Good 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 will be some opening remarks followed by a question and answer session. I must advise you that this conference is being recorded today, Monday, 5th August, 2019.
I would now like to hand the conference over to your speaker today, Ewan Stephenson.
Thanks, Sharon. Morning or afternoon, all. It's Ewan here, the Group I'm joined today by Ian McKinnon, our Group Treasurer and Greg Kayes, Head of Income Investor Relations. There's a fixed income specific slide pack available on our website. We don't plan to speak to the specific slides in our introductory comments.
We'll keep the comments brief. I know many of you most of you will have had the chance For me to quickly run through a few high level points, and then I plan to hand over to Ian for more detail before opening up for your questions. On our first half results, continuing to show positive momentum, we had good robust Top line volume and revenue growth. In the first half, we had adjusted revenue growth of 8%, and this excludes the $828,000,000 dilution gain from our Saudi associate that did flatter our reported revenues this quarter. Costs were better controlled relative to 2018, and the first half adjusted cost growth was 3.5%.
That compares and is down from 5.6% for the full year in 2018. And that reduction was achieved even though we increased investment in the business with overall investment up 17% compared to the first half of last year. Returns were up in the first half, a return on tangible equity of 11.2%. That drove earnings per share up $0.06 to $0.42 Credit conditions remain below long term trend with credit charges of $555,000,000 or 22 basis I would, however, continue to caution on the UK in particular. It remains the market we're most focused on.
U. K. Provisioning will remain sensitive to forward economic guidance, which given the uncertainty around Brexit has considerable potential to diverge in the second half. We also announced today a $1,000,000,000 buyback. We think this creates the right capital management balance between Continuing to execute our commitment to neutralize script issuance over the medium term, while being appropriately conservative given Brexit uncertainties on the horizon.
With that, I'll pass over to Ian for more detail.
Hello, everyone. As Ewen said, the balance sheet remains characteristically strong. The CET1 ratio is up And we're up 30 basis points and gives us significant headroom above what we consider to be our regulatory minimum. We continue to enjoy significant deposit surplus across the group with a loan to deposit ratio of 74%. Our published group LCR declined 18 percentage points in the half.
However, this was driven by more detail in the Technical calculations rather than an underlying change in the liquidity of the group. If you look at Page 14 of the slide deck, You'll see that the funding and liquidity analysis across the main legal entities is very, very strong. During the first half of the year, we issued SEK 8,000,000,000 of MREL and I had anticipated that we would have to issue Some more in the second half. We were thinking of maybe another €5,000,000,000 in the second half to bring us up to the low teen number that I know Greg had indicated to a number of you. Because of the reduced buyback, Additional capital REITs coming out of the U.
S, reduction of EMBL requirements in the U. S. And Generally, a slight increase in profitability that fed through to the parent. This has meant that we I doubt that we will have a significant issuance if any at all in the second half. Our plan is still to issue around $2,000,000,000 of 81 before the close of the Q3 subject to market conditions.
A number of you are aware that we've had to update our Pillar 3 disclosures. This was a voluntary disclosure required by the Bank of England. Hopefully, you'll find some analysis in there that is helpful when you analyze how we set up the group. There's been no real impact on our analysis with regard to CRR2 with the one exception that $9,000,000,000 of Tier 2 secondurities that were previously considered fully eligible are now grandfathered to June 2025. I'm sure I can take questions on that later, but I just wanted to draw that out.
As it stands, this change doesn't impact our Tier 2 issuance plans as we have an excess at the moment. I think with that, I think the main points that we want to just emphasize is we're getting close to the end of our NREL build out. We're well ahead of where we need to be at the moment. We have $77,000,000,000 of MREL eligible bonds, $69,000,000,000 are permanently grandfathered and $8,000,000,000 are fully eligible.
I think there's still
a number of moving parts that we need to finalize before we get a firm view of our end state MREL requirements, largely related to the European Resolution Group. And we are talking to the Bank of England about this. The uncertainty isn't coming from HSBC. A lot of it is just to clarify the requirements from the regulators. We're obviously very confident we'll hit our end state requirements given where we are at the moment.
It goes without saying that our holdco will continue to be the sole issuer of MREL and RightCapital and our OpCos will continue to issue senior unsecured debt for funding purposes. We've had a number of notable issuances in France, Canada, Hong Kong and the UK, and we're grateful that a number of you have participated in these. Back to you, Ewan.
Thanks, Ian. Sharon, if we could now start the Q and A session, please.
Thank you. Your first question comes from the line of Robert Smalley, UBS. Please go ahead. Your line is open.
Hi,
Robert. Accessible time. Greatly appreciate it.
Just a
couple of quick questions. One, just to restate on Senior HoldCo for the rest of this year, you're now moving from 5 ish to 0. That's number 1. 2nd question on AT1s. With your stock buyback announced, does that Block you out of the market from issuing AT1s.
I think this was mentioned on a prior call. And in terms of timing, When do you think you'd get the buyback done and when do you think we could see in the AT1 market? And then finally, just a general question. Given political uncertainty that we're seeing in the UK and now that we're seeing in Hong Kong, as well as your management change. Have you contemplated changing the way that you're approaching risk?
Do you think you'll be pulling back on risk for the next 6 to 12 months? Or how are you looking at that overall? Thank you.
Can I do the first thing?
Yes. On the senior holdco, yes, just to repeat that we had anticipated issuing More of it for the reasons I gave, we don't think that we need to do that this side of the end of the year. On the AT1, we have received Confirmation from our lawyers and the SEC that we are able to issue 81 even through the buyback period. We'd expect the buyback period to run through to middle of October, but I'd hope that if we are going to issue Q1, we'd do it well in advance of that. So, if you're in on
Yes. Look, on the political uncertainty and other uncertainty more generally in the economic outlook, Look, we're constantly reevaluating risk appetite. Yes. So nothing dramatically new there, but I mean we constantly reevaluate risk appetite depending on what our view is on the outlook.
Just if I could, one quickly on Emerald. So next year you have Your maturities are much less. So would we look at a reduced AMRO issuance number for 2020 as well?
Yes. I think that's right. We'll probably just roll over what we've got there and consider where we need to get to during the course of the year. We'll advise you probably a bit later in the maybe in Q3, Q4 what the outlook is once we've done our plans.
That's great. Thanks very much.
Thanks, Prava.
Thank you. And your next question comes from Lee Street, Citigroup. Please go ahead. Your line is open.
Three questions from me, please. First one for Ewen. I guess just Coming in and taking a fresh look at HSBC's balance sheet, I was just wondering how efficient you regard HSBC's capital stack and What areas you can see to enhance its efficiency, if there are any? Secondly, just on LIBOR and as that ends, just how you think about the potential impact on bonds you have outstanding across the capital stack and what options you have to deal with that? And just finally on Page 24, the fixed income slide deck, there's a reference to the future of U.
K. Regulation post Brexit may impact our issuance plans. Just wondering if you could give us some examples or thoughts on what you mean there? That would be my 3 questions. Thank you.
Okay. Well, look, on the first one, look, I think we've been very, very clear about What our balance sheet stack is and I mean, look, my observation would be having joined recently is We're an incredibly complex group with a lot of capital complexity, capital inefficiency. Yes, we have a lot of non diversified risk sitting in multiple subsidiaries across the planet. We have TRAP Capital sitting in various subsidiaries. We currently manage that through sort of high degree of double leverage at the group, which I think is appropriate because it allows us to achieve that diversification benefit of the group that we can't And the subs.
But, yes, overall, though, I think that there's a significant opportunity for further Capital Optimization. There is some, but I think some of it requires quite an extensive Balance sheet consolidation exercise, which may take us multiple years to achieve. So I wouldn't assume there's any sort of near term Significant upside on balance sheet optimization.
Livebore? Livebore, I'll I'll take LIBOR, although it is a bit of a $64 question. I think the main thing that I'm looking for in when we're thinking about LIBOR is to have a settled program out there that allows us to actually issue in a way that you would accept and whichever one could understand how to hedge. And with that, we've been working internally and consulting with a number of the other issuers and other banks to see what the standard would be. And here what I'm talking about is The conventions around compounding and the number of days I'd look back, there's still a little bit of uncertainty around that.
We're not seeing Much development in that, but I guess it will come eventually. Clearly, as we're moving forward, we're trying to do shorter dated issuances. And it's more likely that as we're issuing out of our UK bank, we'll do a Sonya issuance, particularly around the in the covered bond space and also as a plain issuance. But we need to do some work on that both internally on systems and on The way the market would accept that. With regard to our MREL stack, most of that is, as you know, a substantial part of that fixed rate with a call option usually for the last year linked to LIBOR.
We would expect in most cases to call that. So I don't see that as being a big issue. But one of the things we do need to think about Is the impact on future issuances, and we are looking at that. Hopefully, that helps.
Okay. And on the Brexit comment on Slide 24, please.
I think that's probably a well written and Greg can answer this, but it's probably Caveat thrown in there by the lawyers because we do know this what Brexit looks like.
Yes, Daley, it's Greg. So I think this is Broadly just taking a view on the public statements that we've got from the bank. So obviously, The bank doesn't necessarily like the existence of OpCo Capital. We all know that. This is effectively us saying, look, If the bank doesn't like it and if we're leaving the EU and that doesn't bind the Bank of England's hands, they may choose to change the rules.
It is a statement you could apply to a lot of pieces in the slide deck, I guess. We just chose to put it there just to flag it.
Okay. That's it.
All right. Thanks very much for all those comments.
Thanks.
Thank you. And your next question comes from the line of Craig Robbins, Newson Investment Advisors. Please go ahead. Your line is open.
Yes. Thanks for taking the question. I just had a question around the Tier 2 that you kind of highlighted, it's not no longer eligible for grandfathering. It appears just kind of from the disclosure that you also made on your website and the size that you mentioned that it's majority of it is in the HSBC USA Inc. Entity.
Can you give any color around what's changed that drove that decision as well as why that entity is not grandfathered, but it looks like HSBC Bank USA, Pier 2 sub debt is going to be grandfathered until 2025 most likely?
I think if I can repeat the question, what you're addressing is that we've highlighted there's about $1,700,000 worth of U. S. And Canadian issued debt, which we had classified as Tier 2, which On further review under CRR2, we're disqualifying. Is that what you're referring to?
Correct. And it does appear that the majority of that is at the HSBC Inc. USA Inc. Entity, the majority of that one
So we had a look at that and we think that following further advice under CRR2, A lot of it qualifies locally, but we're not confident it qualifies at the top of the house. So we're removing it from the stack. Maybe Greg can fill out some more of the detail there.
Yes, Ashok. So I mean this Obviously, this is bonds moving and as Ian said, it's specifically for the group consolidated. It's not the local entity. And we're moving bonds from grandfathered into ineligible, obviously quite close to the grandfathering cutoff. So we're only really talking about a couple of years here.
And in a few places, obviously, these are bonds that aren't necessarily Haven't been useful for us for some time, say for example, the old household now HSBC finance bonds that we've LME ed for before, Those haven't necessarily been useful for us for some time. So it's I think it's something that We didn't pick up on when we were doing our review last year because the bonds weren't in the scope of the review that we did. Now we've picked up on the most part of the review under CRR too.
Got you. And then just the entity that's below that, the HSBC USA Bank, it seems that those are You know, considered eligible for grandfather until 2025. I guess I just I'm not clear on what's the difference between those two entities That in your view makes one eligible for the group and then another entity not eligible now.
It's to do I mean, I think
On balance is to do with
the fact that one is a regulated bank and the other isn't. That helps.
Got you. Yes, got you. Thank you.
Thank you. And your next question comes from the line of Corinne Cunningham, Autonomous. Please go ahead. Your line is open.
Thank you very much. Sorry, I missed the very beginning of the call. So if you've already answered this, tell me to go away. But hopefully, I'm in time. Have you given anywhere what your double leverage ratio is?
And I just wonder, is that starting to cause some ratings pressure given that there's normally and limit as to how much double leverage you can have. The other question I had was on the LCR. I just wonder if you can give us a bit more and explanation as to what's happening there. And you also mentioned a new way of calculating it. So if you can just run us through there.
And then final one, which you may have already covered, was just the PRA view on non qualifying debt. Is it seen as an impediment to resolution after the after the rule changes or the rules outlined a week or so ago? Thank you.
Yes. Look, on double leverage, we haven't put External targets out. We're comfortable with the double leverage that we're running as a group. I think in response to one of the questions I was answering earlier, Yes. We've probably got the most complex balance sheet structure of any sort of major banking group and We don't have a single dominant balance sheet and therefore we have a lot of nondivisified risk Various subsidiaries across the planet.
Therefore, we do think it's appropriate that we can run higher degrees of double leverage at the group level in order to benefit from the diversification we have as a group. We triangulate that with our Core Tier 1 target and our results The stress testing and therefore we think the 14% group target on Core Tier 1 is appropriate, Which triangulates with around the degree of double leverage that we're running. So I don't think we've ever said that we feel that we're under ratings pressure Double leverage, I think that was your comment rather than ours.
And what is your double leverage calculation? What is the ratio?
We haven't published it, but you can come to your own views based on the disclosure we've got the documents.
Yes. Corinne, you can see a large part of it on the holding company so low balance sheet that's in the annual report and accounts.
Yes. We've had a look. Perhaps I'll run that through with you offline to see if you think our calculations are anywhere where they should be.
Happy to.
Thank you.
And then the other one is the LCR and William.
Just to finish off on double leverage, we do take You do pay close attention to this and one of the reasons why we have On LCR, I think is the question I need to answer. What we have is a calculation which where we're trying to aggregate or add up the LCRs across the group. The start point for the calculation is oddly enough, we start with the European Group and then that is used as the cap for the rest of the group. This time around, we removed some securities that were previously counted there, and we also saw Downward management of the non ring fenced bank and the HSBC France risk appetites and that led to a capping of the group LCR, which led to the reduction from $150,000,000 plus to $136,000,000 The reality is that We had no real change in the underlying liquidity of the group, as you can see from the analysis on Page 14. And the underlying liquidity, the HQLAs are running close to €600,000,000,000 The amounts that we calculate To contribute towards the group number did fall, but the underlying HQLAs are still up there with the end of year figure.
Yes. And also, look, I mean, we also published the individual OCRs by legal entity and all of them are comfortably ahead of risk appetite.
Thank you. And then the last one was just a quick one on PRA's view on non qualifying debt.
Very little of that that you view as subject to being issued by our OpCos. So we don't think that that's a big issue Because most of the debt has been issued by the at the top of the house.
Okay. It's Eric, isn't it? Yes. I mean, this is something that is an ongoing piece of work across the debt stack and across the group as part The resolution assessment framework that you mentioned, Corinne. We're doing that piece of work.
We'll revert back as and when we have anything to report, but at this stage, all we're doing is looking at the bonds and applying the regs as we see them today. That more qualitative assessment will be done in time.
Okay. Thank you.
Thank you. And your next question comes from Hadiya Gokouri from Alliance Global Investors. Please go ahead. Your line is open.
Yes, hello, everyone. I have two questions, please. First, in case of Brexit, What happened for credit impairment under IFRS line, please? And my second question is The MREL, is there some flexibility to manage down Your sum of requirements relating to group entity, please.
Yes. Under The IFRS 9 question on the Brexit, I mean, it will depend on what happens to forward economic guidance. We have set out in our interim report what we're currently assuming, what our central case is, what the Three downside scenarios are, yes, under a hard Brexit, we therefore would move to much more certainty, I think, on what the economic Scenario looks like and potentially won't have the skew to the downside, but we will move somewhere towards the downside. But until we understand what the hard Brexit means and what the economic forecasting is as a result of that, it's Difficult to provide you guidance, but we do think based on the guidance that we've got in our interim report, You can yes, there's a reasonable range of scenarios there with the provisioning against them and you can apply your own probabilities and come up with your own views.
On MREL, We haven't yet brought full clarity from the regulators, including the Bank of England as to what are some of the parts requirements are. We are in conversation with them about how that should be settled and that will probably take place during the course of next year. Craig, do you want to comment any further on that?
No, I think just specifically on that, We've got to still figure out a few moving parts, particularly the interaction of the CET1 buffers across the group when we're adding together some of the parts. And also as Iain mentioned, we need to, particularly in Europe, understand how the European group consolidates, particularly with regards to Pillar 2. I think to address your question on how can we manage it and how do we get flexibility, the rules are relatively set. So I think we just got to broadly live with it and we'll manage it around the edges where we can.
Okay. Thank you.
Thank you. Call. Your next question comes from the line of Jakub Leshwar from RBC. Please go ahead. Your line is open.
Hi,
there. A quick question on the reclassification of capital Can I ask, given the history you guys classified last year, the instruments obviously versus what you thought previously was the reclassification? Now obviously, the regulation has changed. You're reclassifying it again. Can I ask whether The current and the latest reclassification has been already confirmed with Bank of England, with all the regulators, with the lawyers or is this Your latest interpretation is subject to change?
Obviously, this is also in the context of the DISCOs and the waiver of set off, which to my understanding can be interpreted a bit more differently. Thank you.
I'll take that. The exercise that we did this time around, we employed Law firm took look through 300 instruments, external and internal with CRRT in mind. We took the Bank of England through that. You can't say that we got to sign off from the Bank of England. That's not the way it works.
But it's fair to say that they have paid some Detailed attention to it. I can't really comment on the Aitken Gump initiatives around the DISCOs.
Okay. And then maybe one more follow-up question. Greg, was there anything you wanted to add? Sorry. One more follow-up question.
Is there anything in your Understanding that prevents you from moving some of the HFOTCO bonds to HoldCo with regards to the bullet tier 2s. And also Or launching a constant solicitation on the HoldCo bonds that were just that are just being grandfathered until end of 2025 sorry, June 2025.
I think, yes, it's Greg here. So Obviously, when we've got inefficient capital, when we've got bonds that are outstanding for longer than they are useful, we'll have to look at how we address that in the fullness of time. That can involve a number of things. And as you mentioned, consent solicitation is something that we would look at. I think with the holdings bonds, if they are U.
S. Dollar SEC registered bonds, the bar to get successful consent solicitation approved is very high, but that's not to say we wouldn't look at it, but these are all things that we'll have to consider in the coming years.
All right. Thank you.
Thank you. There are no further questions. I will now hand back for closing remarks.
Thanks a lot, Sharon. Thanks all for joining the call today. If you've got follow-up questions, please follow-up with Greg Case through the normal Investor Relations Debt Channels. But thanks for taking the time to join and appreciate your time today.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.