercial Banking amongst our three global businesses.
U.K. expected credit losses were $1.1 billion higher than the first quarter, reflecting the worsening economic outlook for the U.K., of which $900 million related to our U.K. ring-fenced bank. Stage 3 expected credit losses were broadly stable at around $1.5 billion in both the first and second quarters. Although the first quarter included a significant charge on a single corporate exposure in Singapore. Recognizing the deterioration that we saw in the economic outlook in the second quarter, we've updated our range for the full-year group expected credit losses to $8 billion-$13 billion. The lower end reflects a path closer to our consensus central economic scenario, reflecting a strong economic rebound in 2021, with some unwinding of the economic adjustments taken to date.
The higher end of the range reflects a path closer to our downside economic scenario, with a much more muted economic recovery in 2021, leading to further negative ECL adjustments for forward economic guidance in the second half. I'd caution that there remains a wide range of potential outcomes, including the risk that the upper end of this range may need to increase further. In that respect, I would encourage you to read our ECL sensitivities in the interim report. As we look out to the second half, there remains considerable uncertainty, whether that be from the continuing impact of COVID-19, the ongoing Brexit negotiations, or the U.S.-China tensions and any impact that has on our Hong Kong franchise. As such, it's too early to discuss distribution policy or medium-term return targets, and we don't expect to do so until our full-year 2020 results in February.
However, we're pleased that we face into this uncertainty with a strengthening Core Tier 1 ratio at 15%, an extra $85 billion in customer deposits through the second quarter, continued vigor in managing our cost base down 7% Q2-on-Q2. 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-ring-fenced bank, and Global Banking and Markets, with a reallocation of these RWAs towards our strongly performing Asian franchise. Secondly, a significant reduction in the operating cost base of the bank, and thirdly, a material reduction in the ongoing operating complexity of the bank. With that, I'll pass over to Iain to run through the balance sheet.
Thanks, Ewen. Hi, everyone. Iain 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 billion, resulting in a loan-to-deposit ratio of 66.5%. That's down 5.5 percentage points since the start of the year. The group remains very liquid, with those high-quality liquid assets of over $780 billion on hand. That's up $138 billion from the end of last year. Our consolidated liquidity coverage ratio on the European Delegated Act 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 $3.3 billion of 2021 bullet securities while issuing $3.5 billion of new five- and 10-year callable paper, managing down next year's refinancing needs. This year, we continue to expect to keep our net issuance around zero in MREL Senior. Our Tier 2 need will remain zero, and we don't expect to grow the balance over AT1s. With that, I'll hand it back to Ewen.
Thanks, Iain. Sharon, if we can now open up the lines for any questions, please.
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A for you. This will only take a few moments. If you wish to cancel your request, please press star two. Once again, please press star and one if you wish to ask a question. Your first question comes from the line of Daniel David, Autonomous.
Hi there. Thanks for the call, and thanks for taking my questions. I have two. Just looking at your issuance plans, as you said, it looks like mostly refi in HoldCo Senior and AT1. Looking ahead at your maturity profile, you've also got quite a lot maturing in 2022. On HoldCo Senior, would you look to pre-finance any of that $15 billion that's rolling off alongside the nine and 21? On AT1, can we assume that you'll run at the level of AT1 you've got now? 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?
How are you thinking about the DISCOs in the context of LIBOR transition? Thanks.
Iain, do you want to start with that? We've got Greg here, too, who can pick up.
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. It very much depends on market conditions and appetite. With regard to the AT1, I think we're not expecting to extend the base of our AT1. With regard to the double leverage, with the fallback and the cessation of the dividend, double leverage is running at or above risk appetite. We've actually seen nothing untoward there. On the final point, maybe hand over to Greg, but I don't feel I can really comment on the DISCOs at the moment.
Yeah, sure. Thanks, Iain. It's Greg here. 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 DISCOs, we're not going to talk to individual bonds. We don't want to give any kind of legal analysis. Our main intention where we can is to try and remediate bonds and move over to the new reference rates where we can.
Okay, great. Thanks a lot.
Thank you. Your next question comes from the line of Paul Fenner, Societe Generale. Please go ahead.
Hi. Can you hear me?
Yep.
Oh, hi. Thanks for taking my question. I've got two quick ones. First, just to be completely clear, are you still aiming to issue AT1 this year to cover what you redeemed earlier, or is that now off the table for the remainder of 2020? That's question number 1. Question number 2, 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. What people are worried about are the businesses that have typically gone okay in Asia. I can only put the recent HSBC underperformance in bond land. I can only think that that's because people are worried about what's going on in China, Hong Kong.
What is it that you can tell us about?
Sorry.
Maybe I can answer the-
Missed the question at the end there. Paul?
Sorry. Yeah. Hello?
Yeah, sorry. We just missed the question at the very end there.
Oh, yeah. My question is with investors, that's what they're kind of worried about, and I'm never quite sure what it is that I can tell them. I know it's not in your You're not political analysts, you're not economists, but you can tell us something about where you think foreign policy in the U.S., in the U.K., in the European Union vis-a-vis China, Hong Kong, where that could impact your business most readily, so we can kind of just start to factor in some potential downside risks.
Yeah, 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. All I can point to, as I said earlier on the call, was if you look at the underlying financial performance of whether it 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. We're not going to speculate on the position of various government foreign policy around the world. On the first one on AT1 issuance.
Yeah, sure. 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. As we look out over the course of the next kind of 12, 18 months, we've got our next new style 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. Obviously we'll think about how we look at that in the future and whether or not we refinance that. If we were to issue any AT1, it would be to refinance rather than anything else.
Sorry, and that won't happen this year?
We wouldn't rule it out. 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 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 third quarter. Could you talk about, or 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 nine. You've got it by division. Could you give us a breakdown geographically? How much of that liquidity is in the U.K., for example, and how much do you need to keep there around changing economic circumstances and Brexit?
Third, I just want to be clear on issuance on page 18. As a gross number, roughly how much HoldCo Senior are you looking to issue for the remainder of 2020? Thanks.
It's not what we said in relation to ECLs. We indicated in the first half of the year, we had just under $7 billion of ECLs. For the second half of the year, we've indicated a range of $8 billion-$13 billion for the full year, which mathematically implies somewhere between $1 billion and $6 billion for the second half. I don't think we're indicating that we continue to naturally expect the third quarter to see the same run rate that we saw in the first two quarters. I think the key determinant will be as we go into the third quarter, is there any material shift in forward economic guidance? I think unlike some of our peers, I know a couple of our U.K. peers last week talked about much lower sensitivity, but they would caveat that there was 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, hence why we've come out with a broader range.
Rob, on the LCR, we've given the ratios on the slide. There's more detail in the interim report, so you can see 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, 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. If you look out at what we've got to do with for the rest of the year, we've got about $3 billion-3.5 billion of HoldCo Senior that matures this year, or is callable this year, sorry.
Subject to those calls being made, then we'll probably look at refinancing them, but that's not even necessarily going to be 100% the case either.
Thanks. That's very helpful. Appreciate the call.
Thank you. Your next question comes from the line of Chad Leicht , RBC. Please go ahead.
Hi there. Thanks for taking the call. Just one from me, please. More on the payment holidays and for [audio distortion]. When you think of the stock of loans which move to Stage 2, I understand that these do not include the loans that are on payment holidays. When you think of both of these 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 behind the risk potential of these? Where do you expect more losses to materialize over the next, I don't know, six, 12 months? Yeah, anything would be helpful.
I guess within the payment holidays, all of that, 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 two quarters as they do. We have built-in assumptions into that range of 8 -1 3 that we came out with. For example, in the U.K., there's very big judgment calls. For example, on where does U.K. unemployment go post the end of the Furlough Scheme, which then rolls through to whether that puts stress or what degree of stress that puts on payment holidays. We set out on page 67 of the interim report some fairly detailed analysis of what relief we've given where, and you can make your own assumptions on that in terms of the type of loss ratio you would factor in.
We have made those adjustments in coming up with the 8-13 range.
Okay, thank you.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star and one on your telephone, star and one if you wish to ask a question. 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 2, there's obviously been quite a significant increase in the stage 2 balances, which has been mostly coming from the corporate and commercial lending. Just trying to understand what's driving this. Is this fundamental in terms of a real greater risk, or is this HSBC being a bit more conservative in the way they're doing IFRS 9 and moving things from stage 1 to stage 2? Because we're not necessarily seeing a uniform movement across all banks. That's number 1.
Okay.
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 balances that are actually past due, which I'm guessing is obviously coming from the payment moratoria. Just how would you recommend that we go about looking at and understanding what proportion of Stage 2 balances are likely going to actually move into Stage 3? Obviously that's the key question. Just finally on Moody's, I'm presuming you have a regular interaction with them. Any thoughts or comments on the risk of a potential Moody's downgrade for you, basically? That'd be my three questions. Thank you.
On the last one, I don't think we're going to speculate what Moody's may or may not do, and it's probably a question that's better directed at them. On Stage 2, it's mainly the deterioration in forward economic guidance that we've seen. If you go from end of April when we announced Q1 results and run through 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. It only really began to stabilize in July, i.e., at the trough of what people thought for 2020. We did see some uplift on economic recovery in 2021, but not enough to offset the sharpness of the V or the recessionary event in 2020. You obviously have to run your own maths on those.
It's a very complicated set of judgments that you need to make in this environment, given the models haven't seen any event like this. The models are probably less predictive and reliable, particularly when you get to more extreme ends of downside scenarios. We have had to take some underlays as a result that we've set out. 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. All of that thinking has been factored in to the best extent we can in coming up the eight to 13 range. We'll try to give you as much detail as we can to allow you to take different assumptions and apply different probabilities to our various scenarios as set out in our interim report.
Okay. I understand. Just a quick follow-up. Just in terms of stage 2, because I guess stage 2 can also encapsulate incredibly high-quality credit that's seen a slight deterioration in probability default as well as things which are much riskier. Is there any commentary you can give around sort of, is that the case? Is it the high-quality stuff that's sort of blowing up the balances in stage 2 there, or is it just a mix?
Lee, the Pillar 3 doc is coming out in a week or two. You'll be able to see how the CRR or that's the credit ratings that we use internally have migrated. You'll be able to get a reasonable idea from that.
All right, perfect. All right. Thanks all for your comments.
Okay. 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. Appreciate you taking the time to join. If you have got follow-up questions, if you could follow up with Greg Case, our head of IR, through the normal IR channels that you have. Thanks again for joining, and speak in the coming months.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.