Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's HSBC Q4 Fixed Income Results question. I must advise you that this conference is being recorded today. I I would now like to turn the conference over to your speaker today, Ewan Stephenson.
Good morning or afternoon all and thanks a lot for joining the call. It's Ewan here, the Group Chief Financial Officer. And I'm joined today by Ian McKinnon, our Group Treasurer and Greg Case, our Head of Fixed Income Investor Relations. There's a fixed income specific slide pack that's available on our Investor Relations website. We're not planning to talk to specific slides in our introductory comments.
We'll also keep our comments pretty brief because I'm sure that many of you will have had I'll have a chance to listen in by now to the equity investor call equity analyst call we did earlier today, UK, John. Conference. I'll quickly run through what we've announced today, then hand over to Ian for more detail on capital and funding Before we open up for your questions. Firstly, a few words on the plan that we announced earlier today. Yes, broadly, three themes.
Firstly, exiting or running down low returning risk weighted assets and redeploying those RWAs into higher returning franchises. Secondly, executing a new $4,500,000,000 cost reduction program and thirdly, delivering a simplified organization, including slim down group and central costs. We expect that this will result in a return on tangible equity of 10% to 12% by 2022, underpinned by a gross RWA reduction of at least $100,000,000,000 with a similar level of RWA growth over the same period and operating expense base in 20 call. $22,000,000,000 or lower. That's about a 10% reduction in real terms from today's levy today's level and a core Tier 1 ratio of between 14% to 15% with an intention to operate at the higher end of this range over the back end of 2021 2022.
Many of the benefits of the plan will actually extend beyond 2022, so we would expect conference call to see return on equity benefits to accrete over the medium term. Turning to Q4, I think it was a decent set of results. Adjusted revenues were up 9%. In part, that reflected a weaker 4th quarter in 2018, But on a headline basis, we had a goodwill impairment of $7,300,000,000 which meant that we were up 3%. But given the continuing given the growing impact of the coronavirus, We are expecting a weaker first half this year and do expect to take some incremental provisions.
We're making progress on reducing our cost run rate. Crossroads was down by more than 0.5 call. In 2019 from 5.6% growth in 2018 to below 3% in 2019. Call. And if you exclude the bank levy, second half costs were lower than the first half.
Credit costs were down 5 basis points in the quarter 28 basis points. This included a number of items. We reduced our UK Brexit overlay by $99,000,000 to $311,000,000 We took some incremental overlays in Hong Kong, up $56,000,000 to $138,000,000 And we also had some incremental provisions in Argentina of $125,000,000 2nd half credit costs were 31 basis points. So in the second half, we were now within the 30 to 40 basis call. We're expecting a downturn in Hong Kong in the first half of this year now, and we do expect, just to repeat, that we will take additional expected Credit losses into our 1st quarter results.
So to finish on the full year 2019 financial performance before I hand over to Ian. Adjusted revenues up 6%, adjusted profits up 5%, in part reflecting much better With that, I'll pass over to Ian.
Okay. Thanks, Ewan. Let me focus on 3 areas, capital funding and liquidity. CET1 ratio at year end was 14.7%, and that was up 40 basis points in call. Q4 70 basis points over 2019.
This was the result of not only profit generation, but also RWA discipline call. Throughout 2019 RWAs actually came down year on year by 2.5%. Call. On funding, the relevant focus for those of you on the call is our management of MREL Tier 2 and AT1. So let me just cover that conference.
Holdings will continue to be the main issuer of regulatory debt. For NREL this year, We expect the focus to be on refinancing with net issuance to be somewhere between $0,000,000,000 more likely at the lower end of that. Gross issuance is likely to be in the low teens. We will issue primarily in USD and Sterling. We don't expect to issue any Tier 2 in 2020.
And for AT1, looking out over 2020 beyond, We don't expect to increase our net issuance. I know that some of you will be curious about our appetite for liability management. Call. We will continue to reassess our issuances and where it makes sense, we'll address liability management. We'll continue to issue out of our operating banks where this makes sense from a funding and liquidity risk management perspective.
Conference. Let me finish by talking about liquidity risk management. We continue to focus on managing a healthy loan to deposit ratio. It was 72% flat year on year. And as a consequence, our high quality liquid assets were up ended up at JPY 600,000,000,000 reflecting that underlying AD ratio.
With that, I'll hand back to Ewen.
Thanks. We could now open up for any questions you have.
If you open the line, please,
A.
Call. Your first question comes from Lee Street, Citigroup. Please go ahead.
Hello, good afternoon and thanks for taking my questions. 3 for me, please. So firstly, obviously, you made clear that the coronavirus is at a sort of post balance sheet event this morning. So and We've seen press talk of HSBC giving liquidity assistance to certain clients. So my question is, from the leading indicators that you follow, what Can you tell us about what you're seeing on the ground in terms of credit quality in Hong Kong?
That would be the first one. Secondly, this morning, you referenced Ratings in HSBC, the best rated UK bank. So obviously, you're on next to that look at S&K Moody. So what's your commitment to maintaining the ratings that you have conference. And finally, just on LIBOR and unsecured securities with coupons linked to LIBOR.
Is it your base case that you would deal with these via a form of consent solicitation that we've seen in some other parts of the market? And call. What messages and color are you getting from the Bank of England about the time frame for addressing those securities? That would be my 3 questions. Thank you.
Call. Okay. Well, maybe if I take the first 2 and then take the first look, on the coronavirus, as you say, for accounting purposes, it is a post balance sheet event. So There isn't any impact reflected into the Q4 financials from last year. Call.
In terms of what we're seeing on the ground, as you know, we've extended some liquidity schemes. There's been relatively Frankly, models take up credit quality has held up remarkably well, actually given the combination of the protests Last year and now the coronavirus
so far this
year, we are seeing some migration from Stage 1 into Stage 2. I think we're going to have to look at forward economic guidance modeling in detail at the end of the quarter. So to give you, as I said, the other extreme of it, sort of alternative downside scenario That is in our annual report. If we were to go to that scenario, which really assumes the virus extending call. For most of this year, the additional expected credit losses will be in the order of $600,000,000 Call.
On Ratings, look, we've always wanted to be, yes, extremely strong and sound Balance sheet and capital structure, nothing's changed on that. I think today in terms of what we've announced, should only reinforce that, I. E, Wanting to operate the bank in a 14% to 15% range and wanting to be at the higher end of that range Over 2021 2022 as we transition through the restructuring and as we transition through Basel 3 or 4. So yes, it's one thing for me to commit Wanting to maintain high ratings, but obviously, the rating agencies need to agree with us on that view as well.
Call. And on the LIBOR question, I mean, it's a you can have a longer short answer, but I think the call. What we're really saying is that we're very engaged with the Bank of England. We're very focused on the issuances that we have in place. We are very, very clear about the need to address the specific bonds bond by bond because it depends on the language in the bond.
Beyond that, I don't think there's an intention that we'll end up with zombie bonds beyond 2021. I think we'll have to do something on a bond by bond basis. We'd have the pressure coming from the Bank of England anyway to deal with them.
All right. Thank you very much. That's very
clear. Call.
Thank you. And your next question comes from the line of Coran Cunningham Autonomous. Please go ahead.
Good afternoon.
Good afternoon. Thanks very much for the call. Quick question on your CET1 ratio. Your ratio and your target is high compared with international peers. Is that because an element of the capital is basically trapped?
Cost. In other words, it's not fungible across the group in perhaps the same way that some other banks might be. And then I had another question just on your Tier 2 issuance plans. If you have a look at Slide 11, on an ending point basis, costs. Is that something you expect to be running below and setting it with higher quality of capital.
In other words, it's the 14.7%, not really 14.7% if we adjust for some shortages in Tier 2 Securities. And also just what are you including in the 1.7% on the end end basis. Does that exclude all legacy securities? Thank you.
Okay. Well, I'll Take the first question and maybe Ian or Greg can handle the second. I wouldn't say our capital is not Fungible. It's certainly less fungible. If it was sitting in the single legal entity, it's obviously very fungible within the single legal entity the moment that you impose Multiple legal entities, and we have a very subsidiarized structure across the world.
Call. It takes longer to move capital from one jurisdiction to another. So there is a degree call. Within the restructuring that we're announcing, part of the caution on our capital ratios Is the speed at which we can repatriate capital from some places back to the group? Call.
And on the differential you're identifying on Tier 2, it's not covered by the CET1 is more covered by the excess CET1 we carry. And Craig can answer the outlook For the endpoint, but I think what we're respectively saying is that's our estimate at the moment. Okay?
Yes, Trent. So call. And just to elaborate on that point, the we are carrying a reasonable excess of AT1 over and above where we need to from a regulatory perspective. That does mitigate the need for us to run at exactly what you might call the optimum in Tier 2. At the end of the day, I think over time, our capital stack will look more normal.
But Is that a 3 year or 5 year or 10 year point? I think that's still to be determined.
Call. And just what's in the 1.7, does that exclude all legacy securities?
The 1 point 7 on the endpoint, it does.
Thank you.
It does. That's full TRT.
Thank you. Call.
Thank you. And your next question comes from the line of Robert Smalley, UBS. Please go ahead.
Hi, Robert.
Hi, how are you? Thanks for doing the call. A couple of questions. 1 on coronavirus. You talked about Hong Kong.
Could you talk about any or do you have any business comments on your business in over the border in China? That's 1. 2, as you pare down parts of your business globally, Is there a possibility of a change in your GSIB buffer and GSIB requirement, I'm sorry? And 3, You talked a little bit about Tier 2 and possibility of liability management. As you Look to change your business in the U.
S, I know there's some differences in accounting on some of your longer dated Tier 2s. But do you look at possibility of any kind of liability management there call.
Okay. Well, on the
first, Joe, on the On China, the reason for the focus on Hong Kong is just the preponderance of scale of Hong Kong versus relative to China. But call. Equally, I think you should read across the same comments I'm making about Hong Kong to making to having similar impacts in Mainland China at the moment. The other area that we're obviously focused on from a credit perspective on coronavirus is the impact that it's having on supply cost. And we're still doing that work.
On GSEB requirement, we were at the very top end of the bucket Last time around, the quantification is changing. Per se, just intuitively enough, Yes. We haven't spent time looking at this in detail. I would think it's unlikely that there'll be any near to medium term change in our G SIB bucket as As a result of what we've announced today, although it certainly takes the pressure off, I think some of the pressure away from Potentially jumping up a bucket, which we were facing last year.
And on the U. S. Liability cost management. I mean, obviously, it's something that we look at and we've done some exercises in the past. I don't think it would be Right to go into the detail here,
okay? Look, Rob, I think as always with these things, we'll we will look at LMs where they make sense. They have to the economic will go through the rationales. We've done one recently on the U. S.
Bonds. I don't think what we're doing in the U. S. Necessarily changes the calculus too much. You've got to bear in mind that over the plan you'll see in the slides that we published this morning, The RUA base of the U.
S. Is broadly stable over the course of the plan, so we're not aggressively shrinking that business.
Thank you. Your next question comes from the line of Jacob Littrow, RBC. Please go
ahead. Good afternoon. Hi, there. First question is about Amel issuance senior level Beyond 2020, how should we think about it? I mean, I was expecting that you guys may want to issue a bit more and sort of prefund, settled in maturities in 2021.
I appreciate you're showing that you have excess. But again, you Phase is the higher requirement by 2022. So again, I just wanted to understand the dynamics, how that's going to play out over the next 2 years. Conference. And one other question, I suppose it's in the same context.
I mean, you're shifting your capital and risk weighted assets a little bit away from Europe towards Asia. And you're also saying that you'll broadly match the currency exposures cost. With your issuance, so does that essentially mean that we should expect even less euro issuance down the line? I think you alluded conference. Most of the issuance this year will be done in dollar and sterling.
And yes, I mean, I suppose I will be repeating finally, first question. I'll be repeating a little bit what was said. But with regards to the Tier 2 secondurity, I mean, both longer dated perpetual ones that do not conform to CRR2. I mean in your discussion with PRA, are they sympathetic to some of these having a lower cost of funding? And call.
Or is it just a matter? I mean, what are any consequences for your resolution plans of retaining the securities beyond, for 2021, 2025.
Okay. So I think just on the If you go to Page 13 of the deck, you'll see the maturity profile. And I guess what we're doing is we're this year refinancing, which I We've got 11 that we're planning to refinance. The I think the point you make about 20 21 is the same thing. We're going to try and get ahead of that this year, have refinanced some of that this year.
But I mean, as you can see from the plan, we're fairly steady where we are at the moment. We will need to have a little bit of a tick up next year and the year after, But it's not huge.
Yes, I was thinking only that it's falling off 1 year before, right, for Emerald, the 12 months. So that's why I was saying that you want to
Yes. We're trying to address that this year and it just depends on the appetite for take up on that.
Okay.
Okay. And then on the And the other questions, I mean, I think just broadly speaking, I think we just say we're very comfortable with where we are and we We're always in conversations with the PRA and the Bank of England, but it's early days, yes. And on the currency, Currency driver is really a combination of considering which currency our RWAs are in. So for example, the UK businesses tend to need more sterling dollars. It's obviously an easier market And some of this just comes down to try to balance off the RWA driver and the credit spread and the availability in the markets.
Call. We're highlighting sterling and dollars this year, but we may dip into euros, if that makes sense as well.
Call. Okay. Thank you. Thank
you. I'd now like to hand the call back to you, sir.
Okay. Well, look, thank you all very much for getting on the call today. As per usual, if you've got follow-up questions, please follow-up with Greg Case